Every time you use a credit card to buy something, the shopkeeper loses money. A certain percentage of the money you spend has to go to the bank whose credit card you use and the bank whose swipe machine is used to pay the bill amount.
If you had chosen to pay cash for the purchase, the shopkeeper wouldn't have to pay this commission. Hence, he would have made more money on your purchase.
Given this, why do shopkeepers still accept credit cards? If they have to pay a commission to the bank, every time someone uses a credit card, isn't it a losing proposition for them?
Well, not really.
As Gary Belsky and Thomas Gilovich point out in their book Why Smart People Make Big Money Mistakes and How to Correct Them: "Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level."
"Think of it this way: If you have $ 100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don't experience the same loss of buying power that your wallet of $50 brings," he writes.
This is because when spending money through a credit card, people do not feel the pain of spending money. Replace the dollars in the above example with rupees and the conclusion remains the same.
What this clearly tells us it is much more difficult to spend cash to buy things. You can clearly see your hard-earned money going out and it can be painful.
As Belsky and Gilovich write in their book "In fact, the money we charge on plastic is devalued because it seems as if we're not actually spending anything when we use cards. Sort of like Monopoly money."
So individuals don't feel the pain of spending money, when they use a credit card. But how does that help the shopkeeper? Since individuals cannot see the money they are spending, they are likely to spend a lot more.
As Belky and Gilovich say in the book: "But you may be surprised to learn that by using credit cards, you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash."
Given this, shopkeepers do not mind people using credit cards. Individuals using credit cards are likely to shop a lot more than those who use cash.
So the commission that the shopkeepers need to pay to banks is nullified to a large extent by the excessive shopping by those who use credit cards.
The next time you shop using a credit card, be sure that you are not spending more than what you would have spent, if you were using 'good old cash' to make the payment. Happy shopping.
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