519-646-2222Shameless Credit Card Industry
Canada’s shameless Credit Card industry is being reviewed by a Parliamentary Committee, that, like most Parliamentary Committees, will shed light on some of the issues but result in few, if any, meaningful changes to the industry. What a mouthful – let’s get into it!
Credit Card issuers in Canada have been fleecing consumers for decades, just look at their appealing (not cautionary) advertising slogans. It is easier for officials to blame consumer ignorance than admit the real problems are caused by sneaky industry practices that they tend not to regulate. Let’s start with merchant fees, are you aware that when you use a Credit Card the merchants have to pay a percentage of the purchase to the credit card issuer at the point of purchase?
The average percentage is 3% but can run as high as 6% – so if you spend $100 at your favourite store the merchant has to pay the credit card issuer $3, which is of course passed along to you. In other words the goods purchased are priced at $97 but you will pay an inflated cost for them. And never forget that the government also charges HST at 13% on the 3% paid to the
Merchants would be challenged to offer different prices for cash versus credit, so if you always pay with cash you still pay the same inflated price for the goods. Debit cards also charge the same handling fees, adding to inflated prices. It is quite likely that the underlying reason for the Parliamentary Committee has less to do with consumer protection (which successive governments seem to care little about) but perhaps more to do with selling CBDC – but that is a whole other blog!
Have you ever noticed how when you make a payment from your bank account to a Credit Card, even through the same institution the transaction takes days to complete? The money was deducted from your chequing account immediately, it was gone, but does show up immediately on your credit card balance. You might think that when you make a purchase from a store using a Debit card the merchant immediately receives the money they don’t.
The money is held in an escrow account by the bank or Credit Card issuer, which retains possession of the funds for an average time of three days, sometimes longer and sometimes shorter, before going into the merchant account. The funds are deposited retroactively, meaning that your payment will be backdated to the date the funds were taken. What happens to the escrow funds is that they represent assets on the issuers balance sheet against which the issuer may either borrow or lend more money.
It was reported in a Parliamentary Committee that the Return On Investment (“ROI”) for the credit card industry is 52% of what you spend on Credit Cards. In 2018, according to the Canadian Bankers Association Canadians charged about $547 billion on Credit Cards – meaning the ROE at 525% was $284 billion. Now, returning to the notion of holding these funds in escrow, by not immediately moving the money from the consumer account to the merchant account that means that about $1.5 billion per day is held in escrow, and if that were the case for three days before the funds are moved to complete the transaction, issuers are holding $4.5 billion per day (or $1.642 trillion per year) in escrow.
Do the math, on any given day there is three (days) times the daily take held back. What would the annualized ROI be on $1.62 trillion? Even at a mere 3% return that would tally up to a return of nearly $50 billion, not bad if you can get it! And, add that revenue to the already high interest rates on Canadian bank issued Credit Cards.
Ironically we even pay annual fees for the privilege of having the price of everything we purchase inflated. We may even pay higher annual fees for rewards cards – and are duped into believing that while we eagerly use the card far more than we might otherwise, in order to rack up points, there is some sort of gain to us. There is no gain, it is a net loss to us and everyone else around us! Save your money stop using Credit Cards.
To Credit Card Companies and Banks we are all faceless, depersonalized, numbers, represented only by our bottom line value to them as lenders. The industry, ideally, wants us all wallowing in as much debt as we can possibly service, and remember servicing debt is very distinct from paying debt – and of course they have been very successful.
How then can you escape from debt servitude when the game is rigged in favour of the lenders at the expense of the consumer? It is extremely difficult – the rate at which Credit Cards have been used in Canada has been exploding over the past 3-4 decades, and partly as result inflation has been higher than it might otherwise have been making the cost of living even higher and the value of incomes even lower, driving consumers to use more debt to service a lifestyle that is steadily eroding. Politicians of all political stripes have taken little interest in moving meaningful legislation to protect consumers.
We must all try to be more aware of the costs and consequences of using debt to fund our lifestyle(s), and always be prepared to ask questions, dig deeper, until we have a clearer picture of the costs of our decisions, since biblical times we have been aware of how bankers (money changers) exploit consumers for profit. Some religions even bar their adherents from charging or paying interest, yet lenders continue to find work arounds.
As we have said before – “getting out of debt is easy” just call the office at (519) 646-2222.