...you're poor. Previously, I discussed the effects of the de facto privatization of money:
But most of the discussion is over how large the fees should be. That's important, but ignores the larger issue: the de facto privatization of our monetary system. While it doesn't seem obvious, when you use cash there are 'fees' involved--the cost of supporting the U.S. Treasury operations (printing the money, shipping the money, preventing counterfeiting, and so on). To put this another way, the U.S. government could decide to abolish all paper and metal currency, and make all of our accounts electronic (I'm not arguing this would be a good thing, but bear with me). To cover the expenses of this system, either merchants or cardholders (that would be you and me) could pay fees--in this case, taxes--to support the currency infrastructure.
As more and more people shift towards electronic purchases--both debit cards and credit cards used as transactional credit (i.e., not as a loan paid back over time--paying off monthly in full)--private banks have a superb opportunity for what economists call 'rent seeking': charging you, either directly or indirectly, all those damn fees. Here's what I mean:
Banks began issuing cash cards in the 1970s as a tactic to automate services and cut labor costs -- more ATMs meant fewer bank tellers and check processing costs. When swipe machines were first introduced in stores, banks actually paid some merchants to accept debit cards. Later, swipes became free, and once debit cards had become ingrained in consumer culture, banks began charging merchants, and the costs keep going up.
Yves Smith called this "pure profit":
Debit card charges are as close as you get to pure profit in banking once you get the system in place. The service runs over existing charge card equipment and infrastructure on the merchant end, and is integrated into existing bank balance reporting on the consumer end. For retailers, which are often low margin businesses, the various bank payment service charges are a very large cost. And the only serious study done on the impact of card charges (both credit and debit) on consumers concluded that the average household pays $230 a year. This is a significant hidden tax on lower-income households.
And that last sentence brings us to this post at Cracked about the hidden costs of poverty (italics original; boldface mine):
This is the future, where many businesses no longer accept cash as payment. That means you are required to have a checking account to function in the economy. And if you're poor, that means at some point you're going to get bank-fucked.
Because having a checking account while poor doesn't just mean you have to be responsible and good at math -- you have to be perfect. Meticulous, flawless record keeping is the difference between surviving and having the bank seize your next paycheck.
The bank can hit you with a $35 fine for every charge that comes in while you are in minus territory. The bank will not tell you they charged you this money. You will have no idea anything is wrong.
It's a silent chain reaction in which every charge that comes through during those few days before payday draws the $35 fee. The $8 you spent at the gas station for cigarettes, the $24.99 that automatically comes out for your Internet access ... for each, the bank silently zaps out the charge and $35 on top of it, until your next paycheck is gone. Five seconds of oversight gave the bank the right to take away a week's worth of your labor.
Some of you are saying, "Fine, just tell the bank to go fuck itself. Walk out the door and just do everything by cash or money order." Ah, but now when you get paid, you have to go somewhere to cash your paycheck -- and businesses charge up to $8 to do it. If you're working in the service industry, congratulations -- an hour of your labor just vanished ... just so you could use your own money. Some describe this as a "poverty tax."
Likewise, if you're poor and have credit card issues, you have the recourse of legal loan sharks payday loans:
Say the gas bill is a month past due, and they're threatening to turn it off (if so, it's $150 to get it reconnected). Or you're about to be late on a credit card payment (which would be a fee and a doubling of your interest rate). Or your favorite S&M whip broke, and Whipfest is coming up (entry fee is nonrefundable). That is when you find yourself swallowing your pride and heading to the payday loan place.
A standard 14-day "payday" loan charges $15.50 per $100 borrowed. So a $500 loan ends up being $577.50 (or 1.5 tanks of gas in interest). But if you don't have it after 14 days, that's fine -- they offer to extend your loan to 180 days. It makes the payments miniscule. Oh, and you'll be paying back $1,275 at 403.10 percent APR.
It shouldn't cost so much to use money, especially for the poor.
But Geithner and Summers have decreed we have to protect the banks from Elizabeth Warren. And the Grand Conciliator needs around $1 billion to win re-election--and that money isn't coming from people who need payday loans.
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Oh, and you'll be paying back $1,275 at 403.10 percent APR.
That's an inherent problem of compound interest - for long-term loans or just short-term loans at high interest, you get screwed, often royally. Ever see the figures on how much you *actually* wind up paying for a house, once the mortgage is paid off? It's damn near twice the principal.
Compound interest exists solely profit those who have money at the expense of those who don't in a way that should rightly be considered usury. I see no reason why we shouldn't simply mandate simple interest instead, other than that it makes rich people and bloated corporations sad when they can't fuck over everyone else. You'd still make a profit off loaning money, but not enough that shuffling papers around is more profitable than actually contributing to society.
It used to be the case - and for all I know, still is - that in Britain if you paid for your utilities in advance (which you would only do if you were too poor to have a decent credit rating), you paid substantially more per unit. As the companies were typically monopolies and were being paid in advance for what are more-or-less essentials for life, this was nothing other than outrageous price gouging.
I went to your previous post about debit card fees. What would you like? "Free" checking accounts or low/no merchant fees on card transactions? You can't have both. Sounds like the debit card fees actually help the poor keep their free checking accounts. And why can't most people ask to be paid in cash? Because the government requires that payrolls be done a certain way for tax withholding purposes making it very difficult for most businesses to pay in cash. Why is the government even bothering poor people over paying an income tax? Also, what if they want to start a side business out of their homes but can't afford all the licensing and permits? Maybe baking cakes or delivering food? The local government will usually bring the hammer down on them pretty swiftly. There are tons of stories out there on this very subject. You bitch about a 2-3% transaction cost imposed on merchants (which ultimately allows 'free' checking accounts) but then totally neglect the 7.65% tax on gross income taken from the poor by the government for FICA.
@Juice: I want you to think very hard about what you just said the next time you're eating something that you didn't watch being prepared. There's a reason people who sell food out of their kitchens get shut down by the local authorities, and it has nothing to do with the push for a cashless society making a private industry- the banks- the gatekeepers for your participation in said economy. Because lost in this discussion are the people who can't even get a checking account, and are forced into the wacky uncharted territory of Internet-based banking.