Wednesday, July 04, 2012

Half life of money

 Every time someone makes a payment of  Rs 100 using credit or debit card, depending upon his bank, the vendor will be charged somewhere between 2% to 4%. As people do transactions the amount of money available in the market decreases because part of that money is kept by the bank. The plot below shows the number of transaction it takes to reduce "public" money from Rs 100 to Rs 50 at different transaction charges or think of it as time it takes bank to make half the public money its own.

At 2% it takes about 35 transactions and at 4% it takes around 16.  At 10% it only takes 6 transactions to reduce it to Rs 50. The cashless economy taxes its users and that tax is payable to the bank. Good thing is at least in India RBI has now reduced this to maximum of 1% but for online transactions only. 

Making money on loans takes time, 10% over one year. But when transactions are taxed, the amount of money made by the banks is not dependent on time, it is just based on how fast the money moves around in the market. Fast moving money is probably a sign of good economy, but because of the tax, the faster it moves, faster it dries up. The half life of money could be few months to few years. I don't know the numbers, but it seems plausible that banks can make much more than 10% a year, if number of such transactions is say greater than 4 for 3% rate.  

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