Whenever I go to a grocery store or shopping mall to buy something, at the time of payment, one question usually comes to my mind. “How do I pay the bill?” Cash, Debit card or Credit card? And if I have multiple credit cards, which one should I take out?
Many times we don’t get such doubts. Because we think it’s all same. At max what we make sure that we don’t use credit card more than what we could pay at the end of the month. All these make sense. But is it really the same if we pay by cash or debit card or credit card?
With my limited knowledge of working in cards and payment domain in finance sector, I have found few facts which is leading me to this question.
So let’s understand about various cards and payment process.
But before that, one question to all. Why do banks want you to take their credit cards and use it? Why are they giving you some credit for some days for free? They are here to do business and make money. Why would they involve in an activity where they are giving away money for free??
So one thing is final. They are not doing social service. There must be some way by which they are making money even by lending money to us. What could it be?
Here are the answers. Credit card companies mainly makes money by these three ways.
When we ask shop keeper to swipe the card, he will swipe it and make us sign on a slip. Then he will show those slips to his bank and get money after some days. Here in this case it may happen that our bank and seller’s bank is not same. So association like Visa and MasterCard will come in between and settle the payment. Our bank will give money to Visa and Visa will pay to seller’s bank. And we will pay the amount to the bank at the end of the statement cycle.
Here, the transaction fee will come. Our bank will give 2% less to the merchant as a fee. So for the bill of Rs. 100, merchant will only get Rs. 98. But why this merchant is bearing this cost? He can use other methods like ask us to make payment in cash. Here are few reasons why he agrees to pay that amount.
So next point comes in our mind is even if we pay him in cash, he won’t give us discount, then what to do. The answer is simple. Nothing. Use your credit card and enjoy the “free” credit for a month, or go to the seller who doesn’t accept credit card (and may give you some benefit).
Now people, who were thinking about using debit card more, think again. Here also the fee will come to us only as bill amount is same. Rather, we are losing the interest what we are getting on our balance for few days. If we use the credit card and pay the amount at the end of the statement period, we will surely get some interest on our bank balance.
So, next time when you go out for shopping in mall, think once that how should I pay him so that I will be at minimum loss… You may want to use a credit card which will give you more days to pay the final bill.
Many times we don’t get such doubts. Because we think it’s all same. At max what we make sure that we don’t use credit card more than what we could pay at the end of the month. All these make sense. But is it really the same if we pay by cash or debit card or credit card?
With my limited knowledge of working in cards and payment domain in finance sector, I have found few facts which is leading me to this question.
So let’s understand about various cards and payment process.
But before that, one question to all. Why do banks want you to take their credit cards and use it? Why are they giving you some credit for some days for free? They are here to do business and make money. Why would they involve in an activity where they are giving away money for free??
So one thing is final. They are not doing social service. There must be some way by which they are making money even by lending money to us. What could it be?
Here are the answers. Credit card companies mainly makes money by these three ways.
- Advertisement: With each card and its statement, they do some advertisement and generate money.
- Interest: When someone uses a credit card, in many cases, he will end-up buying more than wanted and can’t pay in one go. Credit card companies will wait for that moment and will offer an ‘easy’ EMI. But, interest rate for cards will be in the range of 20%-48% where we end-up paying around 10% to 15% of the cost as an interest to credit card companies. And that is the case when EMI is of 3 months.
- Transaction Fee: With each swipe of card, credit card company will take around 2% as a transaction charge. Just imagine the total transactions per day and 2% of the cost in their pocket.
Here for second and third point, company gets money from the card user. How? Then lets see how money flow happens when a card is swiped at the store.
When we ask shop keeper to swipe the card, he will swipe it and make us sign on a slip. Then he will show those slips to his bank and get money after some days. Here in this case it may happen that our bank and seller’s bank is not same. So association like Visa and MasterCard will come in between and settle the payment. Our bank will give money to Visa and Visa will pay to seller’s bank. And we will pay the amount to the bank at the end of the statement cycle.
Here, the transaction fee will come. Our bank will give 2% less to the merchant as a fee. So for the bill of Rs. 100, merchant will only get Rs. 98. But why this merchant is bearing this cost? He can use other methods like ask us to make payment in cash. Here are few reasons why he agrees to pay that amount.
- With the card, we will not have the limit on purchase and end-up buying more. So more business to him.
- He won’t need a person who will take care of all cash. (end of the day cash will be huge, if all cash is there)
- He will tweak the prices and will transfer the burden of transaction fee to us.
In most of the cases, merchant will not bear the cost, but will pass to us. If you remember your old days, the old kirana stores were giving us more discounts on MRP than all new Bazaars. Because all these bazaars have the component of transaction fee on them they won’t give discount to us. So at the end we will end up paying more.
So next point comes in our mind is even if we pay him in cash, he won’t give us discount, then what to do. The answer is simple. Nothing. Use your credit card and enjoy the “free” credit for a month, or go to the seller who doesn’t accept credit card (and may give you some benefit).
Now people, who were thinking about using debit card more, think again. Here also the fee will come to us only as bill amount is same. Rather, we are losing the interest what we are getting on our balance for few days. If we use the credit card and pay the amount at the end of the statement period, we will surely get some interest on our bank balance.
So, next time when you go out for shopping in mall, think once that how should I pay him so that I will be at minimum loss… You may want to use a credit card which will give you more days to pay the final bill.
