Dirty Secret: The Cost of Fraud

Dirty Secret: The Cost of Fraud – a reader asks…

Hi Chris, you’ve written a lot about credit card fraud and how to protect ourselves from it. That’s all well and good but why should we be overly concerned? After all isn’t credit card fraud simply absorbed by the banks and (slightly) reduces their profitability?

Ahh, would that be the case, it would be a great thing. However the truth is that the cost of credit card fraud is universally treated as a cost of doing business just like any other business expense. That means that when you buy something, the cost of credit card fraud is built into the selling price, since merchants can’t charge you extra for using a credit card to buy something.

Regardless of whether you use credit or cash to pay for something, merchants and businesses price their goods based on a fairly simple equation: the selling price is made up of the cost of raw materials plus the cost of converting those raw materials into a finished product plus the cost of delivering that product to you, plus profit for everyone involved in this process. Our free-market system supposedly uses competition to keep prices and profits in line, but the truth is that it often doesn’t. Not a week goes by when you haven’t read about price-fixing, collusion on commodity pricing, and the sky-high profits many companies enjoy.

The sad fact is that we really have no idea what the real cost of anything is these days. We only know what the thing sells for – what it’s worth. Some products may have a very high profit margin and some may be very slim, but we’ll only be guessing which is which. We’ll never know – pricing is routinely obfuscated by sales, discounts, buy-one-get-one-free, and other marketing tricks. You really didn’t think those marketing gimmicks were designed to save you money, did you? They are designed to get more money out of your pocket and into the merchant’s – nobody is in business to lose money.

[pullquote]You really didn’t think those marketing gimmicks were designed to save you money, did you?[/pullquote]

It only appears to save you money when you buy something on sale, that sham has been foisted on us by the marketing industry. And as for the cost of credit card fraud, while it’s true that banks and merchants work hard to combat credit card fraud, it’s still a routine business expense that’s passed on to you, the consumer. There has never been a ‘free lunch’, despite what you read and hear. We pay for everything, but most often are clueless about exactly how we pay for it – we only know that at the end of the month, our wallets are near empty and we’ve little to show for it. That’s our free market system working hard to make the rich richer.