We're All Subsidizing People Who Use American Express
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There’s a lot of hand wringing about credit card users being subsidized by other customers. If it were that significant, we’d expect to see a lot of stores only accept cash and compete with other stores by offering lower prices. In my experience, cash-only stores are extremely rare.
Customers are incentivized to carry credit cards because of cash back rewards, need for a short term loan, convenience of not having to carry cash, and fraud protection.
Merchants are incentivized to accept credit cards because many potential customers carry little cash because it is inconvenient.
And in all this, we are implicitly paying a 2-3% tax for everything we buy that goes straight to the credit card companies.
How much does that cost the consumer? Is it less or more than the "tax" what we pay to the credit card companies?
Many years ago I worked retail. A few minutes after I sold something to a man, he came back to my counter angrily. He said I'd given him change for a $20, but he'd given me a $50. I was quite certain he'd given me a $20 and he was trying to steal from us. This is not a pleasant situation to be in, and it wouldn't have been possible if he'd paid with a card.
Reversing a card transaction on a CC is one call away on debit GL with that.
In my experience, cash-only stores still exist. Stores that like cash are very frequent.
There's a lot of hand writing about cash users being subsidized by other customers. If it were that significant, we'd expect to see a lot of stores only accept credit card and compete with other stores. They would just be losing a few percentage points of revenue from transaction fees...
Nice attempt to turn my phrasing onto me, but I’m not actually claiming that cash users are being unfairly subsidized. Rather, I’m arguing that cash also costs, and the difference between cash and card (whichever way it goes) evidently isn’t all that important.
I don't necessarily agree, but it's an interesting thought. I've never considered the cash overhead before.
It was pointed it out that it was the perfect tax-free income mechanism; no vendor certification or registration, no fixed property, minimal ingredients, cash transactions...
Confused... I've been all over the US and every city has tons of cash-only stores. Especially smaller cities and towns. It wouldn't surprise me if half of the independent delis in the US are cash only. I'm guessing you live and spend most time in a suburb?
Also, I've encountered a couple card-only businesses lately (local example, Optimism Brewing).
I'm not sure they would be able to stay open if 2-5% was cut off their revenue. It's just money; not a conspiracy.
So if 50% of sales are in cash, it doesn't cost you 10x more.
But every incremental credit card transaction costs another 3%.
So you can't argue that cash customers are subsidized by card customers when cash costs are relatively fixed while card costs scale linearly with volume.
Also, I can store $500 in a locked drawer or I can comfortably bring it home with me. $5,000 would need a safe bolted to the floor. And if you have a safe, now you need a camera to watch the safe. Say you now want to hold $50,000. Now you need a bigger safe and more cameras.
Cash does not scale at all.
I find numerous results on procedures. None obviously addressing premiums.
Though the notion does seem likely.
https://duckduckgo.com/?q=cash+handling+business+insurance+r...
Just to give you a reference, here's a special package Nationwide offers: https://www.nationwide.com/crime-insurance.jsp
Taking another angle: what's your familiarity with this? Operating a small business or insurance firm yourself? Conversations?
Cash handling isn't among them, though embezzlement controls are.
https://www.investopedia.com/articles/financial-theory/09/ri...
A store can't compete on the 2-5% difference in price because it isn't enough of a persuasion on each small individual transaction, even though it's a huge percentage of the business cost when taken together.
I don't even like the name "rewards" - it's really more of a rebate/refund (on the raised prices of everything), with the catch that you forfeit the refund if you pay with anything except a "rewards" card.
The EU's cap is 0.3%, Australia's was 0.55%.
By comparison, typical credit card interchange rates in the US are 2%+.
https://en.wikipedia.org/wiki/Interchange_fee
> ... interchange fees are typically a flat fee plus a percentage of the total purchase price (including taxes). In the United States, the fee averages approximately 2% of transaction value.[2] In the EU, interchange fees are capped to 0.3% of the transaction for credit cards and to 0.2% for debit cards.[3]
That 1.8% difference pays for a lot of rewards, marketing, etc. As a small merchant accepting cards in the US, the best rate one will see is about 1.65% for a high-volume business (plus lots of fiddly fees). Square ran 2.95% when we first started using it, but was worth the difference to a small business to avoid all the fiddly fees (per-transaction, per-month for statements, per-month for online access! (years ago)).
We have seen card usage go from 80/20 cash/card to 20/80 cash card over the last 15 years, and the ease of making additional sales on credit has increased our volume a lot. YMMV.
Most merchant agreements disallow charging customers a penalty for paying by card, but (implicitly) allow a discount for paying by cash (or having 2 prices: cash xor credit). This decision about Amex is part of the same perspective.
True disruption will not reach the US card payment market until some business big enough to take on Visa & MasterCard offers card acceptance to merchants at much lower fees - perhaps without all the rewards, points, and other faddle they now pay to card users.
Sure, not quite the same, but the only way to do it (since debit cards also remove the risk that credit cards do, namely, defaulted payments, which causes the fees to inflate a bit).
It sounds like card issuers in the EU and AU are doing this, or most of it, but that those in the US are not, presumably because they are making a nice profit doing it at 2%-3% now, and have a good moat around their businesses.
By "good fraud protection" I mean the kind that US banks do for credit-card holders now, and not the kind they do for debit-card holders.
who actually does this? I'd imagine most amex users probably have a mastercard/visa anyways, and it's not like they're going to switch merchants to save an extra 1-2% on their purchase, presumably when the merchant they chose already have the lowest prices to begin with.
[1] https://www.npr.org/sections/thetwo-way/2016/06/20/482797151...
To not maximize credit card rewards means to subsidize others who do. To fix the problem, you have to regulate interchange fees down so that rewards aren’t sustainable and are no longer offered. The problem isn’t American Express, it’s lax financial regulation.
Personally, I fully support the cramdown of interchange fees and the resulting impact on financial institutions.
I didn't, for several years, until a Visa card came out with better terms (1.5% cash back) than the Amex variant I was using (1%).
Also, some companies provide an Amex Corporate card for travel expenses, and it's less convenient to charge things to any other card.
I went through a bankruptcy in my early 30s, largely because of credit card debt, and then immediately started getting big pay raises. 7 years later, I came out of it with an 800 credit score and a six figure salary and it was an incredible eye opener how much money and kickbacks credit card companies are giving to wealthy people for the privilege of using their card, while I was getting fucked 10 ways to Sunday on interest when I was making 30k a year and struggling to make minimum payments. I worked out the math later and it turned out that even with the bankruptcy I had paid well over the amount I borrowed in interest and had barely put a dent in the principle.
These days I’m regularly getting $100 cash back rewards and free flights or hotel rooms and not paying a penny in interest.
I don’t really get the economic incentive of shoveling money at wealthy people while grinding down lower class people into debt slavery.
There’s no conspiracy here, any more than there’s a conspiracy behind the large discount you can get if you buy a year’s supply of toilet paper at once.
It is true, however, that wealthy people carry much less risk for them so they may have similar expected values (this is just a guess)
If one poor person is paying, say, 11% interest on their $500 balance for a year, then the company makes a few hundred bucks on the interest. If a wealthier person spends $50k (admittedly random number I made up, its going to vary vastly for different card-holders, and probably in the millions for many) with their card over the course of the year but pays it all off immediately, they've made between 1k and 1.5k risk-free on the 2-3% merchant fees, and the customer will probably continue to use that card.
Like the article says, the fees make the cards a lot of money.
That person putting $500 per month on the card likely isn't poor either unless they are paying most of their expenses with it and paying the card off each month. Again, they get some fees. With a limit high enough for $500 a month without paying it off, they aren't as high risk - after all, that is at least a $6,000 limit. That's a full 20% of a 30k/year income, after all.
These folks are in a middle ground. The company can make some of their money off of transaction fees, but will try to make up for it through interest rates, which won't be all that horrible.
The actual poor person has a credit limit of $500-$1000. They aren't spending enough for the company to make much from fees, so they try to make it up in interest.
That's my understanding anyway. There is quite a bit written on why rewards cards are not free lunch in the end.
And there is the system itself: value exists in transactions, not money. Money is just another commodity. When you have a pile of money, it’s a safe bet there is only one thing you care to do with it: make more. Investments in things you don’t expect to be rising in value are unlikely, but since that pile of money isn’t profitable until you invest it, your choices are limited. All people with piles of money come to the same conclusion: throw it at rich people because that usually seems like the best way to make it get bigger on it’s own. Even if this likelihood even outweighs massive risk, it’s still better than contributing to society because if it works, it will be guaranteed to only take from society instead... which is much easier and somehow still garners social approval.
For society which depends on vertical circulation, the result is catastrophic waste. But the goal was to profit, which requires transactions.
Filmmaker Willard Moss, speaking with Studs Terkel, likely in the 1970s. At about 00:02:00
https://s3.amazonaws.com/wfmt-studs-terkel/published/7546.mp...
Visa & MC's fees have been steadily climbing for years...
I use all of the above, but I _love_ my AmEx (Zync, because I'm cheap) charge card.
Personally, I've found I generate way more "rewards" by using cash for my entertainment budget. Having to look into my wallet at the month's "fun money" and pull out some of it engenders critical thinking.
(This is one of the main reasons casinos use chips - to abstract away the value of your money and induce spending)
Non-sequitur. You can rephrase
Businesses are making more profit off non AmEx card holders
Now more places accept them but they are basically the same as Mastercard or Visa. They charge similar fees but you can't get decent cashback like you used to either.