What’d They Get?

When I tried to check-out from the hotel in Brazil, I discovered the account number and name on the credit card I had been using had apparently been “borrowed” and the account closed.

[Mild Panic.]

But after a relatively long phone call between myself, the hotel and the credit card company, the hotel charge was approved and I could continue to use the card for charges less than $250 for the next two days, sufficient to get me home.

Now, a couple of weeks later, I have the new card and can see the fraudulent charges on the statement which, after calling to identify them, the credit card company has placed “in dispute”. I’ve been through this before and anticipate no problems. They were the first to recognize the fraud so I’m expecting smooth sailing.

I won’t have to pay them.

Looking at those four charges, I became curious. Who were the merchants, how much “product” did the crooks actually get and, ultimately, who pays that $2436.15?

It’s not me.

Or is it?

Credit card companies make money a couple of ways:

• You pay an annual fee;
• The merchants pay an annual fee and also a per-charge fee of a couple of percentage points; and
• The credit card company gets your money before they pay the merchant.

A couple of decades ago, I worked for American Express and, at any given moment, they had hundreds of millions of dollars of “float”. That’s money paid in by members that was destined to be sent out to the merchants but, in the lag between in-flow and out-flow, they could do something with it.

And do something they did – they invested it lots of different ways and turned a large amount of money into even more money.

And because the in-flow was more or less constant, the number of dollars in the bubble was pretty much constant and, by the time they needed to pay the money out, more had come in. So they essentially took the bubble out of the loop, invested it for long periods of time, and used new incoming funds to pay the outgoing payments to merchants.

That’s where American Express made most of its money back then. (The travelers check float was considerably longer but didn’t involve as many dollars. Nonetheless, that float was also highly profitable in the same manner.)

So, when someone rips off your credit card and charges up a bunch that you don’t have to pay, who does?

In most cases, the credit card company simply eats the loss because, compared to the immense flow of dollars through their hands and what they can do with it – remember the size of the bubble is more of less constant and always there – the $2436.15 fraud that was perpetrated with my credit card is probably not even a drop in the bucket.

Yeah, they’d like to keep that from happening but, hey, what’s a few thousand when that same customer (me) channels much, much more through that same account in a couple of years? Theft of my card is rare but I commonly charge, well, suffice to say I travel a lot and my “couple a month” expense reports aren’t that far off from that same amount. Keep that up every month for a couple of years and you can see that the credit card company can make a nice tidy profit off the float that more than pays for the rare fraud that I experience.

So who pays?

Ultimately, and you won’t be surprised, the cost of that fraud is an “overhead” for the credit company and, through what they charge their customers – card holders and merchants – they cover the losses and make a nice tidy profit.

Ultimately, you and I pay for the fraud through those extra couple of cents per gallon at gas stations to use a credit card, or in the slightly inflated product costs used by sellers who then have to pay the credit card company a couple of percentage points when a buyer uses a credit card.

“What, me pay that $2436.15?”

Yep.

And you, too, because even though your credit card wasn’t stolen, you’re still paying those same marked up prices.

Back to the merchants of these particular charges.

Who are they and how much “product” did the crooks actually get?

Well, just from the names of the merchants, it would appear that three of them are either night clubs or restaurants and the last is an online electronics retailer. That last charge may have been flagged before the product(s) were shipped but, whoever was using the card probably had a really fine meal with a lot of his or her friends.

You wanna make a bet on whether or not the waiter/waitress actually ever received the generous tip that probably accompanied the fraudulent charge?