The business doesn't lose 3 percent of revenue, because it also saves money not dealing with cash:
- eliminates cash theft - always a chronic problem for business.
- reduces costs of transporting/dealing with cash
- improves bookkeeping and paper work
and it gains revenue by dealing with people who don't use cash. A large number of customers don't make routine purchases with cash, and these are higher income customers.
So the choice isn't "pay 3% on X or don't pay 3% of X" The choice is "pay 3% on X" or "don't pay 3% on .9X".
Debit cards circumvents the need for cash as well and are much cheaper. Everyone uses debit cards where I live, cash is very rare so companies doesn't need to deal with it much.
So the difference is really just a straight 3% vs 0.15% with no other consequences.
This seems to show the fees can be considerably less than 3%, although PayPal or Square will charge nearly that:
https://www.fool.com/the-ascent/research/average-credit-card...
https://www.mastercard.us/en-us/business/overview/support/me...
Using a credit card is borrowing money. Interest rates have to be disclosed.
So the fees plus the grace period are a way of making it look like typical card users are not paying a lot of interest.
People getting cash back are actually paying low interest rates, because the market dictates it.
If the fees were prohibited, then not much of substance would change, except the numbers would all be higher.
I'm not sure why Americans say that credit cards with 3% fees would be better than this system, and make fun of Europeans for not wanting to use credit cards. To me it just feels like US finance industry tricked everyone into choosing the more expensive product since they hid the costs of it from the person making the choice. But when people has to pay the real costs of credit cards then basically nobody wants one.
I believe there is an opportunity cost for not using a credit card in US: you don't build your credit history. This might leave you disadvantaged in the future because... the finance industry (as an extension, the society) is structured in a way that you must have a good credit history.
But you have a point with circularity and arbitrarity. Credit is basically about trust, and the thing with trust is that you already need trust to build more trust. When do you start trusting people to take loans is just as arbitrary as when a person attains the age of majority.
I don't know if you're trying to characterize my remarks above, but if so, this is inapposite.
I claimed the fees were a shell game, which implies having them isn't significantly better or worse.
If they weren't hidden, it would be clearer how much interest was being paid, but people who pay a low rate would probably still want to borrow.
I do feel like there is more fraud protection with credit cards as they currently exist, which is not to say that is specifically tied to a detail like fees not being regulated.
It seems all around logical and reasonable to me to want to pay a few basis points more in fees in exchange for fraud being someone else's problem. It's not just a fee for service, but also aligning incentives.
If your bank can take the position that fraud is (virtually) impossible, that's not just inconvenient when you happen to be an unlucky victim, but it minimizes their motivation to prevent anything that contributes to it.
Yes, someone is paying for my 2% cash back card but it’s still a net benefit to me.
We (anyone/anywhere) could pass a law that said no more fees, and the credit card companies could instantly raise interest rates and end grace periods to compensate exactly. And then instead of cash back, they would have cards with much lower rates.
I don't see that anybody would be better or worse off, to first order. The difference is framing, and psychological response.
People look at stuff totally differently when it's divided into different buckets.
I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying much less than before.
It's easy enough to ban fees charged to the business, and force them to be charged to the customer, to make pricing more transparent and remove the silliness around rewards. But trying to replace fees with interest rates doesn't work, unless you set up some crazy nonlinear '''interest rate''' calculation.
They will be charged the same amount if the interest rates are set accordingly, it will just be explicit.
>other people that pay the card off slower will suddenly be paying much less than before
You say that as if their rate must remain, if not fixed, in a fixed ratio with others. I don't see why.
>trying to replace fees with interest rates doesn't work
You might be right. But I don't see why, and I think that if I can guess a little, people in the industry know much more and are smarter.
How do you turn that into an interest rate? Stuff at the start of the month and stuff at the end of the month are going to pay interest for different lengths of time. What if they change the timing of purchases?
Let's say you pick an average you're satisfied with. Okay, now you've calculated a rate you need to charge for the first month to match the old fee. You have to charge this specific percentage for the first month to make the math work out. ...but what if that percentage doesn't match the percentage you used to charge after the grace period?
One way to resolve this is to charge a first-month interest rate and a subsequent-months interest rate. But that's not really an "interest rate" anymore, is it? You're just obfuscating the fee, and the goal of this exercise was to make things more transparent.
The other way to resolve this is to have the "interest rate" change every single month, based on the timings of when you did all your purchases. This is just taking the old system and hiding it inside a black box, and that black box spits out an "interest rate" each month.
Unless I'm grossly missing something, there's no way to use just an interest rate to emulate a system of upfront fee plus interest rate. Do you have a suggestion of how to make the math work? Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards". Also tell me what interest rate could replace "0.5% fee, 1 billing cycle grace period, 16% interest afterwards".
If a grace period is ok now, why would it not be ok?
But if there has to be one rate per customer, sure, fine, why can't it be adjusted based on their minimum balance over time?
>Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards"
Option 1 would be to add (for the sake of an example) 24%, keep a sort of grace period, classify people in two groups.
People who were eligible for 2% cash back now pay 0% during the grace period, 16% after.
People who were not eligible for cash back now pay 24% during the grace period, 40% after.
Option 2, if they want to get rid of grace periods, they just separate people who usually pay off their balance monthly and those who usually don't and charge them the different rates.
Grace periods are fine! But you said get rid of them, and I was pointing out that you can't simplify the math that much. It ends up being a mess with a hidden grace period inside a bunch of confusing math, rather than an understandable and relatively stable interest rate.
If you're happy to keep grace periods, great, let's do that. And I'll skip the rest of the post because it's not worth fussing over in that case.