Using cash is expensive

I recently listened a the long episode about Visa on the Acquired podcast, and it was fantastic. Visa is one of those companies that we all think we know, but it’s really quite confusing. From the show:

Visa does not extend credit. They do not issue cards. They do not work directly with merchants. They do not work directly with consumers. They are not a bank or a financial institution. They don’t ever bear any risk.

So what do they do? It’s a long answer, which the show answers well, but they essentially just connect banks to other banks and they make billions of dollars every year from doing it.

As they unpacked the episode, they spent a while talking about how “rewards” cards work. Specifically, how can companies afford to give away cash back, airline miles, and other perks while also paying the fees for running the cards? You guessed it — they raise the prices of the items that they sell.

And they don’t just raise the prices for users with a certain card, they raise the prices for everyone. This means that if you’re not earning rewards on your purchases, you’re losing money. A study from the Federal Reserve Bank of Boston put it in perspective.

• If you pay with cash, it costs you an additional $149 per household over the course of a year.
• If you use a card, you gain $1,133 in extra rewards over the course of a year.

That’s a huge difference! Also, that study was from back in 2010, so the gulf has almost certainly widened since then.

Rewards-based cards can be very beneficial, but those benefits are baked into the prices. If you’re not getting rewards, you’re literally losing money.

Originally published at https://www.mickmel.com on October 16, 2024.