It’s fat times for credit card companies.

Visa made $10.3 billion in profits in 2018 on just $20.6 billion in revenue, up from $6.7 billion and $18.3 billion respectively in 2017. Profits were up again to $3.0 billion in the first quarter of 2019, a 14 percent increase from the same period in 2018. Mastercard, meanwhile, took in $5.9 billion in profits in 2018, up almost 50 percent from 2017, and saw a similar 25 percent jump in the first quarter of 2019. Beyond that, individual banks who issue such cards rake in billions more, especially with credit cards. A 2018 Federal Reserve report shows that between 2011 and 2017, large credit card banks have collected returns on assets between 3.37 percent and 5.37 percent — as compared to 1.32 percent for all commercial banks in 2017.

These companies are part of the American payments system — the ways we move money from one place to another. And it’s never been easier for consumers to move their money around, to pay for everything — from groceries to movie tickets to hotel rooms — either online or in person with little to no thought about what makes that possible. But these massive profit figures raise some questions: Why on earth are credit cards making so much money? Are the services they provide worth tens of billions? And why aren’t debit cards, which function almost identically to credit cards, equally profitable?

In brief, payment card companies are piggybacking on public systems and guarantees to gouge the American public, especially with credit cards. They act as middlemen, skimming fees off transactions and using their size to bully businesses into accepting their terms — who then raise prices on all consumers. The associated profits, both for Visa and company and the issuing banks, are effectively a tax on everything Americans pay for.

And it doesn’t have to be this way.

To understand what exactly the credit card companies do, it’s first helpful to think about payment systems more generally. These are simply a way for entities (individuals, businesses, or even governments) to exchange money. That sounds easy, but as economist Perry Mehrling explains, the details are tricky. One has to consider the direction of payment (do you “push” payments from buyers, or “pull” them on behalf of sellers, or both?), the solvency of the participants, the net balance between them, and so on.

Imagining a simplified version of this situation leads directly to a foundational payment technology — the clearing house, which settles payments across all its members at the same time. Instead of every party having to negotiate with all other parties individually, they settle with the clearing house, which calculates net obligations across the whole group. So where bank A might have owed $50 to bank B, been owed $40 by bank C, and owed $5 to bank D, instead it just owes $15 to the clearing house, which in turn calculates the net payments or obligations for all the other banks as …read more

Source:: The Week – Politics


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Why are we all paying a tax to credit card companies?

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