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Cash Or Credit? Which Is More Expensive?

A piece in The New York Times titled, The Damage of Card Awards, posits that the “Fees that merchants build to cover rewards programs lead to higher prices, which are passed on to poorer customers.” The writer, Ron Lieber, even seems to feel guilty about using his credit card:

For several years, I’ve wondered whether my aggressive pursuit of credit card rewards made me a selfish consumer.

After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.

Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.

So the risk is that we perpetuate a sort of reverse Robin Hood problem, as Prof. Steven Semeraro of Thomas Jefferson School of Law in San Diego puts it. It’s possible that the poor pay subsidies to finance the rewards of the affluent.

Andrew Martin’s article in The Times earlier this week noted how quickly the fees that merchants pay to accept certain debit cards had risen, too. That suggests a related question: Wouldn’t we all be better off if those of us who use plastic to earn free travel or cash back laid down our cards en masse?

The specific issue of credit card rewards is trivial. Credit card rewards are a mechanism card issuers use to get people to select a particular card and, even more important, get them to elect to use that particular card as opposed to another card at the point of sale. If incentivizing people with points was illegal or ceased to work, card issuers would have to use an alternative. The reason they don’t use that alternative right now is because the alternative is more expensive than the points.

More broadly the whole issue of complaining about the cost of credit card fees is really an example of how hard it is to change our perspectives in business.

Because the use of cash came first, we tend to view the cost of handling credit as an additional cost. But credit and, more broadly, electronic payment devices such as debit cards and key fobs are clearly destined to be the payment devices of the future. For a consumer, they facilitate easy record-keeping, avoid the risks of carrying cash, etc.

In fact, perhaps those focusing on the cost of accepting credit cards have it backwards; they should actually focus on the cost of handling cash.

Think about it. You need armored cars, security systems, cashiers have to be watched like hawks, on and on.

Maybe businesses should stop accepting cash and the public policy issue is getting bank accounts for poor people so they can participate in the modern financial system.

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