I received the following email from Tom Greco. As many of our readers know, Greco is a monetary expert and travels extensively, as he is doing now. So I told Tom that I would answer the comments one person made to Greco’s comments regarding a posting I made. To keep this rather convoluted endeavor as simple as possible I have a link below to my original article.

That will be followed by Greco’s comments and his link to my article. Then his email to me for assistance. Followed by the readers comments and my response. Whew!

I wrote an article titled, “What could replace frequent flyer miles.” ReplaceMiles

Greco’s article commented on my story, and the comment that followed Greco’s observations is posted below Greco’s email to Bob Meyer…

Bob,

Would you care to comment on the below comment that was posted to my blog
http://beyondmoney.wordpress.com/2007/12/21/can-frequent-flyer-miles-become-a-real-currency/#comments,
or ask for responses from trade exchange operators?

Tom

Here are the reader’s comments…


Similar to GPX and the airlines, trade exchanges are “imposing heavy fees”
on holders of their currency. If one has an ABC Trade Dollar and wants to
exchange it for an XYZ Trade Dollar he will be charged a transaction fee of
10%; however, the fee is levied in U.S. Dollars. Additional fees include the
cost of joining & maintaining membership in 2 trade exchanges. Unlike the
trade exchanges, the airlines don’t charge a membership fee or maintenance
fees to the best of my knowledge.

The true cost to a trade member to exchange one trade dollar for another
trade dollar exceeds 10% because the market value of a trade dollar is
closer to USD 0.50 than USD 1.00.

If the value of an American Exchange Network Trade Dollar were USD 0.50 than
the true cost to exchange out of AEN would be 20%.

This fact is one reason why the U.S. trade exchange industry has high member
turnover and anemic growth.

Its unfortunate that most trade exchange owners don’t understand the
importance of liquidity.

Bob Meyer’s perspective on the readers comments:

Statement: Similar to GPX and the airlines, trade exchanges are “imposing heavy fees” on holders of their currency. If one has an ABC Trade Dollar and wants to exchange it for an XYZ Trade Dollar he will be charged a transaction fee of 10%. and the fee is levied in U.S. Dollars.

Meyer: Yes, trade exchanges charge a transaction fee when a trade dollar is spent within their exchange network. The only way for the example above to occur is for two people to be members of two identical exchanges. Then their “exchanging of trade dollars” is simply their “buying” from the other party, for which they are charged the normal transaction fee.

However, they would not identify the purchase as “buying of XYZ trade dollars,” but rather, they would state that the purchase is the product or service the other party sells in their normal course of business.

But the fee of 10% is much less than the fees charged by airlines to transfer FF miles.
Let’s compare the two on 1,000 miles (value 2 cents per mile, or $20 per 1,000 miles) and 5,000 miles.

Trade Exchange: 10% fee on $20 (1,000 FF miles) = $2.00; 10% on $100 (5,000 FF miles) = $10.00

Airlines: $6.95 processing fee, plus $80 for trading 1,000 to 5,000 FF miles. (Bottomline: Cost to trade 1,000 FF miles worth $20 is $86.95! To trade 5,000 FF miles worth $100 is also $86.95.)


Trading 6,000 FF miles to 10,000 FF miles @ 2 cents value per mile.


Trade Exchange: 10% fee on $120 (6,000 FF miles) = $12.00; 10% on $200 (10,000 FF miles) = $20.00

Airlines: $6.95 processing fee, plus $130 for trading 6,000 to 10,000 FF miles.
(Bottomline: Cost to trade 6,000 FF miles worth $120 is $136.95. To trade 10,000 FF miles worth $200 is $136.95.)

Trading 11,000 to 15,000 FF miles @ 2 cents value per mile.

Trade Exchange: 10% fee on $220 (11,000 FF miles) = $22.00; 10% on $300 (15,000 FF miles) = $30.00

Airlines: $6.95 processing fee plus $180 for trading 11,000 to 15,000 FF miles.
(Bottomline: Cost to trade 11,000 FF miles worth $220 is $186.95. To trade 15,000 FF miles worth $300 is $186.95.)

Statement: Additional fees (when operating through a trade exchange) include the cost of joining and maintaining membership in two exchanges. Unlike trade exchanges, the airlines don’t charge a membership fee or maintenance fee, to the best of my knowledge.

Meyer: Is it better to pay fees after you’ve successfully spent your trade dollars, or do you prefer to earn airlines miles that are, in many cases, never spent/redeemed?

Statement: The true cost to a trade member to exchange one dollar for another trade dollar exceeds 10% because the market value of a trade dollar is closer to 50 cents than $1.00

Meyer: Obviously the cost is more than the 10% but that cost is in no way related to the market value of the trade dollar. The cost of one’s trade dollar is one’s variable cost of doing business. Period.

Furthermore, to say that the market value of a trade dollar is 50 cents (50%) on the dollar is inaccurate as well. When you go and order a meal on trade, does the restaurant hand you a different menu for meals “on trade?” Of course not, you pay the prevailing cash cost for the meal, understanding that the tax (to the state) and tip are payable in cash.

Additionally, when you have your taxes done you pay the prevailing rate the CPA charges…ditto for dental work, etc. If you are being charged more on trade, and you don’t feel it’s fair you should walk out the door. (Or, maybe you would look at it from strictly a business perspective–considering your variable cost of your trade dollar plus the 10% service fee, and see that it still is a better deal for you than laying out hard cash.)

Statement: If the value of an American exchange network trade dollar were 50 cents, then the true cost to exchange or trade out of the trade dollars is 20%

Meyer: Trade exchanges all operate at prevailing retail pricing. The real “value” of your trade dollar is based on your variable cost of doing business, as mentioned earlier. And the cost of exchanging or trading the trade dollar for another is the transaction fee.

Statement: This fact is one reason why the U.S. trade exchange industry has high member turnover and anemic growth.

Meyer: The transaction fee cost is not the reason for high member turnover and anemic growth. There are many reasons for member turnover, one is that small businesses are turning over, i.e….going out of business…changing ownership, etc. And many haven’t taken the time to appreciate …or they don’t understand what the true value of a trade dollar is. (A barter purchase vs. a cash purchase).

Statement: It’s unfortunate that most trade exchange owners don’t understand the importance of liquidity.

Meyer: Members exchanging trade dollars among themselves may provide more liquidity for themselves (the two respective parties) but it has nothing to do with the liquidity of the trade exchange’s currency.

An option you might want to consider, in lieu of transferring trade dollars (as described) and paying the fees, is to secure a line of credit from the exchange where more trade dollars are desired.

We value our readers comments, see “comments section” by scrolling down after reading this post.

To learn all about how your business can benefit by bartering see: BARTER

This entry was posted on Friday, February 22nd, 2008 at 2:27 pm and is filed under From the Desk of Bob Meyer. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.