House of cards: how tapping to pay is a huge exercise in trust
Waving or tapping a card to pay for something is a massive exercise in trust
THE advertising in the 1980s told us it was our ‘flexible friend’, and it’s hard to believe that easy access to other people’s money via credit cards began only in the 1950s with Diners Club. So using plastic instead of ‘real’ money to pay for things has been around for only a couple of generations.
Now, it seems inconceivable to live our lives without swiping, tapping or inserting a card, and we know our PIN number better than our phone number.
Plastic is fantastic, but if something goes wrong, it can be catastrophic, as 52,000 customers of An Post’s foreign currency card found out in the past week. They had their funds frozen because of the insolvency of Wirecard which, arguably, none of them had ever heard of. It was the middleman for the card, which is supplied by Mastercard, and managed by Germany’s biggest fintech. Confused? I don’t blame you.
The financing of cards relies on Visa and Mastercard, the global behemoths of money transfer, but there are hundreds of companies in the middle moving money around before it gets to retail banks and providers here. You’ll just never have heard of them.
In fact, the only saving grace to the An Post débâcle was that nobody is travelling at the moment, or else it would have resulted in thousands more customers being affected, many abroad and unable to access their own money.
A €1.9bn ‘hole’ in Wirecard’s finances resulted in business being halted, and customers’ funds blocked, which was unfortunate for An Post, which relies on its services. It’s now Mastercard’s problem, and the post office issued a statement saying its business was back as usual.
“An Post, together with our partners Mastercard, have been working intensively to have currency cards operational as quickly as possible following the UK Financial Conduct Authority’s decision to restore operations to Wirecard Card Solutions Ltd, Mastercard’s issuer of the card. An Post and Mastercard are committed to ensuring that customers can make payments safely and securely,” it said. Let’s hope so, but I thought this week I would look at exactly what ‘safely and securely’ really means in the global financial world of cards. The panel below compares pre-paid cards, which are growing in popularity. Waving or tapping a piece of plastic to pay for something is, at its most basic, a massive exercise in trust.
You buy a pair of shoes in
New York. A shop takes it on trust that your plastic card will be honoured in a country thousands of kilometres away, using a different currency, without access to your bank records, transacted in a few seconds, in the hope that everybody keeps their side of the bargain.
No wonder they charge so much! And that is the excuse they use for milking customers for eye-watering interest rates when in fact the bank issuing the card is borrowing all that money for virtually free. They can’t, in fact, guarantee that the customer will pay their bit when it comes due.
Card purchases
Some €1.6bn was spent on credit cards in Ireland in May alone. This is down 25pc on the normal figure, as so many retail outlets remained closed. The average transaction was for €61.32.
When it comes to debit cards, €4bn per month is the average spend. More of us are using cards these days instead of cash due to Covid-19, but what does it cost?
Most banks charge for using a debit card chip and PIN. For AIB it’s 20c and Bank of Ireland it’s 10c, for instance. Contactless is free or 1c, but this will change as banks reach critical mass. It’s a loss leader for now. Profits on credit cards are in the interest charged. ‘Transactors’ - customers who pay off their bill in full every month - pay only the Government Stamp Duty (€30pa). They are truly getting free credit.
The ‘Revolvers’, who keep churning their credit, paying off only a bit every month, are walloped for up to 26.6pc in interest on unpaid balances. Every unpaid item costs a quarter more than its ticket price. European interbank interest rates are zero, by comparison. Someone with a €5,000 balance at that rate, paying a minimum payment of €125pm, would be eight years and four months older by the time it’s paid.
Foreign currency
Cards in non-Euro currencies are hugely popular. They’re pre-paid, not reliant on credit, and can be topped up by users. An Post’s FX Currency Card was the one affected by the Wirecard scandal.
But there are great options out there. Bunq is Dutch, run by Mastercard, and has an EU banking licence (unlike Revolut), but is cheaper than the post office or Revolut’s options as it has no fees and a default spending limit of €1,000 per day.
This means that while it’s your own money you’re spending, having a Mastercard ensures foreign car hire companies will accept it. There’s no stamp duty fee either. Revolut charges a percentage for foreign spending in excess of €1,000pm.
Some €1.6bn was spent on credit cards in Ireland in May alone