At the retail
level, most transactions use cash, i.e. notes and coins.
and plastic cards dominate in dollar volume because they typically
Cash is the preferred method for small
payments because it is the only one that involves no credit, and
therefore no promises.
are a form of credit and involve fixed costs that are independent of
of the check. Thus checks are seldom used or accepted for very
Payments by Check
A check is an order to
transfer funds from
the payer's bank account to the payee's bank. Most small banks do
not process checks themselves. Instead they send them either to a
correspondent bank, with which they have an arrangement, or to the Fed
which also provides that service. Both charge a fee. A
drawn on a bank outside the area of the local clearinghouse generally
the use of the Fed's clearing facilities.
Float refers to checks in
the process of
clearing. When the payee deposits the check in his bank, he
credit the same day for that amount. Until the check is processed
through the clearing system, the payer continues to receive credit on
account. Thus float represents an interest-free short term loan
the payer. Credit cards offer a substantially longer float
The benefit of float to credit card holders is one reason why debit
have been relatively slow to catch on in the U.S.
The problem of bad checks is
avoided by the giro
payment method of transferring ownership of bank deposits.
a check, the payer gives the payment order to the payee. The
must present the check to either the payer's bank for cash or to his
bank for deposit which will then initiate the clearing process.
a giro payment, the payer sends the payment order directly to his own
which then makes payment to the recipient's bank. After the
has been received, the payee is notified by his bank.
A giro payment cannot bounce
because the payer's
bank simply will not accept the order if there are insufficient funds
cover it. The giro is not a useful way to pay for unplanned
in a store. Its principal use is for regular periodic payments
taxes or utility bills. Paper giro payments are unknown in the
Plastic cards had their origin in
cards. Retailers would often extend credit to favored customers,
allowing them to charge their purchases and settle up at the end of the
month with a single payment. The retailer accepted the risk of
As the number of customers who bought on credit increased, retailers
identity cards which evolved into store credit cards.
Later, the financial system
developed the third-party
credit card, expanding the use of credit to a wider base. The
would receive immediate payment from the issuer, less a discount.
The cards were accepted only at any retailers agreeing to the
The card holder would be sent a bill at the end of the month by the
for all of his purchases. Third-party cards did not generally
the option of paying over time.
Banks entered this business with
of their own. However the cards were not widely acceptable
of the restrictions on interstate banking. The banks came up with
a solution, the four-party card which involves two banks in each
the cardholder's bank (the issuer of the card) and the retailer's
With a charge card, you are
expected to pay upon
receipt of a monthly statement. Nevertheless you do receive a
up to the date of the payment. Most people write a check to pay
their card bill. The American Express Green Card is the
With a credit card, you can pay
your charges in
full or finance them up to the credit limit that the card issuer has
you. As with a charge card you get a loan, but you can extend the
term of the loan almost indefinitely so long as you make a minimum
each month. The most widely used is the Citibank Visa card.
Because credit cards now play such an important role in the retail
a more detailed explanation of how they work is provided in the next
With a debit card, the payment
comes right out
of your checking account. The card is issued by the entity that
your money on deposit, probably a bank, but possibly a money market
When you present your card, money is transferred from your account to
merchants account that day. The Check Card
issued by Bank of
is a typical debit card.