Credit Card Fees: Where are the Free-Market People?
Interesting comments on Wanna Save $6 Billion at the Pump. We should debate policy, but we should be clear on the numbers: Every time a consumer makes a purchase on a credit card, the credit card networks skims a fee off the top. The fee is typically 2%-3% of the purchase price, but sometimes as high as 15%. The level of fee relates to the merchant’s industry and size and, most crucially, the level of rewards. Merchants pay more when a customer puts down a cashback/frequent flier super-gold high premium card than when another customer puts down a plain-vanilla card. As several readers explained, this means that if a customer pays for $100 worth of merchandise at Home Depot with a credit card, the store would keep somewhere between $85 and $98, depending on the card the customer used.
According to research published by Adam Levitin, credit card transactions cost merchants, on average, about six times as much as cash transactions and twice as much as check or PIN-debit card transactions.
Because Mastercard and Visa prevent it, the merchant doesn't have the option to charge $10 extra to use a credit card rather than cash, even if the credit card costs the merchant $10 more.
The numbers cited in Save $6 Billion came from different sources. The report on the total dollars for these fees ($57 billion) came from The Nilson Report. The numbers for convenience stores and gasoline purchases ($6.6 billion in fees, 65-86 cents per transaction came from Businessweek). I estimated the cash costs based on the data Adam assembled on the relative costs of cash and credit cards.
We've had some really good posts, but, if I may, I want to re-frame the question just slightly: Whatever your views of credit cards and consumers, why shouldn't merchants be allowed to pass along higher costs of credit cards--and pass along the savings when customers use cash? I know how the consumer advocates feel about this, but where are the free market people? Why aren't those who believe in unrestricted markets jumping up and down over this restraint on trade and demanding that merchants be allowed to determine their own pricing structures? Isn't this an issue on which two ends of the political spectrum should unite?
If I remember correctly when the controlling legislation was passed it prohibited a surcharge for using a credit card, but still allowed a discount for cash.
A minor distinction, but I've had this offered on occasion, usually by small merchants or service people visiting my home.
I think the big firms just don't want to be bothered. Their clerks and cash registers aren't flexible enough to deal with it. I also question whether the fees are as high as quoted. 15% seem unbelievable to me. I think I have heard numbers around 4%.
There has also been the counter trend of places not taking cash (I don't see how this is legal, but...). They claim not having to visit the bank or having to trust clerks and not worrying about robberies is worth the fee.
--- Policies not Politics
Daily Landscape
May 29, 2007 6:35 AM | Reply | Permalink
If I don't watch superbowl ads, should I still pay to run them? i.e. If I mention this fact to a cashier in a store, should I be given a discount?
You mention Home Depot as a victim here but Home Depot has their own credit card and makes good money on it:
"Home Depot and its banking partner have agreed to pay $672,000 to settle charges that its credit card payment practices unfairly increased interest costs for consumers in Connecticut." source
what would prices be like if Home Depot didn't make so much on usary? and, wouldn't small hardware stores be better positioned if Home Depot didn't make so much mony on credit?
and, as a professor, do you think that all university fees should be outlawed unless a student actually uses the service?
I'd still claim that your issue borders on senstational muckraking since marketing costs money and I'd love to see his research to see what assumptions he makes.
In your other thread, I posted ample evidence that credit cards enhance McDonalds' profits and many gas stations would probably report the same thing since "pay a the pump" increases pump utilization and drives down labor costs. i.e. the high priced labor is targeted at customers who come into the store and buy high margin items.
To boldly go...
May 29, 2007 7:33 AM | Reply | Permalink
Not to be picky, but it is spelled "usury."
The larger point is that it would be a good thing if more smaller hardware stores could be opened up if profits come at the expense of charging excessive interest rates. Home Depot's profits should come from the economies of scale, not from overcharging interest and fees to its customers.
Satellite Sky Blog
Find the Truth. Do Justice.
May 29, 2007 7:40 AM | Reply | Permalink
They claim not having to visit the bank or having to trust clerks and not worrying about robberies is worth the fee.
In Minneapolis, k-mart and many convience stores have a cop outside the store and sometimes inside them too.
If a cop costs $50,000 a year, you're looking at $20/hour for security costs alone and that doesn't include insurance, "cash cages," security cameras and whatever else a business does to protect cash like firing employees who steal.
You'll never hear a robber say: "this is a holdup, give me your credit card receipts."
To boldly go...
May 29, 2007 8:09 AM | Reply | Permalink
pass along the savings when customers use cash?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I wish they would... Just like there are some people who should never touch alcohol, there are some who should never get credit cards.
Oh, but the message is loud and clear:
You need a credit card! The credit card co's are all over university campuses and everywhere else telling that lie. The truth is we all need an emergency fund and that message is not as loud and clear!
I don't think anyone should even be able to get a credit card unless they have an emergency fund. Hell with Fico scores.
They don't mean a thing to these predators who are sending mail to those who have filed bankruptcy. Unfortunatley, some of these people are desperate, mentally impaired and don't understand what they are getting into and believe this LIE that they need a credit card to "re establish" their credit! What they need is an emergency fund, use cash only , and not to get caught in a credit card trap !
Bonnie
http://pupart.1hwy.com/
May 29, 2007 8:44 AM | Reply | Permalink
In a sense, aren't most stores already choosing not to do this? Stores want to cell me stuff. I'd rather use my check card than carry cash around. When stores don't accept credit cards, for whatever reason, they don't see me shopping there as much.
Some stores here in New York will only take a credit card if you purchase more than $10 or $15 or more. My free market response is to go to a store that doesn't have a minimum purchase requirement.
If stores were allowed to pass on the transaction charge, I guaranty I'd go to a store that chose not to. And, that'd be a big chain store. Home Depot would undercut the local hardware store simply by not passing on the cost. The happiest merchant under professor Warren's scenario would be Wal-Mart. They would simply eat the charges in order ot undercut their competition.
thosethingswesay.blogspot.com
May 29, 2007 9:01 AM | Reply | Permalink
Credit Card Fees: Where are the Free-Market People?
My analysis, in the other thread, showed that credit card fees are a non-issue if you use a 2% cash back card.
I'd claim that "the cartel" is more worried about protecting the usury rates that consumers suffer from.
However, maybe people will stop charging, just like they stopped smoking, driving without seatbelts and drinking too much, because the high rates will change behavior.
FYI: $57 Billion is pocket change in our economy! Based on today's share prices, Microsoft is worth market cap $292 billion, the largest credit card issuer, Bank of America, is worth market cap $227 billion, McDonalds market cap $61 billion, Home Depot market cap $76 billion, Harvard Endowment $30 Billion (source), total credit card debt $750 billion in 2002 (source) etc...
BTW: since you work for Harvard, your $30 billion endowment brings in (given a 7% return) $2.1 billion a year so is $6 billion for all the gas stations-- which serve millions of customers-- instead of thousands of customers a year, that much?
To boldly go...
May 29, 2007 9:20 AM | Reply | Permalink
And I'm not sure how Ms. Warren-- or her information source-- address the issue that many consumers don't have cash and depend on "credit card balances," "home equity loans," etc... to get cash, "at a cost."
I was lucky that my parents taught me not to buy unless you have the cash to pay.
To boldly go...
May 29, 2007 9:46 AM | Reply | Permalink
here is some background on the higher rates and how you can avoid them:
Third Party Credit Card Processing Vs. Having Your Own Merchant Account
To boldly go...
May 29, 2007 9:56 AM | Reply | Permalink
Re: Because Mastercard and Visa prevent it,
???
I have seen gas stations that charge a higher price per gallon for credit card use than for cash. Though sure, this is rare, probably because this type of pricing drives too much business away with so many people using credit cards these days (and also debit cards: there are also transaction fees charged the merchant on these, and in fact two days ago I paid an extra 35 cents for using my debit card at a pump).
May 29, 2007 10:19 AM | Reply | Permalink
Another very illuminating post. However, it seems to me like Consumers get stuck paying processing fees almost no matter what they do.
If you patronize a cash-only business, and if you don't have cash they "graciously" provide an ATM machine that tacks on an ATM fee. If your financial institution charges a fee as well you pay a double ATM fee. Lets say you need to fill up your Gashog 2000 with gasoline and your bank account is low, (yes, I know no one here gets that desperate) so instead of drawing out the maximum allowed (in most cases $200) maybe you can only afford to withdraw enough to fill up- say $50. If the ATM fee is $1.50 and your bank charges $1.50 you're now paying an effective financial rate of 6% for an "all cash" transaction.
About the only way I know to avoid this is to keep your cash in a credit union that doesn't charge ATM fees, and then avoid ATM machines that charge as well.
-Dave Adams-
May 29, 2007 12:41 PM | Reply | Permalink
However, it seems to me like Consumers get stuck paying processing fees almost no matter what they do.
why don't you find this acceptable? As part of the other post, I posted that it cost about $1.06 to do a teller transaction.
I think the ATM cost was $0.36.
Certainly, banks advertise "free checking" but they're not stupid and find a way to make you pay for the services you are using....
Isn't this acceptable?
To boldly go...
May 29, 2007 1:25 PM | Reply | Permalink
To me, no it isn't, which is why I belong to a Credit Union which doesn't charge for ATM access, and why I also rarely use ATMs which require a fee.
Really, given the ubiquity of ATM technology, a $1.50 fee (which is the lowest I've seen for those that aren't free) on a $0.36 cost means they're making 76% profit on each transaction. In the industries I've worked in, anything above 50% is considered good, and that's for high technology equipment that has a degree of uniqueness (i.e. intellectual property protection) built into it. What we're talking about here is a commodity with an extremely long shelf life. If there's a free market, why don't we see a range of fees? If the market for ATM access were a free market we'd see competion where ATM fees were a lot closer to the $0.36 you quoted.
-Dave Adams-
May 29, 2007 4:22 PM | Reply | Permalink
If the market for ATM access were a free market we'd see competion where ATM fees were a lot closer to the $0.36 you quoted.
I guess that you answered something else.
In my mind, the ATM fees not only pay for the ATM transaction but they also pay for the teller visits ($1.06 each time), the operation of the bank's branches, the phone calls that you make to them, monthly statements, etc...
We all say we're against subprime, etc..., but do we encourage the banks to go there because we refuse to adequately reimburse them for their services?
I also belong to a credit union and get a "free cashier's check" which I use to pay my rent!
who pays for it? I don't know.
the credit union told me that the ATM's were free because they didn't build their own network and their customers didn't use them very often anyway. if that usage pattern changed, they would have to start charging.
it could be that, because I use credit cards all the time, I don't put a big strain on their ATM budget. they also encourage everyone to use their debit cards instead of cash.
To boldly go...
May 29, 2007 5:54 PM | Reply | Permalink
As I said in the previous thread, I profit from credit card use. I get 5% back on gas and groceries and 2% back on everything else. Since I don't do anything to incur the fees and pay the bill in full every month, I've never paid any interest or any fees. Period.
I get dozens of offers in my mailbox every month, I'm considering one now that is offering me $100 the first time I use the card. I like "free money."
Not being entirely stupid, I'm fully aware that these offers are similar to the casino that offers some free chips or the crack dealer that offers the first hit for free. They know that the first taste isn't enough for many people; a goodly percentage will become addicts and be very profitable.
I would support legislation mandating a cash discount (by businesses that take credit cards) and happily go back to paying cash. I understand that the credit card companies (counter intuitively) call people like me "deadbeats" - not what the word meant when I was growing up.
So why all the generous offers to a "deadbeat" like me? I'm reminded of the time I was out hiking in the hills around Austin and I noticed that vultures (buzzards) kept circling overhead. Suddenly I realized: "They're hoping I'll die!"
The card companies don't want me to die, of course - unless they can stick my widow with the bills. They just want me to get into trouble and rack up a lot of debt so they can soak me with exorbitant interest rates and insane fees.
I have that emergency fund Bonnie (good advice, BTW) so I hope they can hold their breath a long long time. On second thought, maybe I don't.
I seriously hate that the prudent ("Neither a lender or a borrower be.") shopper who insists on the most prudent course - paying cash - gets the shaft in this insane "best government money can buy" society. It is past time for a change.
May 29, 2007 6:33 PM | Reply | Permalink
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May 29, 2007 6:46 PM | Reply | Permalink
I always thought that the members of a credit union effectively paid for all of the services they get because they're also shareholders in a nonprofit corporation. If I'm not mistaken, expense of your free cashiers check is debited from the pool of money that the credit union makes on its loans. In that sense you and all of the other members collectively are paying for that cashier's check in the form of lower savings account dividends. As a voting member you ultimately get to decide which services are "free" (i.e. shared), and which are charged directly.
I expect that the actual ATM costs are handled in a similar way. In a sense you and your fellow members already are paying for any ATM charges incurred by your credit union in the same way you all are paying for that cashier's check. The thing is, you only pay your membership fraction of the $0.36 per transaction, not $1.50. There's no credit union profit markup on the transaction because there's no profit.
-Dave Adams-
May 29, 2007 6:47 PM | Reply | Permalink
ahhhh... I see.
my savings account balance is $5.00-- the minimum. Everything else is in CD's so I can't spend it. ;-)
I just looked at WellsFargo's website and yes, as a credit union member, i'm spoiled! I was going to switch to WellsFargo, but they didn't treat their employees as nicely.
And, I switched over to electronic statements in order to save them money each month and they have an incredible email system which is serviced so fast that my requests are handled in minutes without driving down to their office.
To boldly go...
May 29, 2007 8:27 PM | Reply | Permalink
I'd never win a spelling bee and the fontsize is way too small if I use the rich-text editor with the spell checker.
I agree with you 100%. The "usury" issue is the big elephant (or, as some would say, the cash cow) in the room.
I don't think that problem will be solved.
To boldly go...
May 29, 2007 8:32 PM | Reply | Permalink
Why aren't those who believe in unrestricted markets jumping up and down over this restraint on trade and demanding that merchants be allowed to determine their own pricing structures?
my viewpoint on this question is similar to the recent posts about "not all bubbles are bad."
For example, I love trains and I'm not happy that, at one point in time, the current system of roads came about to compete with the "monopolistic railroads."
Perhaps there could have been a better solution which let railroads survive but let people compete in other ways.
An example of "switched fates" might be AT&T who was split up and then, more recently, remerged with Bell South after people realized that "stupid competition hurts everyone."
I'm sure that the banks have lots of ideas about what the next generation transaction system should look like and the banks will use the principles of competition to build out the various parts of this system.
A concrete example of this type of competition is: YouTube is certainly pushing internet providers to their limits as customers demand more bandwidth so the competition needs to be about building the network that is capable of delivering the YouTube content, not reinventing YouTube.
Credit Card transactions have become reliable, useful, predictable in cost and fast and I don't think that merchants, customers or credit card companies want to risk the "secret sauce" in the name of competition.
The next idea has to be bigger and work better because faster, cheaper computers don't inspire unless they do something new!
To boldly go...
May 29, 2007 10:22 PM | Reply | Permalink
I'm glad to see more coverage of interchange fees, a pet peeve of mine and a consumer issue I love to discuss in my work with www.unfaircreditcardfees.com.
As Professor Warren mentioned, Visa and MasterCard prohibit merchants from charging to use plastic and generally utilize their more than 80% market share to impose severe restrictions on merchants.
They also prohibit merchants from offering a cash discount, which is why you usually only see this with small merchants and service people who can avoid the scrutiny.
I have yet to see a store refuse to accept cash, but with the way things are going and to the delight of Visa and MasterCard, it doesn't surprise me.
June 3, 2007 12:48 PM | Reply | Permalink
I am surprised at how many fear mongers are out there rearing their ugly heads. I do not work for an oil company, a convenience gas station, or for a credit card company. However, I feel compelled to comment on these issues.
I do own a small automotive service business and we have been reeling from the increases in credit card processing fees in the past couple of years. We spend on average, between $500-$900 every month, in credit card fees.
Now, from our perspective, the 45% of our customers who pay with cash or check, or even low cost debit cards, are once again going to have to pay higher prices, just as those paying with credit cards will, because we need to raise our labor rates to cover the ever increasing costs of doing business, specifically the costs associated with increases in credit card usage. Is that fair?
If I were a customer who pays my bills with cash or check, should I have to pay more because other customers use a payment form that actually costs the business a significant amount of overhead? (Keep in mind that it takes many repair bills to cover those expenses every month. Considering that every sale must cover other costs too: cost of parts, labor, taxes, building mortgage & property maintenance, tools, training, large equipment (like hoists), etc., and finally, a small fraction for owner profit.)
I only came across this article/discussion as I was looking for information on the legalities of offering a discount to customers who pay with cash (that means actual cash or check), or a little less of discount if you pay with debit card.
It's unfortunate that when ever we feel wronged on an issue, we rarely get to the see the flip side of the argument.
What's really going on with the retail gas price situation is that people are paying with credit cards, buying less in the convenience store (where the only real profits are), and the only ones getting rich are the fuel companies providing the gasoline (certainly not the retail sellers - check it out) and the credit card companies.
PLEASE stop bashing your local merchants, they are only trying to make a living - just like you. Look around at how many businesses cannot survive in the current business climate we have. Our only options are soon going to be large retailers and service companies, where you might have to park a mile from the door, stand in the snow and slush to fill your tank and wipe your windows, eat out of styrofoam containers, get greeted with barely a smile, if at all, etc.
Really. They are the only ones who will be left - once you take the profit out of the small local businesses, and give it to the conglomerates who can save pennies buy cuting your wages, insurance and other basic benefits.
Take a real hard look at the credit card industry. They are making great profits, and even though people are filing bankruptcy at an alarming rate (we just had an employee go through it), the credit card companies keep giving cards to young adults without financial sense or experience, especially to struggling college students, and to mature adults that are already too far in debt to be able to pay them off each month. Not to mention the rates credt card processors are charging to retailers to cover the extra costs associated with all the perks and programs promoted to those end card users. Often times the card users never really even benefit from those programs, but the credit card companies sure do!
Our economy is faltering, credit card companies lobby for laws that only protect them and their profits, AND the government will bail them out when they get into trouble. (Like the insurance companies who got bailed out after Katrina - even though they had lots of real estate they could have sold, and were making great profits!) (Golf anyone?)
Oil companies are posting record profits too! (Profits are from pumping & refining gas to sell, market influences, and from gas company owned credit card fees.) Yet, our government still subsidizes this industry. Why?
Who is going to bailout the little guy, your corner market, local barber, or your auto repair shop when the expenses to their bottom line put them out of business because they can no longer compete with the big retail bullies (like Wal-Mart)? Just look at what happened to many of the little family farms - gone. Who's next?
August 7, 2008 7:12 PM | Reply | Permalink