Banks, Stores, and Plastic: What Makes the (Economic) World Go 'Round

Issuing Companies

For the companies and banks that issue the cards, the world is their oyster. These financial institutions love credit cards. Why?

• They're big money earners (credit cards make the big bucks for credit card companies and banks).
• Credit card issuers can charge high interest rates and get away with it, so they can cackle evilly as they rake in even more money.
• Credit cards encourage revolving debt, meaning it's easy for customers to get into debt and stay there for a good long while, remaining paying customers to credit card companies.

But credit cards aren't just a cockamamie scheme to make money. Credit card issuers like banks do face a few drawbacks with plastic:

• More than 11.5 million Americans were victims of identity theft and fraud in 2014 (source), and credit card companies cough up a lot of cash to keep one step ahead of fraudsters.
• When credit card holders don't pay their debts or have unauthorized charges placed on their cards, it's the banks and credit card companies that end up paying for those costs.

Merchants

Merchants are the companies—including hotels, stores, car rental agencies, and restaurants—that let their customers pay with plastic. Most merchants have a love/hate relationship with credit cards. On the one hand, plastic offers a few benefits:

• Merchants get paid very fast when customers pay with plastic.
• Customers are more likely to buy something (and buy more) if they can pay with credit cards.
• Customers using credit cards tend to spend more (30%-100% more, depending on which study you listen to) when compared with customers paying cash.

But it's not all good news.

• Accepting plastic doesn't come cheap. Let's say your local college bookstore lets you pay for your textbooks with credit cards. You buy your new chem textbook for $100. The bookstore doesn't get $100: they get about 2.5% taken off the top and might end up with something like $97.50. The bank that issued your credit card charges an interchange fee, and there's a processing fee that the bookstore's financial institution charges.
• If your textbook is on backorder and doesn't arrive on time, or if it does come but it has ripped pages, you can ask your card company to reverse the charge (credit the money back to your account, in other words). Then, it becomes the bookstore's problem. Most credit card companies will charge back things with no problem—and they won't ask the merchant first. So the bookstore won't get a chance to argue their side of the case or offer an exchange on the book. You might not feel a lot of sympathy for the bookstore. This is the place that charges you $250 for some textbooks and their re-sale books always smell funny. But you'd be pretty upset if you opened up a coffee shop and lost out on some sales because customers asked their card companies for charge-backs.

Everyone uses credit cards a little differently. For banks, they're a cash cow. For stores, they're a way to make customers happy enough to shop. For you, they might be the thing you hope you can pay off this month.