The Vanilla Index

Remember that line from Toy Story 2 when with reference to the limbo dance Barbie asks: “How low can you go?” Well I couldn’t resist taking the photo in the email because the last time I looked at the price vanilla it was just shy of $30. I feel like saying “How high can it go!”

That price indicates the forces of supply and demand. I am sure the increased price reflects a lower supply. More importantly however, retailers are testing how much consumers are willing to pay for a bottle of vanilla. Are you willing to spend almost $40? Would you spend even more than $40? How high do you want to go?

I was racking my brain recently trying to figure out how banks are extremely profitable. Then I witnessed 2 examples of accountholder behavior that gave me the answer. The banks have nailed accountholder psychology and used that knowledge to their maximum profit.

They know that in today’s society people are willing to pay for convenience, rapid solutions, and rewards and are often indifferent to the cost to do those.

Take for example the e transfer fee. It is $1.50 per transaction. Not bad if you only do 1 or 2 a month. But what if every week you did an e transfer? Over time that would add up. But people think it’s only a $1.50 no big deal. And if millions of transactions are done, well you do the math. And if you are accessing your cash from an ATM that is not your own bank branch there is an additional fee on top of that.

I happened to see a statement for a credit card with rewards attached to it. The interest rate was not your standard 19.99%. It was a full 5% higher at 24.99%. Does that 5% justify the reward of a free movie if you spend enough? Only if the cardholder can pay off the balance every month. How many do?

But the most egregious application of the banks’ knowledge of our psychology is how they behave when people get into credit trouble. This can happen when credit card holders are late on their payments or make interest only payments. I wouldn’t go so far as to say they prefer that credit card holders stay in debt but it becomes much more difficult to get out of debt when a cardholder gets in financial difficulty. This is compounded when someone would prefer to borrow a lump sum just to be able to pay off the offending card. The more prudent path would be to rearrange or cut monthly spending to be able to pay off the debt with their own money rather than borrowing again to get out of debt. But society is so conditioned to a quick fix that many consumers reject a longer term solution. As I said the banks know their accountholders’ psychology and they are not shy to profit from it.

Make no mistake credit is a huge business for banks and is extremely profitable. Recent events in my own life attest to this. During the summer I was shopping at a major retailer that I usually never patronize. The cashier was very persistent in trying to get me to sign up for their store credit card. She kept asking even when I kept saying no, repeating the supposed benefits over and over.

Our bank sent us new credit cards without us asking, even though we had recently received new ones. And you guessed it they are rewards cards. When my husband phoned to activate his, as the primary cardholder he had to listen to a long spiel of all the extra services he should buy that were associated with the new card.

In the near future I will be discussing the importance of understanding your credit score and report.

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