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Credit Card Usage Declines As Bitcoin & Digital Payment Systems Reach Mass Adoption

More than half of U.S. consumers are aware of technologies that would allow them to make payments via apps. Credit Card Usage Declines As Bitcoin & Digital Payment Systems Reach Mass Adoption

An evolution is under way in the global payment system. Advances in mobile phones and internet technology are giving rise to apps and other digital platforms that allow people to pay for goods and services with their smartphones instead of with cash or traditional credit and debit cards.

Credit cards won’t be needed in five years because mobile payments are more convenient, cheaper and more secure.

Credit Card Slaves

Some 44% of U.S. families carry balances month to month, and among families that do maintain this kind of debt, the average balance is roughly $5,700, according to a survey from the Fed’s Board of Governors.

New Internet technologies are giving rise to new online payment networks and lending platforms that some say will reduce transaction costs and the cost of supplying unsecured credit to borrowers.

We Don’t Need No Stinkin’ Credit Cards

Credit cards have played a vital role in our economy, but the need for them will fade away in the next five years. Electronic payments are more convenient, cheaper and more secure, and adoption of these technologies is going to accelerate as a result.

The credit cards of today perform two key functions. They facilitate commerce by allowing consumers and businesses to quickly and easily pay for goods and services. They also are the primary method for delivering unsecured credit to consumers. The economy will still need a system to perform these roles, but credit cards won’t have to be that system.

Given high barriers to entry and large economies of scale, only a few credit-card networks exist, leading to relatively high transaction fees of 1% to 4% on every purchase. Mobile phones and the internet are quickly disrupting this model as the cost of establishing a new, online payment network plummets.

Consumers can now make payments with Bitcoin, text messages and online services, bypassing the proprietary networks of the credit-card processors. Smartphone applications such as Apple Pay and Google Pay are also bringing down transaction costs by incorporating biometric security, geolocation technology and other tools that can sharply decrease fraudulent transactions relative to physical cards.

While credit cards won’t be needed in five years, some people will still want to use them, just as some people still prefer paper checks even though better alternatives exist. Still, there are signs the momentum is shifting.

Millennials are adopting services such as Venmo and PayPal at fast rates, and survey data suggest that nearly 40% of smartphone users have at least one payment app.

Meanwhile, generational attitudes toward credit cards are rapidly shifting. Younger millennials don’t have the same affinity for credit cards as their parents, partly due to a 2009 law that makes it difficult for borrowers under age 21 to get a credit card without a cosigner. Many of them will bypass cards altogether as digital-payment options expand.

Having an unsecured line of credit for emergencies and to smooth out fluctuations in income and savings is what many people value about credit cards. But this flexibility comes at a cost. Credit-card interest rates are high due to the default risk posed by borrowers.

Here again, internet technologies are giving rise to services that can fulfill this role, but at a cheaper cost. Online lending platforms such as LendingClub and Prosper connect individual borrowers with a wider range of potential lenders, reducing the interest rates some borrowers face to consolidate existing debts or finance new purchases.

The next generation of consumer lending may include more “sale-based” financing, where lenders use real-time spending and income data to price default risk on a purchase-by-purchase basis.

Consumers will still demand and need sources of unsecured credit. They just won’t need to carry around slips of plastic to get it.

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