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On cards with cash rewards …

Credit CardsI’m not sure about you but I don’t want a credit card that offers me cash back, I want a credit card that has lower rates. Give me lower rates!

The financial industry finds itself in quite a pickle these days: it started attracting the “best minds” in the 90’s with large pay packages, that engendered a “gold rush” to the financial services industry which created the pay package hangover it now suffers from. A couple of things before moving on.

  1. The self-inflicted stampede to the financial services industry caused a brain drain where we could have used it most: engineering, science, technology to name a few.
  2. The stampede was not effected by normal market supply and demand patterns; instead, pay packages got increasingly larger unreflective of results.
  3. There’s not as much room for creativity in finance as there is in things like technology so the “best minds” started figuring out new ways to move debt and risk around that created wealth without creating value. Think in terms of high speed trading, credit swaps and the like.
  4. As banks looked around for more ways to collect money, they lobbied and won concessions from well-written protective legislation that forced banking services to be separate from investment services due to internal conflicts of interests.
  5. We have now moved into a transactional model for our society in which we are nickel and dimed (in many cases unnecessarily) for every transaction we perform. We “pay-per-view” for television, debit cards, insurance, credit card transactions, etc.

So when is $100 not $100? Sadly when you give it to a bank in the form of a savings account.

ATMs

At best you will see $95 back from the bank, at worst low $80s. Why? Well, for starters, they are only paying you .01% (one basis point for your money), which means you get a penny every month for leaving that $100 with the bank. If you happen to withdraw the money from a ATM not associated with you bank (which is more often than not what happens), you get charged anywhere from $2-$6 for the privlege of using an ATM. Withdraw $30 three times and you could be overdrawn in the worst case scenario. Bummer, huh?

Debit Cards

If you use your debit card to pay for items, you get hit with a fee for every charge (Ooops!). Now because of backlash, banks will drop the transactional charges. Instead they will charge you a monthly fee for the card. I had a bank account once that fell below the minimum. It was a rarely used account, I never checked the statements, totally my fault, but one day I got a notice saying that I was in default. I went back and looked and sure enough the bank was taking $7.95 out of the account every month and kept right on doing it even when there was no money in the account!!

Credit Cards

Oh, boy! This is a fun one. Nah, I won’t get started. But it is a shame that we have an industry that gives you 1 basis point for depositing your money and charges you upwards of 2600 basis points for borrowing. There have to be more intelligent boundaries placed on differences between savings and borrowing rates. This is another tax on savings.

A Solution

Listen I get that banks need to make a profit and indeed they should be allowed to make a profit. I get that some people are incredibly poor risks when it comes to credit cards. None of us are stupid. The single biggest expense service companies have is employee compensation. Banks need to get back to basics. The infrastructure cannot support the weight of non-value-creating high pay packages. Banks complain they have to keep up with the Jones regarding pay. Tough.

Start paying less, let college grads spread out into more industries. It will do a country and an economy good.

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