Credit cards are probably the most consumer friendly innovation ever — a product of the time they were developed. It was an era when the federal government functioned and the credit card operations were so problematic a heavy hand was required.
Every supposedly better alternative adds margin for the supplier, increases the risk of fraud, and leaves the user with poor recourse due to the lack govnerment regulation.
Adding a 3% overhead is cheap for the value. Let the suppliers be squeezed - it’s tiny for big merchants and the little ones are bitching because they’d rather lose sales than pay taxes.
If they provide that much value to consumers intrinsically, then why are banks paying the same consumers to use them?
I completely agree that credit (and just as much, if not more, debit) cards are an incredibly useful invention and great accelerator for online commerce. I don't know of any other way of paying a merchant I know next to nothing of that will allow me to get my money back if they do not deliver on their side of the contract.
But at the same time, the price discovery mechanisms for what exact value they provide (and who, i.e. the networks or the issuing banks, and to whom!) are next to nonexistent. In an efficient market, credit card cashback would not be a thing, for example.
You could argue that that doesn't matter, that the status quo is good enough, but that's what people used to say about incumbent phone companies as well. The EU just demonstrated that an alternative is very possible (at least on the interchange side, which is the bulk of what merchants pay).
>> If they provide that much value to consumers intrinsically, then why are banks paying the same consumers to use them?
The clue to this is in the question. Banks offer cash-backs (and other rewards) not Visa or MC. They do so because credit cards are a commodity and they need to differentiate their product from all the other card providers.
In effect some of the fee paid by suppliers is routed back to the customers. To suppliers the cost is part of doing business, and built into the price.
As a supplier I much prefer customers to use cards over cash. Cash is very expensive to deal with in any volume. And is far more vulnerable to theft (by external people, but also staff.)
The rationale of the banks is clear. The problem is that these are perverse incentives.
The costs hit all customers, not just the ones who use credit cards. And the benefits accrue largely to the cardholders of premium cards, which are wealthy people. It’s a tax on being poor to subsidize the wealthy and the middlemen.
Cards should be forced into being a true commodity with perfect competition. The incentive rewards games are harmful to society.
> And the benefits accrue largely to the cardholders of premium cards, which are wealthy people.
To have competition you do need a way to differentiate, and it's going to be funded by some combination of those fees, interest/charges, kickbacks etc. Some interchange fee is simply necessary, iirc the EU attempts to prevent the egregious regressive aspects of that by capping the interchange fees of all cards. Thereby eliminating the "Amex Premia" as it were.
You do not need differentiation for competition. It’s called perfect competition and it’s a race to the bottom for price, which is the ideal outcome here.
Remember when mobile carriers were competing via "differentiation"? Practically, that meant waiting on firmware updates for months or years, having to deal with preloaded and non-removable crapware on mobile OSes etc.
Now they're largely "dumb pipes" competing on price and quality of service, and as a consumer I couldn't be happier. (Of course, there are now different gatekeepers on our phones, but that's a different discussion.)
I think you're missing the point here a little bit.
To break this down more simply:
Credit cards: Merchants pay 3% and pass the cost on to the customer, IRS gets the vast majority of business taxes paid (no way to under-report taxable income), average person gets all the benefits of a fully funded government plus 1-2% of their purchase back in credit card rewards. Average person also gets a revolving credit line with okay-ish interest rates considering how no collateral is needed and approval is instant.
Cash: Merchants broadly and easily commit tax fraud and under-report earnings, average person then has to pay a higher tax rate to overcome the tax fraud rates and get the same government services in return, merchant still pays something similar to or higher than 3% in transaction costs to handle cash (shrinkage (employees stealing, miscounting, lost cash), physical storage, movement, and processing, armored truck service, etc) and passes those costs on to the customer. Customers have no access to revolving credit which is totally fine but before credit cards people would resort to much more poorly regulated/higher interest/illegal sources of short term loans.
I would also point out that debit card swipe fees are already regulated to under 1% and have many of the same benefits as credit cards.
With your last sentence, you supply your own counterexample demonstrating that "tax-evasion-enabling cash or credit cards costing the merchant 2-3%, pick one" is a false dichotomy.
As I've mentioned, another counterexample is that Visa and Mastercard credit cards very much continue to exist in the EU, even after consumer credit card interchange rates have been capped to 0.3%.
I'm shocked, shocked, to discover that in the land of the "free market" the market optimizes for corporate profit not low prices.
This is not news. In the US people vote for politicians who promise low regulation, business friendly and "economy" priorities. Those politicians run with corporate money and favor corporations.
Other places (like the EU) have people who vote differently and have more appetite for reigning in the "free market" while serving consumers as the priority.
It's not impossible for people to change, just unlikely. We tend to assume the pond we live in has the best water.
> In the US people vote for politicians who promise low regulation, business friendly and "economy" priorities.
People vote for those politicians because that's what they want. But is the problem with what they want, or what they get?
Regulatory capture that puts up barriers to anyone trying to compete with the incumbents is neither "low regulation" nor what people want, but it's the status quo in the US.
> IRS gets the vast majority of business taxes paid (no way to under-report taxable income)
I guess we should dispel this one if it's really why people think financial mass surveillance is a good thing.
Cash is not even close to the only way for someone inclined to do it to under-report taxable income.
Business income is revenue minus expenses. Anything that lowers revenue or increases expenses reduces taxable income. Businesses can deduct things that are personal rather than business expenses, overpay for deductible expenses to anyone giving a kickback under the table, sell at a discount to anyone giving a kickback under the table, do barter transactions and then deduct the traded merchandise as shrinkage, etc. Most businesses legitimately have single-digit profit margins, which doesn't take much to zero it out.
Then if they get caught they go to jail, which is the same thing that happens if they get caught not reporting cash sales.
And we haven't even scratched the surface of what large businesses do to avoid taxes. Spoiler: It's the same overall thing -- reduce revenue or increase deductible expenses -- but they generally have better lawyers and rarely go to jail even when they get caught.
You literally can't reduce revenue on paper when your business revenue is credit card payments. The payments get reported directly to the IRS by the card processor. You can so much more easily fudge numbers if you take in primarily cash.
In both cash and credit scenarios the business owner can increase on-paper expenses to lower tax burden, but there's only so much you can do with that without doing things like spending money on unnecessary costs or risking obvious audit discrepancies.
If you take cash you can just lie and know that if you ever get audited there is no paper trail apart from the one you have created for yourself.
The guy running the cash bar down the street can buy half his liquor from Costco with cash that he never reports receiving, and just pretends like half the bar's sales don't exist. That person would then only report the revenue to the portion of drink sales that go to a legitimate distributor.
In this scenario both the distributor and the bar's receipts all line up and look legit, so the IRS would literally have to come down to the bar and count customers to prove anything was amiss.
We can call this "financial mass surveillance" to make it sound bad and scary, but what's more scary to me as an average taxpayer is businesses evading taxes so that all the things I depend on like Medicare and Social Security get underfunded. As a W2 individual, I have no way to avoid taxes in a similar way.
> You literally can't reduce revenue on paper when your business revenue is credit card payments. The payments get reported directly to the IRS by the card processor.
The revenue isn't on the credit card.
Example: You go to the mechanic to have your brake master cylinder replaced. The part is $100 so they charge you $100 for the part and the credit card company says they have $100 in revenue, which gets deducted because they paid it to the parts company. But what you've actually given them is $100 and your old master cylinder, which can be rebuilt and put into another car and is worth $50. So they've reported $100 in revenue for the part, deducted the labor it took to rebuild the old part in addition to replacing yours (which also negates their profit on the labor), and now they have no profit on the books and a $50 profit off the books in the form of a serviceable part.
Example: Someone frequents a local restaurant, eats there every day, doesn't pay for it. The restaurant is making a tax loss on this, incurring deductible expenses with no reported revenue. But the person eating the food is the landlord for the restaurant owner's personal apartment and is giving a discount on the rent.
> If you take cash you can just lie and know that if you ever get audited there is no paper trail apart from the one you have created for yourself.
This is also a myth. When you take payment in cash, the buyer gets a receipt. All the IRS has to do is go to your establishment, make an anonymous cash purchase to get a receipt (or get one from any other buyer(s)) and then when they audit you the revenue from that transaction had better be in your records or you're caught.
> all the things I depend on like Medicare and Social Security get underfunded
Note that corporate income taxes don't actually fund Medicare and Social Security at all. Both programs are funded by separate taxes that apply only to wages -- and have an income cap. It's one of the dumbest things in the tax system, but as it stands there is no money going from ordinary net profit-based income taxes to either of those programs regardless of what kind of payment system is in use.
> As a W2 individual, I have no way to avoid taxes in a similar way.
It's not because you file a W2, it's because you're not committing tax fraud. W2 workers who commit tax fraud will e.g. have the company expense a personal laptop and then bring it home without reporting it as income. I would hazard a guess that the majority of W2 workers have at various points used company equipment for personal use without declaring the value as income, and in the more brazen instances of this it makes up the majority of their de facto compensation.
But some of those people also get caught, just like some of the people who don't report payments made in cash.
Your mechanic example essentially requires a very specific business scenario to execute. The landlord example is also one that requires a very specific business scenario. E.g., I run a video game studio that is spending the next 3 years working on a game, how is that landlord going to pull off that scam? Are they going to sleep in my conference room at night and deduct it from my rent? In your example the landlord eats at the restaurant every day, but they can't really barter in this way with all their tenants.
The main point is that you with cash you can commit the fraud in the first place, not that you're going to necessarily survive an audit. The IRS from what I can tell audits a fraction of a percent of taxpayers every year and dedictate most of their resources to higher earners. The IRS going to your establishment requires that they dedicate resources to you in the first place.
But there's a really simple mechanism for defeating this cash bar audit example: only commit tax fraud with transactions from the regulars. The IRS agent walks into the bar, is a stranger, and by default their transaction is one of the legit ones. You only run the scam with customers you recognize coming in multiple times over a span of months or years.
I'll give you that Medicare and Social Security aren't paid for by business income...however, a business committing social security tax fraud with paid wages can do so much more easily using cash, so really the argument is similar – in that case it just involving checks and direct deposit instead of cash. An employee insisting on a check or direct deposit is helping ensure tax fraud doesn't happen. I imagine it's even easier to lie about hours than it is to lie about receipts, or exchange a mix of goods and money for labor. Heck, with cash, the employee doesn't even have to exist as an employee. How is the IRS going to know that you actually have two dishwashers and not one? Pay the undocumented dishwasher's salary from the cash transactions from the regulars.
As a W2 employee I have no way to avoid taxes because I have no money flowing that isn't reported to the IRS. And this idea that a large amount of W2 employees are using company assets for personal use is pretty silly, most probably don't even have any assets from the company. And, no, going on Amazon on your company laptop to buy socks doesn't qualify as significant enough personal use to equate to tax fraud.
The study starts with the questionable premise that broadband deployment is associated with digital payments and ATMs per capita are associated with cash payments, but ecommerce sites are some of the least bandwidth-intensive and fully usable on ancient networks, and ATMs per capita is going to have all kinds of arbitrary confounders like population density, average income or number of local banking institutions that make it a poor proxy for cash use.
They then proceed to exclude the types of tax fraud that don't use cash. Of course, this invalidates the result: If Alice and Bob are both cheating on their taxes and Alice accepts credit cards and does the cheating through cross-border transfer pricing and Bob does it through not reporting cash payments then you're going to find that red cars are associated with crashes involving red cars, but that doesn't even imply that most crashes involve red cars, nor does it imply that you can reduce overall crashes by banning red cars.
Then it gets even worse. They try to compare it to data on tax evasion, but such data is by definition speculation because tax evaders don't disclose that they're doing it and you only know about the ones that get caught. So then you have a study implying that the tax evaders who use cash are more likely to get caught, which leads to a different conclusion than the one they're advocating.
> Your mechanic example essentially requires a very specific business scenario to execute.
Not really. The general business model of "you hire someone for a job that results in scrap and they dispose of the scrap" is extremely common in everything from equipment repairs to construction to trash hauling.
> The landlord example is also one that requires a very specific business scenario.
It isn't required that every type of business use the same method; various businesses would use a method tailored to their business.
> E.g., I run a video game studio that is spending the next 3 years working on a game, how is that landlord going to pull off that scam?
E.g. landlord gets shares in the company at a discount in exchange for the owner getting a discount on their personal rent.
> In your example the landlord eats at the restaurant every day, but they can't really barter in this way with all their tenants.
They don't have to barter with all their tenants. Unless you're talking about a huge skyscraper, the rent on one unit will be of approximately the right magnitude to erase the net profit on the whole building.
> The main point is that you with cash you can commit the fraud in the first place, not that you're going to necessarily survive an audit. The IRS from what I can tell audits a fraction of a percent of taxpayers every year and dedictate most of their resources to higher earners. The IRS going to your establishment requires that they dedicate resources to you in the first place.
That's the same as any other type of tax fraud. If you make up and deduct entirely fictional business expenses, someone has to ask for the receipts before you get caught.
> But there's a really simple mechanism for defeating this cash bar audit example: only commit tax fraud with transactions from the regulars. The IRS agent walks into the bar, is a stranger, and by default their transaction is one of the legit ones. You only run the scam with customers you recognize coming in multiple times over a span of months or years.
By which point you've much limited the number of transactions that could go unreported, and you still have the possibility to get caught if you have a dispute with any of the regulars and they turn you in, or the government puts in the work to do a long-term investigation.
Also, how is this anything specifically to do with cash? If the landlord is charging lower rent because they get to eat in the restaurant, how is that any easier for the IRS to detect unless they turn on each other?
> however, a business committing social security tax fraud with paid wages can do so much more easily using cash, so really the argument is similar – in that case it just involving checks and direct deposit instead of cash.
Except that employee wages are business expenses and they'd be losing more by failing to claim the deduction than they'd be paying in FICA.
> or exchange a mix of goods and money for labor.
Which is exactly what happens with electronic payments. The employee is nominally paid $1000 but is actually paid $1000 and an undisclosed amount of goods, with only the $1000 showing up in the bank transfer.
> And this idea that a large amount of W2 employees are using company assets for personal use is pretty silly, most probably don't even have any assets from the company.
Historically it was extremely common to have things like company cars and comped meals. The current rules generally now require that stuff to be counted as employee income and taxed, so it has largely disappeared from large corporate employers that don't openly engage in tax fraud, but you can guess what happens in a lot of small businesses where the family has a vehicle registered to the business and deducted as a business expense etc., or places where employees have access to company vehicles or other equipment and managers DGAF.
> Merchants pay 3% and pass the cost on to the customer, […] average person gets all the benefits of a fully funded government plus 1-2% of their purchase back in credit card rewards.
And if you're below-average (i.e., poor or otherwise 'unwanted') and don't have a credit card then you are paying higher prices without any benefit:
I totally agree, but we also can’t pretend that handling cash costs zero dollars.
That’s only really the case for the tiniest businesses with zero employees.
I think the phenomenon of the poor subsidizing the rich is just sort of how all of life works. The more affluent in society always get the better deal on everything.
They don’t just pass it on, they gain margin through more sales.
I was on a private school board and helped revamp their fundraising. The previous leadership team was cheap and focused on avoiding things like transaction fees. Well, they lost dollars chasing pennies. We boosted sales 25-30% just by adding card and contactless payment.
Not at all. Back in the 90s, I had an American Express Gold Card, probably the premier travel card at the time. It was expensive, but for my specific situation, the travel benefits were basically making me $500 a year, alot of money for me.
People with good credit have access to better cards. It’s about people who pay their shit on time, not wealth.
And I'd be willing to wager that the ability to pay bills on time might be somewhat correlated to wealth.
What you're giving is a rationalization for why the economic landscape of credit cards looks the way it does, which is useful for understanding it, but not at all the same thing as a justification for that being desirable for society as a whole.
We have a perfectly fine mechanism for making lending cheaper for people who pay on time: Interest rates. There's no economic need for tangling all of that up with rewards/cashback rates.
> It was expensive, but for my specific situation, the travel benefits were basically making me $500 a year, alot of money for me.
While I also greatly benefit from the system myself I still consider it a massive resource sink for society at best, and borderline predatory lending behavior at worst, and would gladly see it disappear the same way it has in the EU.
1) the card is expensive in an upfront way that is difficult for poorer people to justify for playing money games
2) getting the value of the card is contingent on spending more money. A poor person with fewer expenses won’t get nearly as much benefit
3) let’s not ignore the elephant in the room which is credit cards trying everything to get you to make minimum payments to prey on the financially illiterate, which again, are heavily concentrated in the poor
I think it’s not surprising, the wealthy get better access to better everything. They can buy higher quality goods and be more discerning, they get better loan terms. Everything about life is better for those with more money.
In a market, participants woo customers with financial and other incentives to select their product.
The price discovery stuff is pretty obvious. Do business with PayPal. It works great… until PayPal arbitrarily decides to freeze your account. Use Venmo or cash app… except sellers will pressure you to treat it like a gift vs. a purchase. You can use ACH, but now some random company has access to your checking account.
Or… you can use a credit card, probably get a 2% kickback, and the merchant pays like 3% unless they’re in a high risk business. If there’s a problem like fraud, the bank eats it.
The biggest whiners about fees are small businesses, especially restaurants. These are businesses where it’s super easy to launder cash and avoid tax reporting.
> Do business with PayPal. It works great… until PayPal arbitrarily decides to freeze your account. Use Venmo or cash app… except sellers will pressure you to treat it like a gift vs. a purchase. You can use ACH, but now some random company has access to your checking account.
Pretty much everything except for credit cards and ACH are really using one of those two behind the scenes, whereas what you want is something that allows you to transfer money using ACH-level fees without the totally unnecessary ACH misfeature that you can't revoke merchants or predefine limits on how much they can charge.
But that's where the "Visa has captured the regulators to prevent things like that from existing" problem comes in.
> The biggest whiners about fees are small businesses
The biggest whiners about fees are small businesses because a) they have very thin margins to begin with, so 3% often means that Visa is taking more of the sale price than they keep themselves and can be the difference between a sustainable business and bankruptcy, and b) larger companies can negotiate deals and pay less than 3%, which creates another competitive advantage for big business that small businesses can't achieve, which small businesses rightfully dislike.
3% sounds like a small number until you're talking to someone with a 5% profit margin before they lose 3% of revenue to the credit card companies. Then you're telling them that they shouldn't care about losing 60% of their personal income to corrupt banking laws.
The bank doesn't eat the fraud. They charge it back to the merchant. That's why restaurants and bars don't like them, and if you fight the charge backs they raise the rates or drop you entirely.
That’s only true for online payments (and even then only if 3DS is not used).
Merchants are not liable for fraud at the POS (which includes almost all restaurants, except maybe those doing deliveries or taking down payments for reservations via the phone etc.)
> Credit cards are probably the most consumer friendly innovation ever
Depends on the consumer.
Vendors often have to raise their prices to keep their own margins, which is passed onto the consumer. If you're too poor or otherwise 'unwanted' to be given a credit card then you are paying higher prices without any benefit.
Every supposedly better alternative adds margin for the supplier, increases the risk of fraud, and leaves the user with poor recourse due to the lack govnerment regulation.
Adding a 3% overhead is cheap for the value. Let the suppliers be squeezed - it’s tiny for big merchants and the little ones are bitching because they’d rather lose sales than pay taxes.