If you’re like the average Canadian, you probably have about three credit cards in your wallet, along with maybe your driver’s licence, debit card, loyalty cards to about seven different stores because you buy too much crap, and a condom from 2009, mostly because you’re getting laid less than Sheldon from The Big Bang Theory. (Whoo. Pop culture reference. I give the kids what they want.)
We all kind of love our credit cards, unless you’re one of those people who can’t handle them and have cut them up. They make everything easier. You can automate your bills so they just automatically charge your credit card, perfect for guys like me who have the memory of Pat Summitt. You don’t have to walk around with a wallet full of cash, which makes your ass happy. And, best of all, your credit card not only gives you an interest free loan, they also give you rewards just for buying crap and using it to pay. You should be all over that like me on a life sized Jennifer Love Hewitt blow-up doll.
So yeah, credit cards are 14 different kinds of awesome. Except for just one thing. I don’t think many people really understand how the business works. Allow me to bust some myths. That’s right, it’s Mythbusters, Nelson style.
1. You don’t owe the credit card company anything
Here’s what happens. The bank signs an agreement with either Mastercard or Visa (never both) to be able to use their brand on the bank’s credit card. The bank lends you the money, and you pay the bank every month. You’ll never owe Mastercard or Visa a dime.
This all gets thrown out the window with American Express. Amex does everything, including actually lending you the cash on the card. You then pay back American Express… just kidding, like anyone has an American Express card. Why would you? Like 64% of stores don’t even take the damn thing. Math is hard.
So what role does the credit card company play? They process the transactions, whether those transactions are paper, (remember traveller’s cheques?) electronic, wire transfers, or about a million other ways. Prepaid gift cards are kind of a big deal these days too. This is essentially all the credit card company does, is move some data around to make sure everyone gets paid.
Along the same theme, it’s the issuing bank that pays you the rewards. The bank then either gives you cash, points, or partners up with some other company to let you blow your points on crap. This is why I always choose the cash back card, that way I’ll squander my cash instead of getting points to squander. THAT’S GOOD SQUANDERIN’.
2. How interchange fees work
Here’s the way a typical credit card transaction works.
The retailer collects $100 for your porn and smokes. You crack out your credit card, and pay the nice cashier lady. Out of that $100, the retailer gets anywhere between $96 and $98, the rest is paid in fees. The fee is split two ways. First, the company that processes the transaction takes their cut. Hey, moving data is hard work. The bank that issued the card gets the rest, as kind of a thank you for having the card in the first place and allowing the customer to pay.
So how does Visa and Mastercard get paid? Banks pay them for being able to put their logo on the card, and it’s the credit card systems that are doing all the heavy lifting (so to speak) during the transaction. The card companies essentially make a fee per transaction that’s negotiated with the bank beforehand.
And also, here’s something interesting, from that same CBC article:
In March 2008, Visa-issuing financial institutions began issuing the Visa Infinite card that is targeted at a specific sub-set of cardholders,” Visa spokesperson Amy Cole told CBC News. “Visa Infinite transactions attract an interchange rate that is one-fifth of one per cent (0.2%) higher than other card products.”
The Retail Council of Canada argues the credit card companies are flooding the market with premium cards that cost more to process — because they can. The council says as many as half of credit card transactions now involve premium credit cards.
Yes kids, Visa is charging merchants more to process payments on fancy cards. If most retailers pay 2%, that’s an extra 10% in fees that they’re paying, just so you can get your reward points. Take that, Mom and Pop convenience store. Why don’t you just torch the place to get the insurance money?
3. It’s illegal to offer a cash discount – at least in Canada
Do you know why you never see a Canadian retailer offer a cash discount? Mostly because it’s a pain in the ass, but also because it’s technically illegal.
A retailer cannot charge a fee to accept credit card payments. So fine, they try to get around it by offering a discount for using cash, except it’s just the same thing in disguise. NICE TRY, RETAILERS, BUT WE’RE ONTO YOUR SHENANIGANS!
Besides, cash isn’t such a great thing either. You have to pay people to count it, and then pay other people to take it to the bank. Oh, and it’s easy for the cashier to swipe. And sometimes the cashier screws up giving back the change. And so on. Cash is great in strip clubs, and only okay for stores that sell you things.
Has anybody ever ran across a retailer who offered a cash discount? Besides some scummy joint where it’s obvious the owner is just trying to sell you stuff under the table? Serious question.