Why Banks Hate Bucks

In his piece “The Abolition of Cash” (April 11), Andrew Stuttaford left out the “drag” on the economy imposed by the “cut” that the banks and processing houses take on each transaction we make with a credit card. This cut has to be passed on by the merchant to recover the discount cost, which raises prices across the board for all goods and services. With cash there is no cut for the banks to take; in fact, cash actually causes them to incur increased costs because they have to physically handle it while getting no fee for doing so. While credit cards are convenient, using them is not “free,” as people think it is, even if one pays the balance off each month and gets “no annual fee” cards. Overall, the banking system is more profitable the less cash there is in circulation.

L. Schworer Via e-mail

Andrew Stuttaford responds: Our editors, a tough crew, allowed me only limited space: I couldn’t include everything! But you make a good point. The increases that vendors make to prices to reflect credit-card transaction fees are, as you say, “across the board.” Customers pay these higher prices whether they use credit cards or not, something that may add a “regressive” effect to the equation (poor people tend to use cash more as a proportion of their spending). At the same time, the profits that banks make from their credit-card businesses can (to oversimplify) be used to subsidize “free” banking services, boost lending into the economy, or return more money to their shareholders by way of dividend. Calculating the net effect on the economy with any precision is not straightforward. More generally, you are also right to suggest that cash-based business is less profitable for banks than its electronic equivalent, whether through credit card or otherwise. Cash handling and storage is expensive, and it’s difficult to attach a fee to it. In Sweden, the banking market is dominated by a few large players: It’s no coincidence that they have played a major part in that country’s retreat from cash.

Doing Justice to the Justice

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