Home Business Opinion | The Capital One-Discover deal won't fix our broken credit card system

Opinion | The Capital One-Discover deal won't fix our broken credit card system

by SuperiorInvest

This is a story about you and your favorite credit card, the one that gives you points. You use your card for everything. You pay your balance every month. And you watch with joy as your rewards grow and grow and grow. And when it's time to collect, you announce that you will receive a family gift. And each member will get one vote. And then her daughter argues that the family needs another iPad. And your child has fallen in love with the ugliest garden gnome you've ever seen. And so, to break up the skirmish, he decides that you will keep the frying pan. Because what unites a family more than food? Martin is the answer. But let's keep him out of it. And when they complain and say, “But that's not what I wanted,” you look them in the eye and say, “This was never about you.” “It's about us, all of us.” And two weeks later your frying pan arrives. And you can't help but smile because you kind of understood this, even though you'll never admit it. And you're looking at the frying pan. And he's looking at you and you at him and he at you and you at that. And you have that split second where you think: Who really paid for this? Who pays for all this? Well, if you love your rewards card, you probably won't like the answer. Because you're trying to be a good person, you shop locally. And every week you buy, say, $100 worth of groceries from MJ. When you swipe your card, that $100 doesn't go directly to MJ. Instead, store owners are charged a series of fees, the largest of which is called a swipe fee. It is established by the card network, usually Visa or Mastercard. And your bank uses it to pay your rewards. The swipe fee is usually between 1.5 and 3.5 percent of the total. The more premium your credit card, the more MJ will be charged. Now, that may not seem like much. But it can add up. For small businesses like MJ's, swipe fees can be one of your biggest expenses. And small stores like hers are charged higher rates than larger competitors. To cope with the situation, store owners like MJ increased their prices. That means we are all paying more. But only those who have special cards get rewards. And here's the problem: The richest Americans tend to have the best cards that give them the most rewards, while the poorest Americans are more likely to pay with cash or debit without rewards or benefits. So what we really have is a system that forces everyone to pay higher prices to subsidize rewards that go primarily to the rich. So this rewards card is really a spoil the poor card. Every time you use it, you're contributing to inequality, helping to drive up prices, and further squeezing the most cash-strapped Americans, all so you can get that free frying pan. You probably aren't benefiting from the rewards as much as you thought. In 2020, the Federal Reserve found that the average American of all income levels loses more from fee price increases than they gain in rewards. And, of course, the poorest Americans continue to receive the worst treatment. On average, they pay five times more in premiums than they will ever receive in rewards. Why are we trapped in this system? Why are swipe fees in the United States nine times higher than in Europe? Why do we have to pay so much just to pay? Well, it's largely thanks to two companies, Visa and Mastercard. This system is your core business. It's what they do for a living. And of course, they are providing a service and deserve to make a profit. But these two companies control more than 80 percent of the credit card market. With little competition, Visa and Mastercard have faced little pressure to rein in wire transfer fees. The truth is that for the vast majority of Americans, the best deal might not come in the form of a new piece of plastic, but rather new legislation. This is because Congress has the power to regulate wire transfer fees. In fact, in 2010 they did just that with debit cards. Remember the fee for passing on that $100 grocery purchase? If he paid with a debit card, it would have only cost MJ 26 cents. Dick Durbin, the senator who helped fight debit card fees, authored a bipartisan bill that would use competition to reduce credit card fees. But banks and credit card companies are, of course, responding. At this point, there are two things you can do. First, call your senator and encourage him or her to support this bill. You can go to this website to find his number. Second, if you're shopping at a small business you want to support, remember that how you pay can make a difference. Using your debit card can save small businesses a lot on usage fees. But the best solution might be elsewhere in your wallet. Increasingly, small businesses are offering discounts for those who pay cash. Avoiding this predatory system can be a win for both of you. And if those rewards are too good to say goodbye to, then at least don't go around telling people you've never accepted a handout, because you have. And the working class is paying for it. [MUSIC PLAYING]

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