Sunday, April 13, 2014

Gresham's law and credit cards























  1. However you should also consider that cash discount you may obtain may come from lower taxes being paid by the business which is the most prominent usage of cash in the first place and that discount may amount to a small fraction of taxes evaded. If the transaction is illegal then this is what you want. If not, you may end up paying much more to make up for the lost tax revenue and may be better off charging it.

    1. True, although a corporate retailer like McDonald's or Safeway doesn't engage in tax avoidance via cash payments, so if they offer a cash discount at all, that's because it wants to save on credit card fees.

  2. Great post. I'd also add that modern banking in sums greater than $10,000 cash currency has additional costs -- probably punishable by something grisly like getting your liberty chopped off.

  3. This Australian retailer marketing tag line is "pay less pay cash". Even with surcharging allowed in Australia many just have a credit card based price (as most pay that way) and you still need to ask for a cash discount.

    1. Bron, neat example. That's a good example of a company that has chosen to specialize in solving the modern Gresham problem of undervalued cash.

  4. I refuse to use my credit or debit card to buy my morning coffee - I want %100 if the money to go to the local cafe.

  5. but if cards are driving out the cash, what good is the 5% cash rebate?

    Sooner or later the lost marginal value of everyone holding an extra dollar will equal the value of the marginal discount at the window.

    this puts an upper bound to the inflation spiral...though we just haven't hit it yet.

  6. 1. The cost of a MC/Visa transaction in Australia is about 0.8%. However the tax benefit of not recording a sale is 30% of the profit. This is why shops refuse or surcharge card.

    2. Market-based fees/charges only work where there is free flowing information. The average consumer has no idea how much merchant fees are, so don't question surcharges of up to 10% (Australian taxis)

  7. JP, I'm fascinated by credit cards so I've read your recent thoughts on them with great interest (and hope you carry on!). I was surprised in this post that you put your emphasis entirely on transaction fees without looking at the main reason consumers actually use credit cards: namely, credit, and more specifically, the time shifting inherent in card mechanics.
    I've lately become a bit obssessed with said time shifting. All cards include a grace period, of typically over 30+ days, which you can time to buy something now and pay for it much later. For a lot of people, the convenience of this small, interest-free time-shift (and of not having to carry cash) is enough to justify owning a card. (In my country, Mexico, 43% of card users are "totaleros", total-ers, who pay every month their entire balance. )

    What's gotten me fascinated is the huge, recent rise here of much longer interest-free credit, initially in select shops and for special periods, but now starting to appear in certain cards in blanket terms. I have a card with HSBC that will ALWAYS allow me to defer ANY purchase denominated in a non-peso currency into 12-monthly INTEREST-FREE instalments. I have another one that will, again all year long, allow me a similar deferment of ANY peso-denominated purchase over 700mxn (~60cad). The added limit on both credit cards is about a year of my salary. On some special months the time shift can be of up to 24-months.

    (If I don't pay an installment I'm up for rapacious (!) interest & fees, but it just takes a bit of prudence and planning on my part to avoid those.)

    What I want to point out is that this is a new time-shiftable kind of money. To frame it in terms of Gresham's law, this deferred, time-shifted money soon starts to drive out the "real", immediate money, for who would pay now when they could pay much later? I'm being lax with what I mean by money, of course, and a pursuit of exactness on the concept is an appropriately recurrent theme in your blog. Let me just frame it in Ray Dalio's famous definition of money as "what you settle your payments with", while credit is merely "a promise to pay money." This emerging use --extremely convenient, widespread, third-party-enabled, blanket-termed-- starts to blur that way of looking at money.

    The way I've come to conceptualize credit cards and particularly this new modality is to consider them as personal-money issuers. My cards, for instance, enable me to "print" out of thin air "my money", backed by me, a full year's worth of it. It is, to be sure, a float I have to pay, but in theory, a float I can keep indefinitely recreating ("all money is a bubble"). In general, this is what credit cards do for everyone on the grace period, but for most people "printing" beyond that period is still outrageously expensive (even without stepping off the wagon). This is an axis for future financial developments that has me tremendously excited... could the blockchain be used for descentralized credit? Could there be billions of colors to tint our coins with?

    Your thoughts? :)
