Pod Insights EconTalk Inside the Mysterious World of Credit Cards (with Patrick McKenzie) About this episode Patrick McKenzie explains to EconTalk's Russ Roberts how credit cards work, who makes money from them and how, and gives his take on whether cash customers and debit card users subsidize the users of credit cards with reward programs.
Transcript 11,624 words · 2 speakers
0:02 Speaker 00 Welcome to Econ Talk, Conversations for the Curious, part of the Library of Economics and Liberty. I'm your host, Russ Roberts of Shalem College in Jerusalem and Stanford University's Hoover Institution. Go to EconTalk.org where you can subscribe, comment on this episode, and find links to other information related to today's conversation. You'll also find our archives with every episode we've done going back to 2006. Our email address is [email protected] . We'd love to hear from you. Today is April 24, 2025, and my guest is Patrick McKenzie. He writes about tech, finance,
0:43 Speaker 00 and, as he describes it, "the wonky geekery that underlies the modern world." He does that at his website, bits about money. He's also an advisor at Stripe. Our topic for today is credit cards, the economics of credit cards and various aspects of credit cards. Patrick, welcome to Econ Talk.
1:03 Speaker 01 Thanks very much for having me. And I'll give the obligatory disclaimer when talking about all things credit cards. I used to work at Stripe for six years. I'm still an advisor there, but I'm not necessarily speaking on their behalf.
1:13 Speaker 00 Absolutely. We're going to talk about what you call, to start with, "the good-fit, non-fraudulent user." So, we're talking about maybe me. I love using credit cards. They make life really easy. What's the economic transaction that's happening there? What role are they playing, besides convenience for me, in not having to carry cash?
1:39 Speaker 01 I think, honestly, and I've thought this since long before I was personally involved in them, credit cards are one of the infrastructural wonders of the modern world. The credit card networks are orchestrating a complicated five-to-six-party transaction. Every time you swipe plastic or tap your iPhone to pay for something, it's actually more when you tap your iPhone, more parties. But there's multiple offsetting transactions, and we'll get into them. But just...
2:09 Speaker 01 From the point of view of your bank, which is how most people conceive credit cards as making money, there's roughly four ways that credit cards make money. They have what's called an interchange fee, which is a fee ultimately paid by the card accepting business or organization for use of what we in the industry call the credit card rails. And rails is just a evocative term to say that it's a complex mix of technology, organizational substrates, contracts, and system design that allows you to move money from point A to point B. Number two, credit cards are both a transactional mechanism for many people,
2:50 Speaker 01 but they are also the largest source of consumer lending in many markets, including the United States. And so some people will never use a credit card for consumer lending. They just pay off their balance every month. That's about 40% of users. But for many people, lending is an important part of the offering. And banks make money in lending in a pretty simple fashion. They get money from depositors and other sort of sources of capital at some rate. They lend it out at a higher rate and they make a spread between the two. And out of that, they pay costs for, for example, credit losses, fraud losses, and operating expenses. So those are two ways credit cards make money. The other two are far less important, but I'll mention them for completeness.
3:34 Speaker 01 One is fees. You might be familiar with the annual fee for the credit card and also late payment fees. Late payment fees were very material for certain spectrums of credit card issuance. For a very long time, they've been kept by regulation and other action over the last few years, and they're far less material now. And the fourth one is a sideline to a sideline, but it's a money paid for marketing consideration by various businesses. And so, for example, if you have a...
4:07 Speaker 01 System within your credit card, mobile application or website which says, "Hey, if you spend $40 on this business using this card in the next two months, we will give you $5 back." That has been, there is a player in the middle that has done the business development to convince your bank to put that section on their website and convince the, you know, 1-800 Flowers, for example, that 1-800 Flowers should spend some of its marketing budget for Mother's Day in giving people credit card rebates. And both the bank and that player earn some consideration from 1-800 Flowers for putting that essential ad into your credit card web application. But the two main ways credit cards make money interchange and net interest income.
4:51 Speaker 00 So again, just to review, the interchange is the fee paid by the store, typically the vendor, the supplier, the producer, not me. The fee paid by the store for the privilege of using credit cards to facilitate transactions. And the second is, some people don't pay their balance. And when they're late, they have to pay interest on that balance. And it's typically been fairly high. When it was high, of course, and it was uncapped, I assume it was easier to get a credit card, perhaps. Now, if it's capped, and it varies, as I understand it, by countries and maybe by states
5:34 Speaker 00 in America, it may be a nice thing that you don't pay these very high interest rates, but it means you've lost, for some people, they've lost the privilege of being able to borrow money at any rate at all because they can't get the card to start with. Is that, is that true?
5:50 Speaker 01 Yeah, there is a rich history of regulation of usury coming down from literally earlier than medieval times. And some of that history is reflected in the laws of the several United States. And there are different regulations based on country. But...
6:10 Speaker 01 Broadly, across the spectrum of credit behavior and other socioeconomic status, there are some people who will be able to get credit in basically any usury regime. There are some people who will never be able to get credit in any usury regime. And then there are some people who are on the margins. And people in finance and particularly in credit cards understand thinking on the margins in a way that economists understand thinking on the margins. But this is occasionally a more complicated thing to get broader audiences to understand. But it's important that we are thinking on the margins. There are some people who are bankable, who can get a credit card issued to them or a checking account issued to them.
6:55 Speaker 01 Checking accounts are also a credit product, that's a digression. They are bankable at some interest rates and they are not bankable at other interest rates. And they might get pushed from the sort of formal lending markets mediated by banks into what are called alternate financial services, such as, for example, payday loans, which have, generally speaking, much higher interest rates due to various shenanigans and offer comprehensively worse products, which is why they're quote unquote "alternative." Or they might be forced to use non-market mechanisms to access credit. For example, borrowing from friends and family at some sort of social cost, which doesn't conveniently have an APR associated with it.
7:39 Speaker 01 Or doing activities in their life which essentially borrow from their future self, but which aren't mediated by the financial industry and which frequently have ruinous costs associated with them. So, for example, if you don't pay your electricity bill and you have your electricity turned off, you're in some sense borrowing from your future self who would like to consume electricity to manage your payments for the month. And so...
8:07 Speaker 01 This is one reason why access to credit is systemically important and important goal of both the financial system and society. And the financial system says self-servingly, but true. When you, when you tell us that we are only allowed to charge interest rates up to some certain amount of percent. Well, money doesn't come from nothing. And there are people at the margin that will be affected by that decision. And many of those people will be very sympathetic to you and their lives will get worse as a result of you putting that cap in there. And that is a thing that I wish policymakers and the broader civil society would keep more close to the top of their mind when making decisions like that.
8:47 Speaker 00 One of the reasons we're doing this conversation, having this conversation, Patrick, trying to spread the word. You mentioned APR, that's annual percentage rate, correct? That's the interest on the unpaid balances.
9:01 Speaker 00 I think one of the reasons the public, a lot of reasons the public struggles to understand these issues and non-economists or non-finance people do. But there's a certain suspicion that financial intermediaries, credit card companies, banks and so on, quote, "don't do anything, they don't make anything and they only have profits." So a higher interest rate is just obviously merely taking flesh out of the body of the poor borrower. But we will come back to that. I would also just, you didn't mention baseball bats, but of course, besides friends and family of social cost, there are other types of market transactions that are not formal.
9:46 Speaker 00 They're often called black market, where people borrow from gangsters, crooks, thieves. And those contracts are often enforced with violence, the threat of violence for sure, but also actual violence in the case of unpaid, unpaid bills. Now, so I want to focus for now, for a while on interchange, which is an awkward word because it is only used in everyday parlance to mean a junction of a highway, but interchange, you said was the, the fee paid by a merchant for the opportunity to process transactions via a credit card of a particular credit card issuer. And one of the greatest things about economics, of course,
10:29 Speaker 00 is that when we use the phrase, the interchange is paid by The vendor, the merchant, we understand in economics, that's not always literally the case because the merchant or vendor can sometimes, if not always, pass on some or if not all of those costs to the customer in the form of higher prices. It's certainly not free to the consumer. So the consumer is excited. Consumer is excited that this merchant accepts a credit card that the consumer carries with them. But there's a fee associated with it and how that interchange and how that's divided between consumer and merchant is uncertain.
11:14 Speaker 00 It depends on market forces typically and market competition. Do you want to say anything to that before we go a little deeper into it?
11:22 Speaker 01 Sure. I'll give one clarification just for the payment industry nerds out there that there is quite a bit of complexity and nomenclature in finance. And so people who work at, for example, Visa might say, well, okay, interchange means just one thing, but there's also scheme fees, which are fees which go to Visa directly. And there are, we prefer to call it a merchant discount rate for the thing that you're saying, but I just prefer using the word interchange for simplicity. And we don't have to care exactly about how it is divvied up. Some, I suppose, brief points I'll make. One interchange is not a constant number.
12:06 Speaker 01 So across the sort of panoply of the United States, you can round it to about, call it 2.2, 2.3% for credit cards. But it isn't constant for each credit card product. And so one of the things that Visa, Mastercard, and to far a lesser extent, Amex have done is brought essentially every financial institution and every card transacting business to the world to the negotiating table to hammer out some negotiation of the interchange fees paid. And The there are massive PDF files which list, you know, if you are in this line of business by what the industry calls an MCC, Merchant Classification Code,
12:51 Speaker 01 and you are dealing with this level of Visa card, this is the interchange you will pay. And it's typically a percentage of the transaction size plus some fixed fee. And and off the top of my head, these are, by the way, very difficult documents to understand. There was literally a team of PhD level people at Stripe that was attempting to predict in advance of getting the bills from our merchant processing bank. In advance of getting the bill from the bank, can we predict what the interchange will be for what percentage of transactions? And it took many years of work from a team of literally PhD level people before we could predict that at least 99% of the time.
13:36 Speaker 01 And so you can Google for these PDF files, like just Google, you know, Visa interchange rates 2025, and you'll you'll get a PDF file. But it's difficult to get signal of the, you know, down to the dollars and cents level on like an individual. What did I, what did someone pay for when I bought my coffee this morning from that PDF file? But broadly speaking, as you go up in socioeconomic status, your custom becomes more valuable to businesses across the economy. And those interchange schedules will say broadly speaking, for any business, whether it's an airline or a supermarket or similar, as you increase in socioeconomic status,
14:19 Speaker 01 you will get into progressively more, quote unquote, exclusive card products. And those card products will cause the accepting business to be charged more interchange than if they had used a less exclusive product. And the trade that the payments industry made with the rest of the world many years ago was, well, People who have money are great customers to have. We will identify the people who have money. We will market to them incessantly and we will put a piece of plastic in their wall that will cause them to come back to your business more frequently, spend more money when they do and thereby contribute more to your enterprise. And you'll pay us for that in the same way that you pay the newspaper for advertising your goods and services.
15:04 Speaker 01 But unlike the newspaper, we only get paid when someone actually comes into the store and spends money on you and you have perfect visibility into when that happens. Versus like you spent $15,000 a month on a spread in a magazine and goodness knows if that generated anything for you at the margin.
15:23 Speaker 00 It's a fantastic example of how market forces, to the extent there are market forces in this business and there are, but of course they vary by product and I'm sure time and history and all kinds of things. I mention it only because there's a limited number of commonly used pieces of plastic. It's, you said Amex, that's American Express. There's Visa, there's MasterCard. It used to be Discover, I don't know what else there is. I have, I have an Apple Card. I don't even know, it's, I don't even know what kind, I think it's a MasterCard. But my point is, is that it's a beautiful example.
16:06 Speaker 00 The credit card company is providing a service that is not transparent to anyone other than the vendor, other than the merchant. Because you and I as customers, as people going through the world, you know, we get an offer for a card, it looks good or it doesn't look good. We take it, we don't take it. But what you're explaining is that there's information that's useful and actionable about the kind of people who generally take this card rather than another card and that changes what they can charge. And it doesn't necessarily mean they make an enormous greater amount of profit off of those cards with respect to merchants because they incur other costs to identify those peoples and as they miss or fail.
16:51 Speaker 00 I want to actually though back up a little bit.
16:55 Speaker 00 Because you have a wonderful paragraph, and I'll let you talk about it after I read it, that sort of summarizes why a credit card is attractive for the merchant. In the old days, as you point out in the essay that I'm quoting from, and we'll put a link to this essay and to other essays you've written on this, on the topic, in the old days, stores offered credit, and they kept a ledger, that was a piece of paper, eventually it became a computer program that they had, they had a bookkeeper, and they offered credit to their customers because sometimes customers didn't have sufficient cash to make a payment, and they were happy to take care of that as long as they were
17:36 Speaker 00 going to be paid eventually, and paid a little bit more perhaps for the opportunity to delay the reception of the payment. But this is what you wrote, quote, "This is the deal that the credit card issuer offers to the merchant, quote, 'You know, if you had a specialist doing that for you, it would be much more efficient. They'd have computers doing the math, not bookkeepers. They'd have departments doing collections, not clothing salespeople worried about offending customers who they'd need to get at Christmas. They'd have access to cheap deposits to fund loans rather than expensive working capital. They'd be adequately capitalized against losses rather than having tiny margins backed by almost no equity like most retailers.
18:19 Speaker 00 They'd diversify against regional and sectoral risk rather than being all in on the plant down the road still being open.'" So, just that simple, end quote, just that simple explanation really gives a rich flavor for the power of this innovation. This is effectively an innovation. This is a, it's not just, "Oh, it's convenient." It is a transformation of the payment experience with a myriad of costs that used to be associated with it for the vendor now being, the merchant now being, reduced if the price is right.
18:57 Speaker 01 Yep, and there's a complex bundle of goods that I didn't even get into everything there. Businesses receive their money much faster when getting paid on a credit card versus being paid in other fashions. There isn't a 60-day invoice dance for businesses in the economy that are poorly capitalized. The difference between getting your money, you know, two business days after a transaction and getting paid 60 days after a transaction is really quite material. Money is useful. You can pay it to employees and similar. And it moves credit risk from the merchant to the issuer, which is a very important part of the transaction. So this might not be obvious for people, so I'll just say it explicitly.
19:43 Speaker 01 You probably pay all your bills, but if something ever happens in your life, if you get laid off, if you have a medical catastrophe or similar, you always have the implicit option with the credit card of not paying the credit card. And you'll be assessed a fee and you'll be sent to collections and that will be very unpleasant for you. In that hypothetical world where you don't pay your credit card bill, the bank doesn't call up every company that you've bought a coffee from or bought a TV from and say, "Well, they welched on the bill, so I want my money back." The bank takes the loss and, you know, they have carefully mapped out to make that a survivable loss, given a portfolio of similarly situated customers and the other lines of the business that the bank runs.
20:28 Speaker 01 But in the world, and again, we used to live in this world where retailers took the loss if you were less than creditworthy. That had multiple negative consequences. Downturn, widespread economic downturns hurt retailers in multiple ways. One, by depressing demand, but two, the combination of depressed demand in the current period, plus credit losses for purchases that had already been made in past periods tended to kill retailers in downturns. And so moving that risk into the financial sector causes more problems at the margin for the financial sector, but less problems at the margin for people that can't afford teams of PhD economists to do risk catching.
21:15 Speaker 01 And the very real factor is that...
21:24 Speaker 01 Putting retailers on the hook for this sort of thing meant retailers would essentially be underwriting based on social capital and visible attributes of customers and similar and not underwriting based on, say, risk scoring models that were adequately informed by actual data about behavior. And that resulted in very sharply different experiences from people who are relatively advantaged in the socioeconomic system they find themselves in versus other people. And so one of the, I think you could call it a triumph of the financial industry over the course of the last few decades has been increasing financial inclusion to people who are not central examples of the socioeconomic system they find themselves in.
22:11 Speaker 01 I don't think we've mentioned, but I was an immigrant in Japan for about 20 years. And the month I got off the plane, I was explained by,
22:21 Speaker 01 I'll name the company, I won't name the financial firm. I got all my computers from Dell back in the day. I got to Japan with a suitcase full of clothes and immediately went to Dell and said, can I please buy a computer? I would love to be able to, we used Skype back in the day. So I would love to be able to Skype my parents. And I assume you offered computers on credit? And Dell said, we would love to sell you a computer. Talked to the finance people. And the finance people in Japan said, you're a foreigner who's been in the country for one week? No, absolutely no, hell no. You have a paycheck, we don't care. And so I did not, you know, what was the old commercial? You get a Dell? I did not get a Dell until I was able to convince a Japanese financial institution to take a risk
23:05 Speaker 01 on a lanky foreigner who had only a few weeks of being in the country. And, you know, the United States broadly is better at that than Japan. And Japan has gotten much better in the intervening 20 years on that story particularly.
23:21 Speaker 00 How much was that Dell computer 20 something years ago? Do you remember?
23:27 Speaker 01 I'm a bit of a gamer, so it would have been a little less than $2,000, $2,400. But you could get a reasonable computer back then for about $1,200, $2,400. And of course, you could get adequate for your WordPress and computers for a few hundred dollars even back in the day.
23:48 Speaker 00 Okay. I want to talk for a second about the interchange fee of 2.2%, 2.3%. And then you mentioned in passing that, and a fixed charge. I think most of us have experienced at some point in our life, we walk into a store, we have zero cash. And by the way, I live in Jerusalem, Israel. I don't carry any cash with me generally. Everyone here takes credit cards. But let's say I want to buy a Diet Coke. And they might have a minimum that I have to pay, I have to be buying to use a credit card. And I assume that's because of that fixed cost. And I'm curious, is that always there?
24:33 Speaker 00 And is it, in general, the reason you would do that is that there are costs associated with a transaction of any magnitude? And there are costs that vary by the amount of the transaction? You would say, you might think, well, I mean, how, what's the variance in the amount of the transaction? But of course, if you don't pay, it's a bigger loss for a big transaction than if you don't pay for a smaller transaction. So that would be why you'd want to have a percentage rather than a fixed cost at all. So do you have anything to say about that? I suspect you do, Patrick.
25:04 Speaker 01 Sure. So the fixed cost is not necessarily fixed at a particular number for all businesses at all times. Again, they do heavy discrimination based on ability to pay, based on what industry a business is in. And so businesses with large margins, generally speaking, the banks negotiate more of that margin to themselves than businesses with very thin margins. The, it's not primarily caused by the, the fixed cost does not primarily pay for the, you know, an underlying cost of the rails that operates on a per-transaction basis. It's simply...
25:48 Speaker 01 Part of the model, let's say.
25:49 Speaker 00 Okay.
25:50 Speaker 01 And they're, this is, credit card transactions are a complicated bundle of goods. Again, we talked about they are a risk transfer, they're a convenience mechanism, they're a marketing mechanism and similar. And there are parts of the bundle that are priced directly in that you can read on a statement and there are parts of a bundle that are unpriced because the business, the businesses involved or the industry finds it difficult to charge for them, but which they nonetheless must offer by some combination of customer preference, regulation, contractual agreements between themselves and similar. And so, for example, one interesting thing about credit cards is if you are traveling
26:33 Speaker 01 abroad and you lose your wallet or I get your card stolen and you find yourself in a city that you've never lived in with no payment method in your pocket and you call your bank at 2:00 AM in the morning, someone will pick up at 2:00 AM in the morning. And if you explain the circumstances, let's say, yep, we have a process for this, we will overnight you a credit card. And, you know, it doesn't matter if you're in the middle of central Japan, your bank is in St. Louis, nope, we can make that happen. And often that will be offered just as a courtesy for you. At some places, they charge you a Tic Tac fee, like $5 or $20 for expedited shipping, but they'll usually waive it if you ask a grocery about the world.
27:14 Speaker 01 But, you know, what pays for the person to be awake at 2:00 AM in the morning, even though they can't charge you for a 1-900 number phone call? It's the broader revenues thrown off by the credit card business.
27:30 Speaker 00 Yeah. So, as one of this aspect of the credit card world, we haven't gotten to, but you just kind of hinted at it. I'm on a trip, or I'm home, it doesn't matter, and I lose my credit card. And a miscreant finds a bad person, in fact, maybe it's not, I didn't lose it, it gets stolen. And I don't notice for a while, and this person tries their darndest to buy things with my credit card. The risk to me is, has a ceiling. In my memory in America, it was, in the old days, it was something very small, seventy-five dollars.
28:12 Speaker 00 I don't know if that's right still, but the point was is that, what of course this means is that I'm not as careful with my credit card as I otherwise would be. I'm not as desperate to find it if I do lose it or it gets stolen. And it also means that the credit card company is extremely eager to discover a stolen credit card transaction because they're going to eat that amount, not the store in the literal sense, the store has transferred that risk, as you said, mentioned, or at least in the explicit sense, to the issuer of the credit card. So talk about what's going on there and how banks and credit cards deal with that.
28:50 Speaker 01 Sure, so if your credit card ever gets stolen or you get defrauded using credit card networks, I apologize in advance, you are going to undergo some hassle, but your direct out-of-pocket expenses are capped. By regulation in the United States, the most salient regulation is called Regulation E, and there's a fifty-dollar cap if you give timely notice, which there's a very generous definition of timely notice to your bank. Banks in the United States, virtually universally, as a market news decision, waive the fifty-dollar deductible. So your actual out-of-pocket costs are highly likely to be zero.
29:31 Speaker 00 Wow.
29:31 Speaker 01 And in the case where...
29:36 Speaker 01 You call your bank and say this transaction was not authorized. Your bank is going to do a few things that will cause what the industry calls a chargeback. And so in the case where you don't pay your credit card bill, that risk hits your financial institution. In the case where the card is used without your authorization, the bank will do a chargeback which ultimately flows to the card accepting business. And so in that case, they have not successfully, in most cases, laying off their risk on the credit card ecosystem, they are internalizing that risk. There are products they can buy from the credit card ecosystem to insure them against that risk. And like most forms of insurance, there's a cost that is associated with that insurance.
30:19 Speaker 01 And because banks don't, they do bear certain forms of fraud risk, identity theft and similar. And they bear non-payment risk, but they don't bear fraudulent usage of credit card risk. There is actually, let's say, less investment by banks with regards to quickly indicting fraudulent use of credit cards than you might expect in a world where hypothetically they bore that risk directly. Banks are incentivized to approve more transactions at the margin than otherwise because approving transactions is how to get paid. And I have a essay about this whose title I inadvertently snowcloned from Dan Davies,
31:03 Speaker 01 who's a wonderful English author and economist. The optimal rate of fraud is non-zero.
31:13 Speaker 00 Correct.
31:13 Speaker 01 And the businesses all over the world get to choose at which margins what transactions they allow to go through and what transactions that they would stop or where they would impose other costs on the transaction going forward. Like you need to speak to a sales rep about this, you need to convince their fraud department you are who you say you are. You need to spend time out of your day versus simply typing in your credentials. And businesses that have very high margins.
31:48 Speaker 01 Would like to push the friction of marginal transactions in most cases to very close to zero so that they can realize those high margins, even if that pushes fraud up a bit at the margin. Businesses with low margin or which exist in very fraud-plagued industries because of the dynamics of the things they are selling generally tend to have more friction associated with transactions. And so they are more inclined to either deny transactions which are close to the margins or to subject them to other forms of secondary screening that users will perceive in the moment as being annoying. Like, I am who I say I am. You know I am who I say I am because I have a credit card and driver's license. Why? Why aren't you
32:33 Speaker 01 letting me buy the thing? Well, the bad guy also has the credit card and driver's license. And so, you know, we occasionally that is not dispositive on the inquiry.
32:43 Speaker 00 So just a couple of things here. I'm going to make sure I understood that correctly. You said, so let's say a thief has stolen my credit card, goes into Best Buy and buys a color television and charges it with my credit card. And there may be a policy that Best Buy has that the person has to show identification. In my experience, it's rarely the case anymore. They just take the card. And by the way, here in Israel, I never sign anything. There's no piece of papers. There is typically still in America where you have to physically sign your name. In Israel, at least in my experience, you just tap your
33:25 Speaker 00 phone and you're done. Phone obviously has special features that make it a little different than a random piece of plastic, but put those to the side. My point is a thief buys a color TV on my credit card. I get the bill. I say, this isn't me. And who pays for that TV?
33:46 Speaker 01 So it will ultimately be the retailer paying for it in almost all cases.
33:50 Speaker 00 That's the chargeback you talked about.
33:53 Speaker 01 A chargeback. So the...
33:57 Speaker 01 The way the interaction will work from your perspective is you call your bank. You say, I don't remember this transaction. A relatively non-senior employee of your bank will ask you a few questions about it like, well, do you remember going into that store as a possible someone else in your household could have used that? And they'll go through a bunch of things which are designed to essentially talk to many customers who are mistaken about the facts, which happens quite frequently, from filing a chargeback. But ultimately, you are the customer of the bank and Best Buy is not. And so the person who the bank has the most incentive to keep happy is you. And so if you are persistent about saying, no, really, that was not me, it is very highly likely that the bank will say, okay, we agree it wasn't you.
34:41 Speaker 01 And if the bank agrees with that, then in 99 point, well, okay, 99.9 is not quite accurate. That is the, that is the end of the inquiry in many cases. The bank will push some buttons on the rails, as it were, which will immediately claw back money from the credit card processor of the merchant. And that credit card processor will immediately claw back money from the merchant themselves. And the credit card processor will also typically tell the merchant, a customer has the other bank open to dispute with you. You can present evidence to the bank.
35:22 Speaker 01 And then, again, your bank will make a determination based on the evidence presented to them, whether they uphold the dispute or not. And in the case where, you know, the store wins the dispute, they get their money back, less some fee for the services of the bank and being an intermediary. But a thing that businesses will kvetch about incessantly is that even when they go through and they submit their evidence, they do not often win disputes they feel, subjectively speaking, they should have won. Or there are some businesses which say, well, I was not a party to the fraud. Someone came in. They looked reasonable. They presented a credit card. Shouldn't the bank eat that for me? And there are configurations of the world in which that is a decision we could have made.
36:06 Speaker 01 But we do not live in that configuration of the world. If you are Best Buy, you are certainly sophisticated enough to understand the deal you have struck. For smaller businesses, I understand that many smaller businesses are relatively less sophisticated with regards to those things. You might be surprised the first time it happened or viscerally emotionally funded when it happens. I say this to someone who has paid my fair share of chargebacks myself, sometimes for legitimate reasons and sometimes not. But that is the nature of the risk transfer. The banks buy certain forms of risk and they decline to bear other forms of risk.
36:45 Speaker 00 So this is an application of what I think of as the Coast theorem, which is basically property rights, the assignment of property rights sets in motion a set of incentives. And if you change the property rights, you're going to have different incentives on the parties. So in this particular allocation, which is not imposed, I don't know, but you'll tell me, if it's negotiated rather than imposed by regulations. But with this particular configuration,
37:22 Speaker 00 the Best Buy has the incentive to avoid the fraud and the bank issuer of the credit card, less so. And I find that fascinating just simply because every retailer, almost every retailer that I've interacted with in person, online's a little bit trickier, obviously, but I'm talking about in-person transactions where I swipe the card. I never got much of a hard time in recent years proving who I am. So is there an inherent level of lawfulness and trust that's driving this in a country like the United States? Is it different in other countries?
38:06 Speaker 00 I'm surprised that there's a full chargeback. And that, and of course, by the way, we didn't mention this, but you know, if every week I call my credit card company and say, you know, I didn't buy that television. I didn't eat at that restaurant. I didn't take that trip to Tahiti. Eventually, they, I'm sure they have systems for, for people who have too many claims like that. So you could
38:29 Speaker 01 Go ahead. I apologize. I apologize for interrupting you. One aspirationally hopes that banks will clamp down on abusive use of chargebacks. And that's aspirational in some senses.
38:48 Speaker 01 The words high trust society comes up quite frequently, often in the context of saying the United States is no longer a high trust society. I think people who make that claim fail to understand how different the spectrum looks over the entire world.
39:04 Speaker 01 But indicatively, Japan is an extraordinarily high trust society. The loss rates, both in terms of fraudulent transactions and non-payment of legitimate credit card bills in Japan are so low compared to the United States that people assume when they see the numbers that they, there must be a math error. But the United States is broadly a trusting society. That is partly why it works fractally within the United States. Well, that's why everything works, that we do have such trust in each other, largely deserved. And that is one reason why you are not constantly asked to prove your identity every time you, you try
39:49 Speaker 01 to buy a cup of coffee. It's, you know, physical control of the plastic or physical control of the phone is good enough in most cases. And there will be some fraud losses when they come out of the wash.
40:03 Speaker 01 This does not apply in every industry, in every geography, in every similar, and there are places where it does not apply. The
40:15 Speaker 01 It's something like doing the C-Trade back during the age of piracy. Or I suppose we are still living in the age of piracy in certain parts of the world. And it is impossible to navigate certain straits at the moment. But be that as it may, there are places in the world where chargeback rates are astoundingly higher than they are in the United States. And where it is the assessment, people in the financial industry who see the numbers, that a large portion of those chargebacks are what the industry calls friendly fraud, where the cardholder did indeed authorize the transaction, but would prefer to get the gooder service and also get their money back.
40:57 Speaker 01 And has used the financial industry as a weapon against the person selling the gooder service to defraud them of that gooder service essentially. And that friendly fraud happens in the United States as well, but it happens to a much greater degree in some other geographies to an extent where it is a, you know, it makes it difficult for some transactions to clear at all, or the market for some transactions to clear rather than the transactions clearing on the specialized credit card industry sense of that term.
41:31 Speaker 00 So I found out about you from a thread you had on X that we'll post where you're reacting to an article in The Atlantic, the author of the article is Hadi Lowry. And I'm going to try to do justice to her claim. And it's a little bit complicated, as is your reaction to it. So I'll try to read this slowly and try to make sure people understand what's being claimed here. So the article claimed that poor consumers who use credit cards for gas and groceries, what we would call necessities, those people often end up carrying a balance on their credit card with a high interest rate.
42:14 Speaker 00 And those low-income customers are subsidizing rich consumers.
42:21 Speaker 00 Who are buying business class airline tickets who never incur interest charges because they pay off their balance every month. Now, I would just say in passing before I continue that we talk about consumers as if they're A or B, rich or poor, carry a balance, don't carry a balance. I just want to mention, when I was younger, I carried a lot of balances. And when I'm older, I'm carrying fewer. So it just, I have been both in my life. But Annie Lowry's concern was that poor customers who use credit cards or even who pay cash are subsidizing richer customers. And part of the reason she would say that.
43:06 Speaker 00 Customers also use cash or debit cards, which we haven't talked about, but are different. And when you're a customer in a store, the price of the items are the same for everybody. Now, there are exceptions to that historically and probably, I'm sure, in different geographies, where you would pay a difference whether you charged it or didn't, or whether you paid cash. And in real life, there are plenty of people who give you a discount for cash because they don't have to pay the intercharge and they can sometimes not report it as income. So there's a lot of reasons for why businesses might like cash. But the point is that in many, many stores, there's just a price. So if you're paying cash or using a debit card to buy that item, because the intercharge
43:49 Speaker 00 fee is general, you're going to be effectively subsidizing the users of credit cards because that intercharge fee is embedded in the price of all the goods in the store to help cover the costs of giving consumers the convenience of plastic, even if they're not particularly using that plastic on any one transaction. So the claim of the article was credit card transactions punish the poor, help the rich, and then just to sort of, to make it even worse, the richer folks who are using the credit cards as opposed to cash or debit cards, they often get rewards
44:32 Speaker 00 for their use of the card. They pick up points for air travel, or they might get some rebate at the end of a time period. So they're actually getting a discount that is funded effectively by poor people. And this is the way you framed it, quote, not the way you believe it, but the way you framed the critique, quote, "There's a general feeling in some quarters that the payments industry functions as a tax on everyone, and that the incidence of this tax must be highest on the poor because they're least likely to have a rewards card."
45:06 Speaker 01 This thesis is fundamentally untrue. Very important to say that outright. The claim that the credit card rewards are funded by interest payments is just straightforwardly inaccurate. The issuers manage portfolios for each of their credit card products, and on a portfolio basis, there might be some users who very optimally take advantage of complicated reward schemes to get more in rewards out than businesses are charged in interchange for processing those users' custom. But over a portfolio for a particular product,
45:47 Speaker 01 it would be a very poor job indeed by the program manager for the card to require subsidization from other users elsewhere in the bank. And so, as a general statement, no, this is just straightforwardly false. The more sophisticated version of the critique is that, as you mentioned, there are people who use cash or debit cards that don't pay rewards, or certain forms of credit cards or other payment methods that don't pay rewards. And there are some people who get non-zero rewards out of the system. And so, given that they all pay the same prices in the checkout line, isn't there intrinsically some incidence that is happening that is transferring money from pocket A to pocket B?
46:30 Speaker 01 I broadly believe there is not. And serious people have looked into this question seriously and attempted to find evidence in favor of that that narrative of redistribution happening. And for example, there is a great paper out from Sumit Aragwal et al. At the Federal Reserve Board, Who Pays For Your Rewards: Redistribution On The Credit Card Market. Like many social sciences, certain parts of the economics and policy sphere would like to find certain answers to the questions that it seeks versus other answers. Some answers would end up in the filing drawer.
47:12 Speaker 01 Despite the title of this paper, which was cited to me by many people who said, haven't you read the the updated research in economics? It proves that there is redistribution. The distribution, the redistribution that they find is not the redistribution that is alleged in the Atlantic article, which they very clearly wanted to find. That's a bit of editorializing of me by the by me of the authors, but I think it is fair editorializing. What they actually found was a redistribution from savvy from less savvy consumers to more savvy consumers, which they say tends to benefit better off consumers, but there are
47:53 Speaker 01 better off less savvy consumers who are also being redistributed to less better off more savvy consumers. And that, by the way, ties into something which you mentioned earlier, that someone's socioeconomic status and their interaction with financial industry is not static over the course of their life. A different paper by partially the same authors, which I describe as the Rosetta Stone for credit cards, finds that credit cards are most lucrative in two portions of the FICO spectrum. The lowest end of the FICO spectrum, where people are paying lots of interest rate on high resolving balances, but also counterintuitively, the highest end of the FICO spectrum, where they result revolve almost no balances and get lavish credit card rewards, but are getting
48:38 Speaker 01 even more lavish interchange income from the bank. In the middle, and the, you know, 650, 720, etc. FICO levels, the
48:51 Speaker 01 Customers profitability to the bank actually dips negative. And that's because unlike the two extremes of the FICO spectrum, the middle levels of FICO are not exactly an attractive state for most users. You will tend to be in them for a while and age out. And so you might be an early career professional, perhaps a grad student, and you have relatively good credit habits, but you not have much credit history. And so you're in that 650 to 720 thing, where a lot of banks are saying, hmm, in expectation, you might not have all that much income right now. You might not be that lucrative a customer right now. But you certainly seem like someone that we would like to recruit to our bank
49:35 Speaker 01 and keep for a very long time, with the expectation that they make more money from you as you gain more income, as you get more wealth, as you age and age into life circumstances where your consumption tends to go up. And so cross subsidization of people isn't impossible in the financial industry. It happens and is acknowledged in many places. This particular cross subsidization that was alleged in the Atlantic article does not happen, flat out. And interestingly, by the way, people like to say that all customers pay the same amount of money at the checkout for the same things. But that just straightforwardly isn't true.
50:19 Speaker 01 That is well known by people who work in retail. For example, perhaps less central to the experience of people who read the Atlantic. But there are many people typically in lower socioeconomic strata who historically spent a lot of time couponing. And so there is, you know, one price for Kellogg's cereal at a particular store on any particular day. Unless you were willing to spend a lot of time with the newspaper on Friday, patiently clipping coupons that would give you 25 cents off of a certain box of cereal if you presented the coupon in the checkout line. And that allows retailers and
51:01 Speaker 01 To perform some price discrimination on the various customers of Wheaties. People who think that earning $10 an hour implicitly is a good use of their time will spend a lot of time couponing and get discounted Wheaties. And people who think that, you know, spending their Sunday afternoon clipping coupons is not a good use of their time will pay the list price for Wheaties, or, you know, whatever the price it says on the shelf is. And we don't often describe that as a subsidization of certain consumers by other consumers based on who is more willing to do couponing. But if you were to describe that in that fashion, I suppose that tracks the economic truth. But, you know,
51:43 Speaker 01 in the same fashion that if you're willing to spend a lot of time on couponing, Wheaties cost less for you. If you're, you know, willing to use certain card products versus other card products, Wheaties does cost less for you. That's, that's true.
51:59 Speaker 00 But to get to the central question. There's a store. The store has decided to accept credit cards. And credit card users,
52:14 Speaker 00 that, that has certain advantages
52:18 Speaker 00 in attracting customers. It also leads to some challenges and costs. And the interchange fee is, is one example of that. There's also fraud and, and that we talked about, the chargeback problem. So prices are higher than they otherwise would be in a world without fraud and where it didn't cost anything to offer a credit card. So I, I assume that stores that offer that convenience in a certain sense, and it's a tricky sense, there's, there's a direct way to think about it and what we might call a meta way to think about it, but. Uh, users, customers pay a privilege, pay a, excuse me, customers pay a fee for the
52:58 Speaker 00 privilege of being able to use a credit card, not have to carry cash, not have to borrow money through a different kind of system, et cetera. People who don't have access to credit cards, who choose to shop in that store, they don't have to, there could be other stores that don't take credit cards that have different prices. They may be convenient and inconvenient for different types of users and customers, but I assume it's a true statement that if you have a rewards card and you buy one item, the person who buys that one item with cash is paying a little bit more than they otherwise would for the privilege of
53:42 Speaker 00 shopping in that store. And I don't want to, you could debate whether that's a cross subsidy or redistribution. It doesn't strike me as a proper use of the phrase, but I think it's a, that part is a true statement. Do you, or do you want to challenge that? Because in your, your Twitter thread, your X thread, you had something to say about the volume of transactions, which I think you alluded to in a little phrase a minute ago. So what do you got?
54:09 Speaker 01 Yeah. I think there's an empirical question there, and it's not as obvious to me empirically that stores pass through payment cost to customers. The, the portion of business that various groups of customers represent is not, for most businesses, equal per capita across the population. And so broadly speaking, better off users who broadly speaking are in more premium credit card products that have higher interchange costs associated with them, and also tend to give those users monetary rewards.
54:51 Speaker 01 Spend more of the total spend at stores. They represent more of the total purchasing power in the economy. And so to the extent that they are driving up payments costs for the stores, they're driving up payments costs for the stores that are paid by users who are themselves. And I think if you sketch out the math there, even toy economic models don't work in such a way that there could be enough money coming out of the lower socioeconomic strata to subsidize the consumption of the much more consuming, higher socioeconomic strata. And
55:32 Speaker 00 Well, the only thing I would say to clarify that for listeners who might be a little bit struggling with it, I deliberately said one item. So if I go into Best Buy and I buy three color TVs, three TVs, they're all colored. I don't know why I called it color TVs. I would say that that dates me. It doesn't. I don't really remember. I've never used the phrase black and white TV very much even when I was younger. But if you go into a store and you've just bought a house and you're going to have multiple televisions in the house, so you buy a bunch of colored televisions and you buy a bunch
56:13 Speaker 00 of other products, fancy coffee maker and printer for your computer, maybe a couple laptops and so on, and you're going to pay up prices for those goods that has possibly in them some piece of the interchange fee, but they're going to make money on you. Both the Best Buy and the credit card company that issued you the card that you use when you pay for those things. And because the magnitude of those, I think what makes you, I want to make sure I'm understanding you, the magnitude of that, of those transactions relative to someone who comes into that store
56:56 Speaker 00 and buys a thumb drive, a 32 gigabyte thumb drive that's now practically a very, very small amount of money. That person also pays a little bit of a premium and that person paid cash. And so the price of the thumb drive, the richer person might have bought 10 of them. Now I am dating myself because people don't hardly use them anymore. But that person's gonna pay cash and the poor person buys one. The richer person buys 10 and of course, they pay a lot of money for those 10. And the fee is in there and they're helping cover the cost of the store in a much larger amount than the poor person.
57:37 Speaker 00 So if everybody bought one thing, once per time period and paid the same price, I think the critique has perhaps a little bit of validity, the Atlanta critique, but it requires you to ignore any possibility, again, of competition from other stores and opportunities to coupon, although couponing, I'm a little bit skeptical of. And I'm not sure that Kellogg's doing a lot of price discrimination. They could just be trying to encourage people to buy their product with the thrill of that slight discount. But, and it's a form of advertising. But my point is, is that, at least as I understood your point, it's the volume of transactions of people who are not being subsidized at a loss.
58:20 Speaker 00 They're just, they get a little bit back because they have a rewards card, but not like they're taking it out of the hide of poor people who pay cash.
58:33 Speaker 01 A few things to respond to. So I definitely agree that part of the thrill of couponing or the economic impetus to do it on Kellogg's perspective is not similarly, simply to engage in price discrimination, but it's to give people a moment on Sunday where they think about, think with anticipation about buying their box of Wheaties this week. And so they will consume more Wheaties at the margin than other companies that don't provide the fun game with the Sunday newspaper. Credit cards also function in very much that fashion. The brands are extremely aware that if we co-brand with an airline, that you will have a little bit of anticipation every time the plastic leaves your wallet, that I'm earning
59:18 Speaker 01 points for that great vacation or my honeymoon are similar. And therefore, I will feel a bit of willingness to spend more money at the margin than I would if I just had plain boring cash, which never does anything fun for me, aside from buying goods and services in the economy. But yeah, the broader point it was making that
59:44 Speaker 01 again, the Atlantic makes a statements that interest rates are subsidizing rewards, which is straightforwardly untrue. There's no cut of the math that makes that work.
59:59 Speaker 01 But in a toy world where everyone consumes the same basket of goods and services, and you assumed that there was pass through of all costs of the the storage customers on a ratable basis, then it might make sense that if some users are paying 2.2% interchange fee essentially on their basket and getting no rewards and other users are paying the same 2.2% but getting 1% rewards, then while they're all paying something, one is paying less on net. And so there is some sort of redistributed thing in that toy model of the world. In the world we actually live in, the people who are paying interchange but getting
1:00:41 Speaker 01 some rewards back consume more of the total basket of goods produced at the store. And so it doesn't subsidize them to the point where they are, you know, getting something net out of the equation.
1:01:00 Speaker 01 The interchange also has some other interesting
1:01:07 Speaker 01 economic consequences. One thing that it does is that it subsidizes down the cost of credit for certain users. And so in a world where you capped interchange,
1:01:25 Speaker 01 you can squeeze different parts of the model, but they have to the juice has to flow into other parts of the model. In worlds where you capped interchange,
1:01:36 Speaker 01 All sequel interest rates for users that consume credit have to rise. And so one way to think of interchange is the bank and the town hardware store saying, you know, the two of us will come to an agreement that we like subsidizing economic activity in this town and the availability of low-cost credit subsidizes economic activity, which is our mutual interest. And so we will bear some of the cost of credit on behalf of the consumers in this town, and then they will spend more, and that will be good for both of us.
1:02:11 Speaker 01 And the limit case of this is the payment method called buy now, pay later, which charges a much higher, they call it a different thing, but it's interchange, charges a much higher interchange to accepting businesses than credit cards do. It's closer to 6% versus 2. something percent. But buy now, pay later says for all users here, you will
1:02:41 Speaker 01 get the gooder service right now, but pay for it over the course of typically eight weeks, and you will not pay for, you know, the consumer credit at all in the course of that eight weeks. There is no high APR at all. That has been subsidized down to zero for you. They don't explain that to the customers because the person buying with loss at Sephora doesn't care about the detail. But what the buy now, pay later provider has done is structured some deal where they slice out, say, a percentage point out of that 6% that they charge the merchant, and they do a warehouse financing agreement with some hedge fund and math it out such that
1:03:26 Speaker 01 they essentially structure a synthetic 25% APR consumer loan ex nata without ever needing to charge customer for.
1:03:36 Speaker 01 And so credit cards that quote don't have rewards do have a, you know, APR that has been bid down a little bit from where it would prevail in a world where interchange did not exist.
1:03:55 Speaker 00 And I said something about Meta. You know, obviously, the existence of credit cards, which are never free. You mentioned the optimal amount of fraud is not zero. It's easy to get to zero fraud. You just don't have credit cards or you don't sell things. There's a lot of ways to think about why you don't want zero fraud. It's too expensive to get to zero. So, credit cards are a glorious way to ease economic transactions, to reduce the transaction costs surrounding commerce. And if they were eliminated, the world would be very different.
1:04:40 Speaker 00 It's hard to even begin to think about that. Things would be more expensive in a different way, and those birds would fall.
1:04:46 Speaker 01 Can I make an interjection there?
1:04:47 Speaker 00 Sure.
1:04:48 Speaker 01 So, you know, you mentioned earlier that fraud imposes a cost on society, which is trivially true, and that society has to pay that cost in some fashion. And in credit cards, we make it relatively explicit who is paying and how much they're paying. In some other forms of payment methods, we make it less explicit about who in society bears the cost of fraud. And so, for example, in the case where someone uses a fraudulent check, a particular type of fraudulent check, where they intentionally balance a check to pay for groceries, for example.
1:05:30 Speaker 01 The one thing that society has chosen to do there is to criminalize that act. In many places in the United States, it's called uttering. And you can be imprisoned for doing what is, in some cases, maximally fraudy fraud, but in other cases, just looks like personal finance mismanagement, or the unfortunate experience of being poor but wanting your kids to have food to eat that day. And we send people to jail for that. And society pays a great deal of money to send people to jail and pays a non-economic but very real cost when a mother can't meet her children for 90 days because she, quote,
1:06:13 Speaker 01 uttered a check that she did not have balance sufficient to cover when the check was presented a few days later.
1:06:23 Speaker 01 You know, we, when we internalize that cost in credit, in credit cards, virtually no one gets sent to jail for, you know, simply not paying a credit card bill. That, that is a normal and expected part that some people will use credit cards improvidently and the bank will take care of that. And there will be consequences, certainly. They might have less access to credit in the future. They might be charged a fee. The future banks might decline to, to deal with them, et cetera, et cetera. But they don't go to jail. And there is no, you know, $45,000 per prosecution cost, which is passed on to the taxpayer. And, you know, no one fails to see their kids for an extended period of times over what's
1:07:05 Speaker 01 ultimately considered to be a transient and within the distribution economic issue at the scales of the US economy. And so we, we have choices in how we choose to allocate costs. And certain costs are more salient to people because they, for whatever reason, are more legible, or they're written down in a PDF file somewhere, or you can read the disclosure statement from your bank. Or indeed, they are seen politically relevant to people who might write in high status journals like The Atlantic. But those are
1:07:47 Speaker 01 not the only costs in the world. And merely wishing away the, the costs of the incredible complexity and frictions within society will not make those costs go away.
1:07:58 Speaker 00 I want to make sure I understand, before we leave this question of cross subsidization, I want to make sure I understand how we're thinking about this.
1:08:13 Speaker 00 If I'm a reliable payer of my
1:08:18 Speaker 00 Small loans that I've taken out with my credit card. That is, if I pay my balance off every month. I avoid certain fees. If I have the discipline not to overreach in what I charge on that card. If I have the success and wherewithal to make the payment every month. I avoid fees. If I do that very well, I may get certain rewards. If I'm a big spender, over time, I may gain access to certain rewards that I wouldn't otherwise have.
1:08:58 Speaker 00 But of course, my economic activity is what allows me to earn those rewards and my reliability. For somebody who doesn't have those things. They have trouble maybe psychologically paying off their debts accrued on credit cards. They are unable to pay credit card balances because of their economic situation, that their pay is low or erratic. Those people do pay, obviously. They're disadvantaged in a certain sense.
1:09:39 Speaker 00 So I think the key piece of your critique of The Atlantic is somehow that rich people who are reliably paying off their balances are somehow extracting resources from people who pay cash through the form of the price level of the goods in the store. And I would say that your critique of that view is simply that some behaviors are rewarded in life. But also the fact that the people who have reward cards are often.
1:10:20 Speaker 00 Buying a very large share of the activity, economic activity of the store. And as a result of that, they are, they have access to, to products that otherwise are unavailable to, to other people. Am I missing anything there? Is that, is that a fair summary of your, of your view?
1:10:40 Speaker 01 I think that is a relatively fair summary. I, I think that the, the moralization of being in credit card debt is sort of a, a attractive set point for people for a variety of cultural and similar reasons. But there is no moral failing in being in credit card debt. I, I used to run a business and I often described to people that the investors in my business were Visa and Mastercard, or I suppose more to the point, Bank of America and Chase, because they were the ones actually taking balance sheet risk for me. And I paid tens of thousands of dollars of interest over a number of years that were leaner for the business.
1:11:25 Speaker 01 And then I sold the business for much more than I paid in interest charges over the years. And they, you know, I joked that they were investors, but they did not get equity upside in the business. They were simply paid for services in the same fashion that other vendors that I used were paid for services. The extension of credit in the economy is a valuable thing. It allows people to pull consumption into the present and allows them to smooth out those variability in income that, that some people deal with much more than others do. And, and the extension of credit is not free. There, there is a cost associated with that. People who, who use that service a lot will tend to pay a lot for it.
1:12:09 Speaker 01 And if you make very disciplined use of small amounts of credit, the, that extension of credit will be.
1:12:22 Speaker 01 Offered to you on extremely favorable terms. For example, we haven't said the word explicitly, but grace period. For people who virtually never resolve the balance, you are still consuming credit in some fashion in that you buy the thing today, you pay for the thing today, but you might have 45 to 60 days until the cash actually physically leaves your bank account to pay for that thing. And the business is getting paid two business days from now. And so where that money come from between T plus 2 and T plus 60? The bank. You know, the bank has advanced it and they have paid some cost of capital for doing that. And why did they pay that cost of capital?
1:13:06 Speaker 01 Well, interchange makes that a very lucrative business for them to be in. If you are constantly spending a lot of money on your card every month and paying it off every month, even net of the rewards, they have to pay you. But if you spend relatively less every month, but do carry a large and compounding balance, you will pay for that balance.
1:13:28 Speaker 00 In the course of reading your essays on credit cards, I stumbled on your essay on negotiation. I'm not sure we could have an entire episode on that essay, but we might. It might even be a three hour episode. We may do that down the road, Patrick, but before we sign off, I do want to let listeners know that we will put a link up to that essay on negotiation, which I found both highly entertaining and practical. Negotiating a salary, especially for younger people, is frightening, scary, fraught with
1:14:12 Speaker 00 danger, and thereby therefore often doesn't take place. So this will ease your pain, those of you out there who have a chance sometimes to negotiate, and you may not realize that that opportunity is there and Patrick will guide you. And so we will put a link up to that essay and Patrick, my guest today has been Patrick McKenzie. Patrick, thanks for being part of Econ Talk.
1:14:38 Speaker 01 Thanks very much for having me.
1:14:46 Speaker 00 This is Econ Talk, part of the Library of Economics and Liberty. For more Econ Talk, go to EconTalk.org, where you can also comment on today's podcast and find links and readings related to today's conversation. The sound engineer for Econ Talk is Rich Goyette. I'm your host, Russ Roberts. Thanks for listening. Talk to you on Monday.
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