Why banks want you to use debit cards and credit cards to pay for everything

7-11-petition-drive-762Consumers and businesses alike are being fleeced by banks and credit card companies into paying unnecessary fees because of a shift in spending with cash to plastic. Consumers can directly impact their product or service costs by paying with cash rather than credit. Banks and credit card companies lure consumers and businesses into spending and accepting plastic by offering rewards and rebates, but still the rewards don’t compensate for the increased costs. Reward members are only getting ripped off slightly less than other consumers. Below, I will discuss the details of how these fees work their way into the cost of everything you buy. Furthermore, I will discuss the struggle in the business world and why companies trying to gain rebates at the expense of vendors is a poor long term solution. And lastly, why consumers should stop spending on credit as often as possible and why rewards cards are still a rip-off.

Why do banks encourage you and me to spend our money on our debit and credit cards? We’re now a culture of card carriers, plastic for this, plastic for that, hardly anyone carries cash anymore. And the banks are laughing all the way to the, well, the bank. It’s not funny though, because we are essentially paying an additional 1 to 3% on every purchase we make with our plastic payments. That 1-3% is going right into the bank’s shareholder pockets or to help pay someone’s exorbitant bonus, with little value added to our transaction.

Who is paying this premium? Someone has to pay and the merchants aren’t footing the bill forever, after all – you’re making the purchase with a Visa or MasterCard, or Discover or whatever card of your choosing, and those card companies charge the merchant for accepting payment. Instead of making smaller payments via card, consumers must work together and make them with cash and help drop prices for everyone in the long run. Although, some would argue that the businesses compensate in the lost fees by the uptick in credit spending.

In the business world, companies constantly try and take advantage of their vendors over terms and methods of payment, but this is a bad long term decision. Treasuries departments try to become profit centers by engaging with bankers offering a quick buck in the form of rebates for using their company credit cards to pay for everything. In essence,  companies encourage their vendors to accept payment via credit cards (p-cards, T&E cards). These companies think they’re smart in trying to slip a fast one by their vendors.

As mentioned, the company sending payment via card receives a rebate from the bank (or card company), because the bank charges the company receiving the payment around a 1-3% fee. The bank or credit card company then cuts the company paying via their credit card a rebate of something less than the 1-3%. Eventually, the company receiving payment raises prices to compensate for the fees and or changes their terms on the paying company to recoup the costs. In the long run, both companies lose while the bank profits. It simply doesn’t make sense to grab short term profits in trade-off for long term losses, but these bankers will continue to flash the cash in front of the company big dogs and wine and dine them as long as they’re silly enough to fall for their crap. Ultimately, the companies harm customer relationships and sacrifice too much for these short term rebates. The company earning the rebate will often tease the vendor owed money telling them they will pay faster, increasing their cash flow while reducing overhead.

Small businesses are fighting back. In New Jersey, gas stations are offering cash discounts to help consumers kick the habit of paying with cards.

Consumers and small businesses must unite and eliminate the card companies from the transactions all together. However, we’ve played right into the card companies’ hand by cashing in on rewards cards, partially passing the cost of the fees to those consumers who don’t use reward cards. This is simply a short term solution to a long term problem. If you keep it simple and keep the banks out of your transactions as often as possible, you limit their ability to take your money, and everyone is going to better in the long run.

Truecostofcredit.com shows how much vendors accepting your cards pay to the card companies. The numbers are similarly disgusting and staggering for debit and credit cards. Below are some examples of fees on common purchases with debit and credit cards, and in most cases these fees are passed on to you.

debit card fees

Many people argue that rewards cards are the way to go, but you can clearly see that the card companies are making off like bandits by offering crappy rewards for a considerable increase in costs to you. Are you willing to do your part and start using cash? Or are you happy with 1% rewards and increased product costs of 2-30% or more? Reward members should really consider stop being greedy and start making a stand to remove the middle men. In the long-run we would all be better off!

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11 Comment

  1. […] Original post:  Why banks want you to use debit cards and credit cards … […]

  2. hvyhitter says:

    What is even funnier if you look at the terms that visa and mastercard put to the stores. It says it is against the agreement to charge people more for credit transactions than cash..

    Awesome.. banks are such AWESOME concepts arent they.

  3. sutch says:

    Since each individual consumer is better off using plastic than not using plastic, each consumer will then continue to use plastic. It’s the prisoner’s dilemma (http://en.wikipedia.org/wiki/Prisoner's_dilemma).

  4. BreatheFree says:

    It’s also about Control. Your personal details & lifestyle habits can be shared with other organizations without your knowledge, and demanded by government authorities. A loss of control of your identity is also possible, as details can be stolen and sold by low-paid outsourced workers in third-world countries.

    If all your spending is funneled through plastic, it becomes easier for large entities to take command of your personal finances. Don’t like a new bank fee or government charge? Don’t worry, they’ll continue to rip it out of your account while you waste time protesting it, without success.

    Walked out on your mortgage? Wanted for non-payment of parking tickets? If you’re somebody the banks or the government don’t like, what do you do if plastic is the only way of paying and they turn yours off? So what if you go to court with a valid case and win – in the meantime, how do you eat? How do you travel? Where do you stay? The answer – you will do what you’re told. What if you’re doing what you’re told already and somebody has just made a mistake, and your plastic’s been canceled in error?

    How do you hold a garage sale? Do you have to set up as an electronic merchant and pay bank fees on each sale? Do you have to contact the government and pay a fee for a business registration? Now on the bureaucratic radar as a business, do you have to take out extra home insurance to cover people on the property for a business reason? And don’t forget the tax department – they’ll get to know of your backyard bazaar, and want to know the profit you made, so they can tax you. Can’t find the receipt for Aunt Sally’s antique china vase she bought overseas in 1960? No doubt the taxation bureaucrats will have a way of presuming a capital gain amount for you and taking their “share” of it.

    —-

    On another note, spending with credit cards can lead you into living beyond your means. Even if you pay the card off in full next month, consider whether or not you are using next month’s pay to live today. If you only spend the cash you actually have in your hand or your bank account, then you are much more likely to live within your means and consider purchases more carefully. The more you live within your means, the more freedom you have.

    “The borrower is servant to the lender.” ~Proverbs 22:7

    “It’s not having what you want, it’s wanting what you’ve got.” ~Sheryl Crow, ‘Soak up the Sun’

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  6. anon says:

    The merchant agreement for credit cards says that merchants can’t charge extra for credit cards, but they can give a discount for cash. Generally, no rules on debit card fees.

  7. FinanceDad says:

    You’ve raised a number of great points on the pitfalls of privacy with regards to spending on plastic. Thanks for your comment!

  8. FinanceDad says:

    You’ve raised a very good point. Thanks for commenting!

  9. FinanceDad says:

    You’re right… but it’s more lip service than anything.. to make consumers think the card companies aren’t the bad guys. Thanks for your comment!

  10. Bead Demon says:

    I have long abhorred the credit/debit card processors AND the banks that issue the cards. Today, I decided I am going to become an activist for the merchants who are at their mercy.

    WE (merchants) are usually the ones who pay for the miles/points/cash-back, etc. We usually have to pay a flat fee per transaction and then a variable percentage of the purchase, depending on the card used. We have to agree NOT to have minimum credit/debit purchases and NOT to dissuade people from using their cards or reward them for paying with cash or check. We have to pay a monthly STATEMENT FEE, which is frequently MORE if we want it electronically. It’s virtually IMPOSSIBLE to determine the actual fees charged for a particular sale. We get charged extra if we have to type the card in because it won’t read (I think they DESIGN the magnetic strip to wear out). Returns and other “abnormal” transactions all incur an extra fee. We have to agree to rigorously verify the person’s identity so that the processors/companies themselves are at less risk.

    I’m over it. There is virtually NO education of the public about these issues, and the government basically does the bidding of the credit card corporations. Another reason to be an activist if you’re an American citizen.

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