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Comment by eru | Hacker News Reader

What you describe works a lot like insurance from the customer's point of view.

Normally for insurance the suggestion is that you should 'self-insure' smaller risks, and only purchase third-party insurance for catastrophic risks. The theory being that insurance has extra overheads and on average has to cost you more money than you get out. But that for catastrophic risks, you can't rely on averages.

(Of course, that only applies in the absence of tax or regulatory arbitrage. Eg I hear in the US your employer can buy health insurance from pre-tax money, but you'd have to use post-tax money for paying out-of-pocket.)

Similar for a company like AmEx you have to weigh whether the occasional wins you describe are worth the constant drain. Or whether you should just put the winnings in a piggy bank, and use a small part of that to finance the replacement for the never-arriving fancy new sofa.

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Credit cards let you externalize the cost, since merchants raise their prices to account for credit card fees, but raise their prices for everyone, not just credit card users. In other words, the cost of better consumer protections from credit cards is subsidised by those not using credit cards (and those who carry a CC balance and pay interest, but that's another matter).

Alternatively, maybe practically everyone uses credit cards, so the "subsidy" is negligible, and everyone loses slightly on average. But then you'd lose even more if you didn't use a credit card and subsidised everyone else.

It's basically a big version of the Prisoner's Dilemma.

You are right up to a point: but this analysis doesn't (fully) apply to American Express, exactly because it has such limited acceptance.

I mostly don't shop at places that accept American Express, exactly because their prices are higher to pay for this cross-subsidy. Thus I don't pay for this cross subsidy.

Merchants can give cash discounts; many do. And there are also expenses to handling cash that credit cards eliminate: for instance, such as the need to securely transport large amounts of cash to and from a bank, the need to count the cash, and the extra labor of cashiers making change—a skill that many cashiers are simply borderline incapable of these days anyway.

I was about to say "hey, in most US states what you're saying is illegal" and realized I was letting that myth live in my head as if it were true.

So, to be clear for anyone else with the same problem I had:

Merchants in all US states can legally give cash discounts.

In Connecticut and Massachusetts, it's illegal to add a surcharge for credit purchases.

Yes, but it's not a pure dilemma between American Express and cash. There are other ways to pay without cash and without American Express.

I see a few explicit discounts (or surcharges) for different payment methods here and there, but mostly the system works by segregation: the cheaper suppliers with lower margins don't tend to accept the more expensive payment providers.

> US your employer can buy health insurance from pre-tax money, but you'd have to use post-tax money for paying out-of-pocket.

Ya, what’s up with that? It is totally true, but I’ve never been able to figure out why it’s true like that, given its huge unfairness. Is it just punishing people who get laid off from their job and have to go on Cobra? Likewise, are independent contractors just SOL?

There was a time in US history, starting somewhere around WW2, where maximum marginal income taxes were crazy high (like 90%) and you had other wage controls in place at various times.

These high income taxes were politically popular, but companies still wanted to compete for workers. So they found all kinds of loopholes for extra benefits they could give employees at a lower tax rate (or at no taxes at all). Sometimes they even lobbied for those loopholes, too.

See https://en.wikipedia.org/wiki/Health_insurance_in_the_United... for a brief overview, and perhaps follow references from there.

It had nothing to do with tax rates and everything to do with wage "controls" (i.e. caps) during WWII.

Employers were not allowed _by law_ to pay their employees competitive wages, so they offered benefits which weren't restricted.

Even after the war, this was still a benefit to employers: the cost of benefits paid by the employers could be deducted from their taxes, but employees didn't have to pay taxes on it (unlike wages), so it was more efficient; also, changing jobs meant changing health insurance plans, which complicated job switching for employees.

(BTW, the supposed "high tax rates" were paid by almost no one, in part because they only applied to the highest tax brackets but also because of numerous tax deductions.)

Yes, the high tax rates weren't meant to be paid. They were almost universally routed around via benefits and deductions.

Of course, both what you said and what I said still doesn't explain why benefits weren't taxed (or at least not as heavily).

Btw, I remember growing up in the 1990s in Germany that having a company car used to be a big deal as a perk. I don't hear about that as much anymore, I suspect it's because the relative tax attractiveness of benefits vs straight up cash changed over time; I remember some loopholes being tightened (if not closed).

If you don't carry a balance, then the only cost is if the card has an annual fee.

The protection that Amex has given me, when it comes to chargebacks for purchases that didn't work out has easily justified the annual fee.

And that's before any perks like miles or cashback or anything else.

> If you don't carry a balance, then the only cost is if the card has an annual fee.

You know that every time you use the card, American Express charges a fee?

All the perks and cashbacks etc come more or less out of that fee.

Of course, that fee doesn't show up directly on your bill. But you still pay ultimately it. (Just like you as an individual bear most of the brunt of a VAT, even if officially the shop hands the money to the government.)

> Of course, that fee doesn't show up directly on your bill. But you still pay ultimately it.

Unless I’m charged a lower cash price vs a higher credit card price, no, I’m not really ultimately paying it. You may be correct at a macro level but I’m looking at it from a practical standpoint.

When a merchant does charge a lower cash price, I make a real time judgement call to pay in cash or use card.

> Unless I’m charged a lower cash price vs a higher credit card price, no, I’m not really ultimately paying it. You may be correct at a macro level but I’m looking at it from a practical standpoint.

It's typically the more expensive merchants with higher margins who accept American Express.

So you are right that staying with the same merchant, you seldom get an explicit discount for not using American Express. The non-AmEx discount is more hidden, in the form of being able to shop at not-so-overpriced merchants.

Doesn't the merchant pay the fee? Never heard of shops having different prices for different credit cards or cash but maybe they should do that in order for card users to see the real cost of their credit cards.

Until that happens card users will not care

The consumer pays higher prices (since the merchant charges higher prices due to transaction costs), which is passed onto the network+banks via the merchant.

There’s an analogous situation with tariffs - it seems the manufacturer pays the cost of the tariffs since it is coming out of their bank accounts. But it’s actually consumers paying the tariffs.

You're right, then we should move to have different prices which show clearly the fees, I suspect a lot more people would go back to cash.

The problem is the govt wants to get rid of cash all together so I guess this will never happen

Not really true, depends on the marginal elasticity of demand whether the consumer vs. the retailer pays and how much. My wife owns a retail store, and she loves Amex customers, they’re usually the highest spenders and easiest to upsell. Having a surcharge for credit cards or Amex in particular would be counterproductive.

Well, and I assume those upsells probably have a higher margin for her. Ie effectively she's charging those Amex guys more.

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