The Risks and Benefits of Different Payment Methods in the Digital Era

Take a moment to think about how you manage your day-to-day transactions. How has that changed over the last 10 years? Over the last five?

Many of us can remember a time when cash was “king”; the predominant method to pay for simple daily purchases and even transfer funds to family members. Cash transactions come with no personal information linked and no paper trail to keep track of. However, as we navigate an increasingly cashless world, it is important to keep an eye on all available options to keep our money safe and secure.

We as consumers have seen a major uptick in the variety of payment methods available to us, with more options than ever before for paying bills, making purchases, and sending money to family and friends. Many of these methods are just a tap away, right on your phone. While all of this is convenient, it’s natural to ask which one is the most secure to use.

In today’s digital age, the plethora of available payment methods can be overwhelming and confusing. Credit cards, debit cards, ACH transfers, wire transfers, digital wallets like Apple Pay and Google Wallet, and peer-to-peer payment applications — Venmo, Zelle, PayPal, and CashApp — offer distinct features and benefits. Here, we take a look at the various options so you can determine how to choose the best method for your transactions.

Credit Cards/Debit Cards

Bank of America introduced the first version of what is considered the modern credit card in 1958. Risk has closely followed convenience from the very beginning, with the first known incident of credit card fraud reported shortly after its introduction, according to Forbes. In the years since, credit cards have become largely the default option for daily purchases, offering a growing list of added perks like cash back on purchases, travel rewards, or access to clubs or lounges. However, popularity for debit cards has been trending upward since their introduction in 1966.

S&P Global reported in a 2022 study that 56.2% of consumers now prefer debit as their primary payment card vs. 39.5% preferring credit. Clearly, some consumers are wary of the expenses that come with carrying a credit card balance, preferring debit cards as a way to intentionally limit spending and prevent added interest expenses.

Fortunately, both credit and debit cards offer fraud protections, but it is important to note the differences between the two. Credit card issuers are required to reimburse customers for unauthorized transactions over $50, thanks to the Fair Credit Billing Act. Alternatively, debit cards are protected by the Electronic Funds Transfer Act (EFTA) which limits the liability for unauthorized transactions to $50 only if you notify your financial institution within two days of a lost or stolen card. If you report a fraudulent transaction within 60 days, the act limits liability to $500. Beyond 60 days, you could be on the hook for any and all unauthorized activity. It is important to remember that these are broad protections and you should check with your financial institution for their specific policies and procedures.

Digital Wallet Apps

Digital wallets, such as Apple Pay, Google Wallet, and Samsung Wallet, are electronic payment solutions that allow you to securely store your physical payment methods like credit and debit cards on smartphones or smartwatches. There’s the added convenience of storing items such as gift card balances, plane tickets, and event tickets when using these apps.

Digital wallets employ various security technologies that differ from the traditional credit card swipe. When a card is added to a digital wallet, it is instantly encrypted and can only be unlocked when one wishes to make a payment, typically through two-factor authentication, either by using the phone’s password or biometric capabilities like fingerprint or Face ID.

Furthermore, digital wallets provide an additional layer of security by using tokenization technology for every transaction. In essence, tokenization creates a unique “secret code” for each payment you make, instead of giving the merchant your actual credit or debit card number. Therefore, even if a malicious person were to somehow obtain your one-time token, it would be rendered useless and ineffective. The same tokenization technology is also accessible through physical credit cards, either by using tap-to-pay or inserting the card with the credit card chip. It is important to remember that when opting to swipe your card, tokenization technology isn’t utilized, as the actual card number is stored on the magnetic strip and remains unprotected. When making online purchases with your credit or debit card, if you have the option to use your mobile wallet instead of manually entering the card number, this will also leverage tokenization technology.

ACH Transfer

Separate from card-based transactions, common methods to transfer funds to others come in the form of Automated Clearing House (ACH) payments or wire transfers. ACH transfers are often free to use and come with a processing time that could range from one day to upwards of three business days to complete, depending on your financial institution. Inversely, wire transfers post within the same day and often come with a fee charged by your financial institution. It’s very important that you take caution when providing your personal banking information as bank transfers don’t come with the same protections and regulations as card transactions.

Wires are instant and it can be more difficult to retrieve any money that is sent for fraudulent transactions. The brief delay in ACH transfers does offer a small window to stop a fraudulent transaction before the money leaves your account, but this isn’t a guaranteed solution. These types of transfers are commonly coordinated through Resource Consulting Group (RCG). We take extreme care in facilitating these transactions on behalf of clients. RCG requires staff to obtain a verbal authorization from clients for large money movements. The Firm does not provide wire or ACH instructions for a client account without explicit knowledge and consent from clients. Wire instructions provided for large purchases such as a home closing are verified both with the client and closing agent involved in the transaction.

Peer-to-Peer Payments Apps

As an alternative to traditional cash and check payments for family, friends, and even small businesses, peer-to-peer payment applications have quickly gained popularity. These apps include services like Venmo, Cash App, Zelle, and PayPal, offering users convenient ways to send and receive money electronically.

According to the Consumer Financial Protection Bureau these peer-to-peer payment apps processed nearly $900 billion in 2022, and they expect that number to rise to $1.6 trillion by 2027. Using these applications to send money to family or friends is generally a safe and convenient option. However, as these apps become more involved in our financial lives, it’s crucial to understand their susceptibility to fraud.

These applications move money faster compared to card payments and bank transfers. Instead of waiting for banks to approve the transaction, the payment is authorized as soon as the sender hits “submit.” Consequently, once money has been sent, it becomes nearly impossible to get the money back. This behavior makes these peer-to-peer payment applications vulnerable to misuse by scammers. Therefore, it is advised to send money using peer-to-peer payment applications only to those that you know and trust.

Apps like Cash App and Zelle do not guarantee refunds if you send money to a scammer. On the other hand, PayPal and Venmo provide a certain level of purchase protection when you make a purchase from a seller. However, this protection is contingent on the payment being explicitly tagged and labeled as a “payment for goods or services.” If you label the payment as “personal,” you might still be responsible for any issues that arise.

Therefore, if you must make a payment on one of these peer-to-peer payment apps to someone you might not necessarily know well, consider linking your credit card instead of your bank account. This way, your payments are as protected as they would be with any credit card transaction. There is one caveat, though: these apps will require you to pay a 3% fee for each transaction that uses your credit card.

If you ever have any specific questions or concerns, please do not hesitate to reach out to your RCG advisor. We are always available to help answer questions or guide you to optimal solutions for safely handling your daily transactions.

Resource Consulting Group is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Resource Consulting Group and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Resource Consulting Group and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Resource Consulting Group and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Resource Consulting Group and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.