Credit Card Follies
| Thu Jul. 16, 2009 3:39 PM PDT
Ah, credit card interchange fees. One of my favorite subjects. Here's how they work: every time you buy something with plastic the merchant pays a 2-3% fee to the credit card company. You never see this fee, though, because merchants are contractually forbidden from charging you an extra 2-3% for credit card purchases. Instead, they just add it to the price of their products and pass it along to everyone, including customers who pay by cash or check. The whole process is invisible.
Merchants are unhappy about this arrangement. 
But generally speaking, what they're unhappy about isn't the invisibility. They're unhappy about the size of the interchange fee, which they'd like to be lower.
Now, it's obvious why merchants and banks fight over the size of the fee. A big fee is good for banks and a small fee is good for merchants. But they both seem to be fine with the invisibility of the fee. Why?
Again, it's pretty obvious: If fees were tacked onto credit card purchases, people would use their credit cards less. That's bad for banks. But if they used their credit cards less, it probably also means they'd spend less, period. That's bad for merchants. It's better for both parties to keep the fees invisible and keep everyone spending lots of money.
This has recently become the subject of a major lobbying effort, but instead of trying to make interchange fees transparent, merchants are mostly just trying to convince Congress to regulate them downward. Andrew Martin reports:
But retailers may have a tough time convincing Congress that consumers would benefit if the effective interchange rate, which has increased slightly in recent years, is dialed back. Many other countries, including Israel and Australia, have required banks that issue cards to reduce the fee. Yet there is little evidence that the savings were passed along.
In Australia, where regulators required banks to cut the interchange rate for Visa and MasterCard purchases to 0.5 percent from 0.95 percent, the banks offset their loss by reducing rewards programs and raising annual fees, according to a 2008 report by the Government Accountability Office.
So what's wrong with that? In fact, I'd go further: let's kill two birds with one stone and just abolish interchange fees altogether. Card companies would then be forced to charge higher annual fees to credit card users — fees that (a) would fall solely on the people actually using credit cards and (b) would make it obvious just how much credit cards actually cost. That strikes me as an excellent idea. Credit cards aren't a free lunch, and there's no reason that consumers should be fooled into thinking they are.
And if that means consumers end up using credit cards less — well, what's wrong with that? It's the free market in action.
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Comments
Is it only a percentage fee,
Submitted by steve s (not verified) on Thu Jul. 16, 2009 4:07 PM PDT.
Is it only a percentage fee, or is in a set amount plus a percentage, like, say, 25c +3%? I ask because several places around here have minimums for using a card, like $5. Which wouldn't seem to make much sense if you aren't trying to overcome some set amount.
the devil's in the details - of the credit card contracts
Submitted by Anon (not verified) on Thu Jul. 16, 2009 5:28 PM PDT.
Yes, I know for a fact that at least some contracts between credit cards and merchants involve a set amount PLUS a percentage, and if the transaction is small enough, that can really eat up a lot of margin (maybe even making the sale into a net loss).
You may be interested to know that merchants are not actually allowed to impose minimums, although they often do anyway. In general, the big credit card companies' contracts with merchants require that the merchants accept the cards for any transaction, no matter how small (these are the same contracts that prohibit offering a "cash discount"). In effect the contracts say: if you want to use credit cards at all, you have to treat them as cash. That means (a) no "cash discount", and (b) allowing somebody to charge $1.23 on their credit card, even if our fee then eats up a big chunk of that amount.
It's a terrible deal for merchants, who routinely violate (b), although I think it's rarer to see violations of (a). Merchants would much rather set a $10 or even $20 minimum. But they do so in violation of their contracts, in general. The only choice merchants have at the moment is to stop accepting MasterCard (or whatever) if they don't like its contract terms. But that's not much of an option, really. So we're stuck with an arrangement that basically hides all costs and (as I understand it) enriches credit card companies at merchants' expense.
Here's another route, one
Submitted by Michael R (not verified) on Thu Jul. 16, 2009 4:31 PM PDT.
Here's another route, one that could be taken by retailers like Wal-Mart and Target, who are spending money fighting the credit card companies in congress. They could simply offer a discount for paying with cash, say 1% or 2%. Not the biggest discount in the world, but it's something. Customers using cash would take away from credit cards' business, providing some incentive for them to drop their charge, and retailers, whose prices are already marked up to cover the 3% spread, would still benefit an extra 1% or 2%. And of course customers could save some money, too. Everyone wins but the credit card companies.
Law
Submitted by Art Eclectic on Thu Jul. 16, 2009 4:56 PM PDT.
First, they have to change the law. The credit card companies lobbied hard many years ago to make it not allowable to charge more for using a credit card or to offer a "cash discount." So, retailers have no choice but to comply. However, I've been seeing more retailers buck the law. My hair stylist is now offering a discount for paying cash.
If nothing else, just remove the law forbidding retailers from passing their credit card costs back onto the consumer.
I think it's not a law -
Submitted by Anonymous (not verified) on Thu Jul. 16, 2009 5:20 PM PDT.
I think it's not a law - it's the contract between credit card companies and merchants, which is very long and complex, and which you won't be surprised to know, the credit card companies write.
Bit of both
Submitted by Art Eclectic on Thu Jul. 16, 2009 5:39 PM PDT.
In California, it is illegal to add a surcharge for use of a credit card, but offing discounts for cash is legal. Frankly, I think this is kind of stupid - the price is the price. The price for using a credit card transaction should be a surcharge, I see no reason why consumers shouldn't pay the costs of the credit transaction. I do internet retailing as a side business, so I do have a horse in this race and am still seething over recently getting hit with a new fee of $200 a year for BS PCI security compliance. The financial services industry is leaving no stone unturned in their attempt to keep profits rolling in and bonuses high.
Kevin Drum: "And if that
Submitted by alex (not verified) on Thu Jul. 16, 2009 4:40 PM PDT.
Kevin Drum: "And if that means consumers end up using credit cards less — well, what's wrong with that? It's the free market in action."
No, a free market would be where merchants can choose whether to eat the interchange fee or pass it on to the customer (or split the difference). As long as they're clear and upfront about passing it to the customer, I've no problem with it. Let the merchants decide what's best for their business.
Some gas stations already do this, but usually have big signs for low gas prices and small signs about "cash only".
Simplest solution of all? Regulate our 2-3% fees down to the 0.95% that Australia used to have before they lowered it to 0.5%. Even under the old scheme Australian merchants were getting ripped off less than American merchants are. Talk to anybody who runs a small business with lots of CC sales (e.g. pizzeria) and they'll happily tell you how much this pisses them off.
Of course that will never happen because the US government is owned by the banks (just like Sen. Durbin said).
Different Down Under
Submitted by Doctor Jay on Thu Jul. 16, 2009 4:42 PM PDT.
I have it from friends that visited Australia recently that many stores, perhaps the corner market type of store, have a "cash discount" posted right above their credit card machines. Or maybe it's even more blatant. So, the fee isn't invisible there, and guess what, my friend paid cash a lot more. Maybe this works better in tourist areas, I don't know.
Actually they seem like a
Submitted by Anonymous (not verified) on Thu Jul. 16, 2009 4:48 PM PDT.
Actually they seem like a completely free lunch. The credit card company charges interest on the loan, gets an application fee and all sorts of late fees, gets to sell information about your buying habits to partners, and gets to work on the float.
Interchange fees should be either 0, or made completely visible.
The credit card racket
Submitted by anyfreeman (not verified) on Fri Jul. 17, 2009 1:52 PM PDT.
1) Get in the middle of every transaction possible (Try renting a car w/o a CC)
2) Hold the float as long as possible
3) Charge the merchant on the transactions
4) Charge interest on the balance, shorten the 'grace period' and load on the late fees
5) Collate, coordinate and merchandise your customers' information, habits and preferences to "affiliates"
6) Lobby the regulators and legislators into your corner with cash...priceless
free enterprise?
Submitted by MarkH on Fri Jul. 17, 2009 5:58 PM PDT.
It's a free country. Nobody forced them to sign those contracts. I suspect that by having the contracts and paying the fees that they keep a lot of customers they'd otherwise lose.
If anything I'd suggest the credit card companies could raise their fees & rates until some businesses begin to think it isn't worth it. Isn't that the true business idea of charging what the market will bear?
Merchants do get some
Submitted by marcel (not verified) on Thu Jul. 16, 2009 5:03 PM PDT.
Merchants do get some bennies (other than more shopping) from credit cards: they don't have to spend time, etc., deposting cash and checks, and don't have to worry about bounced checks. On the other hand they are somewhat more on the hook for bad merchandise/service than with a cash customer. None of this, I imagine, is worth 2-3%, but it is something.
Cash discount
Submitted by thersites on Thu Jul. 16, 2009 5:07 PM PDT.
In Massachusetts, it's illegal for a gas station to charge extra to credit card users. A cash discount, however, is perfectly legal. What exactly is the difference?
I am, in general, perfectly cool with the idea of a cash discount.
(At least that's my understanding. Someone who actually knows the law might say different.)
If they could charge a fee, then you might have different fees for different cards, or card companies trying to get the company to jack up the fees for other company's cards (they already give discounts if you don't use the competition).
Also, it would usually be a hidden fee that would show up the moment you sign, which would kinda be a gotcha fee, which more people would pay than not, meaning people would literally spend more money than they do now, just at less places.
I almost never carry much
Submitted by jimBOB on Thu Jul. 16, 2009 5:21 PM PDT.
I almost never carry much cash anymore, as nearly anything I'd want to buy is available for credit. (I've had the same few dollar bills in my wallet for weeks.) I pay my full balance every month, so it effectively costs me nothing to do this.
If I wanted to take advantage of a cash discount, I'd have to go back to carrying paper bills around, and replenishing my supply from time to time (meaning useless side trips to a bank or ATM). Plus I wouldn't have a ready-made database of where my money gets spent the way I do now on my monthly statement. Yuck.
I'm well aware of how evil the credit card companies are, and I'd be all for cutting their fees, even if it didn't save me any money. Not sure I want to go back to the carrying-cash paradigm though.
Marcel beat me to it. It
Submitted by zeno2vonnegut (not verified) on Thu Jul. 16, 2009 5:26 PM PDT.
Marcel beat me to it. It does cost a merchant to process both checks and cash. It sounds to me as if the Aussie 1/2 or 1 percent is about what it costs the merchant to handle physical money or a little less and is profitable to the card company.
Same here, jimBOB.
Submitted by Swift Loris (not verified) on Thu Jul. 16, 2009 5:39 PM PDT.
I do almost all my shopping on the Web, since I don't drive and don't have easy access to public transportation. I'd be willing to pay a small monthly fee for the convenience.
The assumption that the interchange fees go to the credit card
Submitted by jcricket on Thu Jul. 16, 2009 7:24 PM PDT.
companies is the basic error here. The interchange fee goes to third party middlemen/clearing houses that process mass amounts of credit card data, sort it according to the bank that is the actual credit card issuer, makes the transfer, and then deposits the money into the account of the merchant. The deposit is of course, only 98% or so of the original batch transmission from the merchant.
It doesn't mean that the 2 - 3% is justified, but it is a mistake to say that it is going to the actual credit card companies who have issued the cards.
This is with the caveat, of course, that all things financial in this country are intertwined in incestuous relationships, as long as there is a buck to make off of the general public.
Actually, the interchange
Submitted by TriadBob (not verified) on Fri Jul. 17, 2009 7:39 AM PDT.
Actually, the interchange rate income does go to the card company. The processors tack on addtional fees and/or percentage. All processors begin with the same "cost" (the interchange rate), then the merchant can negotiate with the various processors to get the final best rate at his store. Merchants can't deal directly with Visa or Mastercard, so it is unlikely that interchange will ever go to zero.
Cut them fees period!
Submitted by BigTom (not verified) on Thu Jul. 16, 2009 7:40 PM PDT.
Even if immediately merchants will pocket the savings, merchandizing is after all a competitive business, and lower costs for all mean someone is going to try to steal business by lowering their prices. So the savings will eventually accrue to the customers.
I go to a discount no-frils discount food store. They only take cash -or debit card transactions, and their prices are lower!
I once remember buying a thousand dollar bicycle. I paid with a check. They owner said I didn't have to, but I said he needed to make a profit, and there was no point in me forcing him to pay the card fee. After that I got great respect from him. It was clearly worth my while to sacrifice that float, even if the shortterm monetary game accrued to him rather than me.
And how would this affect
Submitted by BriPet (not verified) on Thu Jul. 16, 2009 7:59 PM PDT.
And how would this affect the use of debit cards? There's some stores that allow the use of debit cards, but refuse to accept credit cards. Does that mean there's no fees associated with the use of debit cards, even though it says "VISA" on mine?
When you type in your PIN, you're entering a different set of authorization system than the check/credit portion of your card. The laws are looser for debit, and they can charge a fee for using it, but get charged less - there's less fraud and no airline miles, for instance.
When you use the VISA
Submitted by Crissa (not verified) on Thu Jul. 16, 2009 10:07 PM PDT.
When you use the VISA portion... And sign instead of using your PIN, they get charged the credit card fee.
There were a number of birds
Submitted by springfielder (not verified) on Thu Jul. 16, 2009 10:00 PM PDT.
There were a number of birds in this post, so I wasn't entirely clear on which two were being killed by that one stone.
One bird that I am certain would not be killed is the higher prices. I mean, such a change in credit card fees would be a godsend to merchants who would see margins increase by 2-3% (or more) instantly.
Because, Kevin, the way it's done now, only the people using them the most pay the most, the rest is spread around.
For the most part, the fee is so small to disappear into the land where statistics cannot yet fathom, so of course they can't prove the fees weren't passed on as savings.
Also, merchants should pay for some piece of this pie as well, as they're reaping the benefit of the system. The problem is the universal fees - since one pair of companies collude to own 80% of the market, there is no competition for fees. So no pressure on the banks to lower the fees.
If you put the fees on the consumer side, the banks will just put the biggest fees on the smallest users, because that benefits them. That hurts consumers.
I was just shopping at Ikea
Submitted by Anonymous (not verified) on Fri Jul. 17, 2009 6:16 AM PDT.
I was just shopping at Ikea last weekend (I know, I know) and if you use a debit card instead of credit, they give you a coupon for your next purchase that's worth 3% of your current purchase. Clearly the credit card contract has a loophole!
Free market? Really?
Submitted by Anonymous (not verified) on Fri Jul. 17, 2009 7:44 AM PDT.
Kevin says a free market would come from Congress abolishing interchange fees. Alex says "No, a free market would be where merchants can choose whether to eat the interchange fee or pass it on to the customer (or split the difference)." Call me stupid, but I think a free market is more or less what we have now, where merchants who want credit card business freely enter a contract obligating them not to pass interchange fees along to customers. We can argue about whether it's the best way (I'm inclined towards Kevin's, personally), but let's not pretend that government interference would result in a free market.
What's wrong? I'll tell you.
Submitted by Quaker in a Basement (not verified) on Fri Jul. 17, 2009 8:34 AM PDT.
So what's wrong with that?
What's wrong is such a reckless scheme forces the affluent to bear the entire cost of their consumption habits.
Why not pass along some of that cost to those less well-connected and with fewer big obligations? The goods and services I buy with my credit card provide jobs! Jobs, I say, for busboys, caddies, and car wash attendants across this fair city. And are they grateful? They are not!
What is America coming to?
Food for thought on Interchange
Submitted by Thinker (not verified) on Fri Jul. 17, 2009 8:56 AM PDT.
Interchange is a difficult issue, and the retailers are in search of problem to fix. The issue is with Visa and MasterCard, not with banks and credit unions. Financial institutions collect the fee to cover the convenience of issuing the card. Go ask your local bank or credit union (not BOFA or Wells) and ask them how much they make from offereing plastic cards; the answer, very little. Interchange is a convenience fee the merchants just don't want to pay. And don't by that line about passing savings to the consumers. If interchange goes away, prices will stay the same.
An on that argument, under that logic--if interchange is built into the price of goods; shouldn't Congress regulate everything that goes into prices? Isn't the goal here to lower prices for consumers? Thus, all businesses should be under rent control; and all shipping companies should be limited in fees and charges.
This isn't about lining the pockets of banks, its about a problem that doesn't need to be fixed. Financial institutions are easy targets right now, and this seems like a fair issue, but its not.
Re: "It's the free market in action."
Submitted by Tim Fowler (not verified) on Fri Jul. 17, 2009 11:55 AM PDT.
Your in effect proposing a price control for interchange fees (with the price being set to zero). That not exactly "the free market in action".
I think the idea that
Submitted by Anonymous (not verified) on Fri Jul. 17, 2009 2:13 PM PDT.
I think the idea that merchants would lower prices in response to a ban on interchange fees is pretty naive. More likely the merchants would keep the prices where they are, then pocket the difference.
Merchants want government regulation?
Submitted by Anonymous (not verified) on Fri Jul. 17, 2009 6:58 PM PDT.
That strikes me as a positive sign, provided it becomes a habit and benefits consumers as well. There's been far too little regulation for far too long. If we're to prevent another meltdown, we'll have to restore it big time. Then we need to fund education in a big way to prevent any future stupidity like listening to voodoo conservative ideas.
Interchange Fee Split
Submitted by Michael Masinter (not verified) on Sat Jul. 18, 2009 9:09 AM PDT.
A merchant who accepts payment by credit card pays several players for the privilege, including VISA or Mastercard, the merchant's bank, the processing company the merchant hired, and the consumer's card issuing bank. But the split is anything but equal; virtually all of money deducted from the sales price goes to the consumer's card issuing bank, not to the other players. That's because of the voting structure that governs the two membership corporations, VISA and Mastercard, and because card issuing banks have something approaching oligopolistic market power, while merchants' banks have none. All of this played out years ago in unsuccessful antitrust claims brought against the big card issuing banks.
Cutting the interchange fee means cutting the profits of the major card issuing banks. Good luck with that.
Card issuing banks have cleverly enlisted consumers as allies by marketing cash rewards cards; largely affluent consumers who benefit from those cards by paying their monthly balance as it falls due and by collecting their cash rewards have a direct interest in protecting the power of the card issuing banks to spread the cost of those rewards among all less affluent credit card users through high interchange fees. Cut the interchange fees and the cash rewards cards go poof. It's no wonder few of the many critics of the credit card industry have targeted cash reward cards as one of the industry evils.
Credit Card Companies At It Again!
Submitted by Credit Card Skeptic (not verified) on Fri Jul. 24, 2009 7:14 AM PDT.
It's sad that it took a global financial meltdown for Congress and Americans alike to start paying attention to abuses in the credit-card industry, as things like the ridiculous Interchange Fee have been going on for years. Unfortunately, individual retailers have no choice but to accept such terms; their other option is to not accept credit card payments at all, which is no choice at all given how much we all use ours.
Fortunately, steps have been taken by Congress to address the stranglehold credit card companies have on consumers, though of course those won't go into effect until 2010. But what was left out is addressing the ill-effect interchange fees have on small businesses, particularly "Mom and Pop" shops like small retailers and restaurants. I posted an article detailing this effect on http://www.creditcard321.com recently if you want a more indepth look at this, but the bottom line is that it stands as another example of banks figuring out ways to 1) skimp money from the average Joe, 2) pay members of Congress to look the other way, 3) use those earnings to gamble on things like derivatives, then 4) expect the average Joe bail them out when their gambles don't pay off.
But things are coming full circle. The White House seems serious about averting another financial collapse, and that begins with breaking the cycle banks have created to take profits from mere billions to hundreds of billions, all while putting the burden of it on average Americans who are powerless to change it.
