Credit-card convenience (5 May 2009)

I've worried before about whether I should switch to a cash-only lifestyle. The idea was that using only cash would keep me in touch with reality and allow me to actively resist the creep of ersatz convenience into my life. But this reasoning may be somewhat flawed, in that there are straight financial incentives for customers to use credit. (Then if they use it unwisely, they fall prey to the abusive lending practices that the consumer credit bill of rights law stalled in the Senate currently is intended to prevent. Basically, the payment system is designed to grease the path to debt slavery.)

After looking at how interchange fees -- what banks charge business for processing credit-card payments -- have increased despite technology making credit-card usage far more efficient, Mike at Rortybomb wonders why more businesses don't offer customers a discount for using cash. He breaks out some game-theoretical analysis to show that customers (thanks in part to rewards programs) have an incentive to pay with credit, especially since businesses pass on the bank fees to consumers through uniformly higher prices:

A small business I was at had a sign noting that they get charged over 2% every time a customer used a credit card, so why don’t you pay cash or with a check? But as I was about to pay cash, I wondered: “Don’t the prices already reflect that I will use a credit card? I might as well get points towards my free inflatable grill or whatever comes with the card.”

As Mike notes, this structure encourages us to use credit cards even when we don't find using them to be more convenient.

Nonetheless, I still think retailers are too mindful of consumer convenience to ever implement a cash discount, which does send a message that customers are not always right in their preferences. The discount -- differential pricing for different classes of consumers -- would make explicit something retailers prefer to remain concealed: the practice of price discrimination. Once customers are aware that their activities might affect what they have to pay, their comfort level with shopping as a leisure activity generally has to shift as well. In America, set prices promote the enticing illusion that shopping has a leveling effect, that in the great arena of goods, all customers are equal since they are entitled to the same great deals. This also has the byproduct of letting us experience any exclusive deals we finagle as personal triumphs, secret signs of our specialness or our ability to beat the system, transcend it, rise above consumerism while mastering its terms.