Credit or Gift Card Positives, Negatives and Innovation

The banking industry has never been known as innovators or centers of creativity, that’s why an article in the Wall Street Journal caught my attention today: Ice-Cream Bank’s Rocky Road. I’ll get to the article in a moment, but my gripe with credit cards and gift cards is that although they provide a definite convenience, their negatives outweigh their positives for many Americans.

Credit cards, and debit cards are definitely handy. No one wants to carry thousands of dollars around when making large purchases and they are necessary for making flight, hotel and car rental arrangements. They also provide reward points that can be used for gifts, cash, and travel; maybe a few percentages of the purchase.

Then there are the negatives: retailers are charged 1.5% – 3% on purchases, inflating the cost of goods we buy automatically. The credit card industry makes a lot of money on these fees. They also like it when people don’t pay-off their balance each month, because they charge up to 30% interest on unpaid balances. The credit card issuers are really nice when they offer you a card, tempting you with points, no interest for the first year, and maybe waive the annual fee. However if you run into hard times, and miss a payment, many of them increase your interest rate to their highest rate nearly 30%, making it even harder to get caught up.

Research shows that people that use plastic to buy goods instead of cash psychologically feel less pain, and spend more per purchase.

In summary, you use credit cards out of convenience, the retailers charge more for the goods to cover the cost, you spend more money, may end up paying high interest rates, and in return you get convenience and points. Now some people have awesome discipline and don’t spend more, and really profit from the points. I wouldn’t recommend this to most people, but if you are really disciplined, the points can cover your vacation costs every year, potentially saving a few thousand dollars from your budget.

Gift cards on the other hand, are a nice way to buy gifts for people. Some people buy them at grocery stores, and get reduced cost of gasoline; Kroger and Giant Eagle are common grocery and gas bundlers in our area and some people do this when making large purchases at other retailers. The negative side of gift cards is they can sometimes get lost in the mail, forgotten or lost once we receive them, or lose value if not used within a specific time.

Now back to the story about an Ice-Cream Bank. Seems there’s this boutique ice-cream parlor in Pittsburg that pays 5.5% interest per month on their cards. The interest can be redeemed for items they sell such as ice-cream and coffee. The banking regulators are in turmoil trying to shut down this parlor offering bank like products, but so far they haven’t figured out how to shut down the niche the proprietor found in banking and securities regulations.

I like innovation, and admire Ethan Clay’s (the owner), creativity and courage to come out with an interesting idea to attract and reward customers. This got me thinking, why doesn’t the credit card, banking and major retailers come up with ideas to not just add convenience and points, but to encourage saving money on purchases, maybe provide a discount on purchases if you use their card? Wouldn’t it be cool if a credit card company rewarded people who finally paid off their balance, by depositing money into a special savings account (redeemable only the future) for each month that the balance is reduced? Maybe even increase that amount for every month that this is maintained, and then repaid. They probably cook up ideas like this all the time, but they are not approved when they get to the executive team, for fear of losing revenue, since they make more money on interest and fees. But like Ethan Clay’s small Whale Bone Cafe, small companies can try new ideas. Maybe a smaller credit card issuer will read this story in today’s Wall Street Journal and provide a card that has positive innovations to help people more.