Editore"s Note
Tilting at Windmills

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April 2, 2007
By: Kevin Drum

HIGHWAY ROBBERY....Credit card issuers have recently jacked up the transaction fees they charge merchants, and it's easy to understand why they had to do it. Check this out:

Credit card companies' profits from interchange fees rose 33% from 1990 to 2004, according to a September report by the Government Accountability Office.

That's outrageous. Only 33%? Don't small merchants understand that credit card executives have yacht bills to pay?

But it's not all about snark here at the Washington Monthly. It's about forward looking solutions. So let me offer one. The basic problem is that merchants, by law, aren't allowed to charge more for credit card purchases than for cash purchases. This means that card issuers can keep jacking up hidden transaction fees with no worries that the higher charges will drive away business. The only way to lose business is if merchants simply stop taking credit cards at all, and card issuers know perfectly well that this just isn't a realistic option for most retail operations. So they keep jacking away.

So let's unleash the free market on these guys. If they refuse to accept caps on transaction fees, let's allow merchants to pass along the fees to their customers. This would cause more people to pay by cash and check, of course, but that's the price of freedom. How about it?

POSTSCRIPT: Transaction fees were originally designed to offset the actual cost of processing credit card transactions. But how high are those costs? Lower than they were in the pre-computer era, certainly, but how much lower? As the article notes, Britain and Australia recently analyzed actual processing costs and discovered that they amounted to about 0.7% — i.e., less than a penny per dollar.

And how high are the fees in the U.S.? Over 2% That's a lot of free money the card companies are ripping off from merchants.

Kevin Drum 1:15 PM Permalink | Trackbacks | Comments (75)

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Comments

I was at a restaurant lately that gave a "cash discount." Legal? I paid cash.

By the way, is there any distinction in cost to the merchant between credit and debit card transactions? I know only one store (in MA) that states a preference for debit.

Posted by: David in NY on April 2, 2007 at 1:47 PM | PERMALINK

Some merchants set minimums of around $10 for credit card purchases. Technically, I think this is illegal, but after reading this article I'm more sympathetic to them.

Posted by: Matt on April 2, 2007 at 1:48 PM | PERMALINK

Kevin, I'm disappointed you didn't suggest setting a cap on the fees themselves. Any entity partaking of our artifical debt-monetizing monetary system deserves whatever regulation we want to put on it - it's not a free market to begin with, and can't be (find out about how money supply and debt works....)

Posted by: Neil B. on April 2, 2007 at 1:50 PM | PERMALINK

It's interesting how little howling there has been from various right-wing noise outlets about THIS particular government interference in the free market.

Posted by: bleh on April 2, 2007 at 1:50 PM | PERMALINK

I've been to stores that charged a premium for a credit card purchase. I didn't understand why until I asked. Basically credit card companies are skimming 2% of his take. I didn't realize there was a law in place to prevent differential pricing. It should be repealed.

Posted by: Ali Blahblah on April 2, 2007 at 1:51 PM | PERMALINK

No one is "ripping off merchants," as that fee is figured into the cost of whatever it is that you are buying.

However, I would agree that 33% is a might high. In fact, fees for all sort of credit card transactions are up. Noticed this when being billed for something in Canada. With the dollars being so close to one another now in value, the fee is almost enough to put them at par.

Posted by: JeffII on April 2, 2007 at 1:52 PM | PERMALINK

Ha! Soon the credit-card companies will be our overlords. Congress made it impossible for consumers to escape credit-card debt, and I'm sure that soon Congress will make it impossible for merchants to escape taking credit cards. Senator Joe Biden (whore-MBNA) will no doubt sponsor some "consumer-friendly" legislation mandating that all businesses must be accept credit cards--while explicitly allowing transaction fees to soar through the ceiling.

Posted by: Derelict on April 2, 2007 at 1:53 PM | PERMALINK

The farmer I purchase produce from at a farmer's market adds the cc transaction fee to the total. I have always paid cash, but I see they posted a sign, "Due to rising bank fees..."

Posted by: Brojo on April 2, 2007 at 1:56 PM | PERMALINK

The credit card biz is the only business I can think of where the entity bringing a customer pays a fee for bringing a customer. In a free market world one would think a commission would actually be paid to the merchant for acquiring the banks a customer. Right?

It is remarkable, if not counter-intuitive, that fees are so much lower in Europe. Maybe they have governments that are for the people.

Posted by: joeis on April 2, 2007 at 2:01 PM | PERMALINK

Interesting to note the cost of those transactions as being so low. I am sure the low costs are similar with ATM transactions, yet we get whacked anywhere from $1.00 to $6.00 per transaction, often by two different banks (the ATM bank and the card bank).

Posted by: bubba on April 2, 2007 at 2:02 PM | PERMALINK

At least the credit card companies haven't instituted pre-payment penalties on people who pay off their balances every month.

Posted by: Qwerty on April 2, 2007 at 2:03 PM | PERMALINK

I didn't realize that credit and cash prices had to be the same by law. I've seen several gas stations that offer 4 cents off per gallon for cash. And I've seen several student-type restaurants that charge the transaction fee on purchases under $5 or $10.

Posted by: James G on April 2, 2007 at 2:03 PM | PERMALINK

"It is remarkable, if not counter-intuitive, that fees are so much lower in Europe."

There were near riots in the UK a few years back when the banks tried to assess fees for ATMs.

Posted by: bubba on April 2, 2007 at 2:04 PM | PERMALINK

I've noticed that stores post notices that basically amount to a "request" that consumers pay more than 5 or 10 dollars before putting something on a credit card. Now, I'm sure if a customer DEMANDED to put the purchase on a credit card, the store might go along with it, but merely asking consumers to pay in cash probably has 90% of the intended effect.

Posted by: Tyro on April 2, 2007 at 2:07 PM | PERMALINK

Are you sure the credit-cash price equivalence is a matter of law? I thought it was part of the contract agreement with the credit card company; if you break it then they will not allow you to process transactions with their card.

Posted by: Walker on April 2, 2007 at 2:10 PM | PERMALINK

If you figure the cost of chargebacks, most merchants are paying 3%, not 2%.
And because of chargebacks, the credit card companies have little incentive to prevent credit card fraud. If the credit card companies weren't allowed to charge back (provided, of course, that the merchant is meticulously following all anti-fraud requirements) then the credit card companies should be stuck with the bill, which would give them the incentive they've been lacking to finally do something about fraud.

Posted by: some guy on April 2, 2007 at 2:13 PM | PERMALINK
The basic problem is that merchants, by law, aren't allowed to charge more for credit card purchases than for cash purchases.

By what law?

Posted by: cmdicely on April 2, 2007 at 2:13 PM | PERMALINK

Shhh, Qwerty! Don't give 'em any funny ideas!

Posted by: Matt on April 2, 2007 at 2:13 PM | PERMALINK

Places can offer a discount for cash, which amounts to the same thing: http://origin.mercurynews.com/ci_5537278?nclick_check=1

To say that they can offer a discount for cash but can't charge more for credit cards is, of course, nonsensical: Raise the price of everything, then offer a 5% discount for cash. THe fact that most businesses don't do that indicates that there's other benefits to accepting credit cards. Since it's not real money, for instance, people spend more and perhaps even money they don't have. This is actually a free market success story.

Posted by: Seabiscuit on April 2, 2007 at 2:14 PM | PERMALINK

At least the credit card companies haven't instituted pre-payment penalties on people who pay off their balances every month. Posted by: Qwerty

It's a wonder this hasn't come about. Then again, since apparently very few Americans do this now, the credit card issuers aren't in much danger of losing money having too many responsible customers who live within their means. That would be positively unAmerican!

Posted by: JeffII on April 2, 2007 at 2:17 PM | PERMALINK

So let's unleash the free market on these guys. If they refuse to accept caps on transaction fees, let's allow merchants to pass along the fees to their customers

They already do in the form of higher prices for merchandise. Thus cash paying customers are subsidizing rising credit card fees.

Posted by: Not Fair on April 2, 2007 at 2:17 PM | PERMALINK

I am reasonably certain the law requires that there not be an upcharge for using the card.

There is a difference between a merchant charging an add-on credit card fee and offering a cash discount.

The big issue though is why are the fees artificially high in the U.S. (we know the answer. it's just a rhetorical question.)

Did you know the merchants pay more for corporate cards? & They pay more for rewards cards.
Why should the merchant pay more for the banks credit risks and special marketing campaigns?

Posted by: joeis on April 2, 2007 at 2:17 PM | PERMALINK

Credit card fees are a 2% hidden tax, like the VAT, on nearly everything. And instead of it going to build schools, heal our injured vets, it buys private jets for our fat cat class.

Just plain wrong.

Posted by: MobiusKlein on April 2, 2007 at 2:20 PM | PERMALINK

"Any entity partaking of our artifical debt-monetizing monetary system... (find out about how money supply and debt works....)
Posted by: Neil B. on April 2, 2007 at 1:50 PM |"

What I think NB is alluding to here is something that I did not learn in Ec101 in college, nor anywhere else, but from reading one book: Galbraith's "Money: Whence it Came, Where it Went" (1974) -- out of print, but available cheap from Amazon's "marketplace," e-bay, and I'm sure Powell's, allibris, and all the usual suspects.
Which is: any bank or enterprise with the government-granted power to lend money and with a required reserve (what percentage of their deposits they have to keep as cash available for depositors to withdraw) of less than 100% has the de facto ability literally to create money. (I had thought that only the gummint, in the form of the Fed, could create money.)
I suspect I'm not the only person who failed to understand this key point about how our economy actually works -- and whom that empowers and enriches.
Galbraith's book might not be the only place to get this explained properly, but it's the only one I ever found, and it was an eye-opener for me.
And as the owner of a credit-card-taking enterprise myself, I'm with Neil -- I got no sympathy for anyone or anything with the ability to create money.
BTW -- yes, there is a big difference between the charges merchants are assessed for taking credit cards, and the fees for debit or "check" cards -- but most merchants don't tell their cashiers any of this, so they're not in a position to tell you. But the different fee structures are part of the battles being waged over those fees, as are large number of TV ads you see urging you to use your check card instead of your credit card, and vice versa.

Posted by: smartalek on April 2, 2007 at 2:22 PM | PERMALINK

There are 10 states with state laws that prohibit credit card surcharges by most private merchants: California, Colorado,Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas.

Discounts for cash, however, are generally legal in those states.

Posted by: some guy on April 2, 2007 at 2:22 PM | PERMALINK

The pure processing costs are certainly not that high. I'd look into the costs of:

* marketing / advertising (All those mailings certainly are not for free)

* fraud, though I have no clue how much is borne by the CC companies vs. the vendors/restaurants/...

Posted by: otmar on April 2, 2007 at 2:26 PM | PERMALINK

I get 2% in CASH back from every purchase I make. I don't pay any fees, I haven't been over my credit limit, I don't pay interest.

I get a serious rebate each year.

I know the merchants are paying for it but shouldn't I take advantage of the discount while it exists.

If you allowed merchants to institute a surcharge then it would have to be different for each card. One of my Visa cards gives me 2% while another card, which I never use, gives me nothing at all. The merchant should charge me more, probably about 2% more, for using one Visa card instead of the other.

How can something like this be realistically implemented?

Posted by: neil wilson on April 2, 2007 at 2:29 PM | PERMALINK
At least the credit card companies haven't instituted pre-payment penalties on people who pay off their balances every month.
Actually, Qwerty, there are some cards targeted at bad credit consumers that do have this provision, I think. I lost my house in the mid-90s and I got some amazingly bad credit offers in the mail. There were also "credit cards" which could only be used at the overpriced mail-order stores run by the credit issuers. I think where they really made their money, though, was in the high application and membership fees. Posted by: Don Hosek on April 2, 2007 at 2:35 PM | PERMALINK
Transaction fees were originally designed to offset the actual cost of processing credit card transactions.

No, they weren't. They were designed to make money for the card issuers. They were justified as necessary to cover the cost of processing credit card transactions, but almost any time a for-profit company (and more certainly nearly every time a large, widely-held, publicly-traded, for-profit company does so) institutes a charge it is designed to cover as much more than its actual costs as the market will bear, and any public justification issued is just a pyschological warfare campaign to increase the costs that the market is willing to bear.

Posted by: cmdicely on April 2, 2007 at 2:37 PM | PERMALINK

neil, the way merchant fees are set up, it's one rate for Visa/MC, another (usually lower) for Discover, and another (usually higher) for Amex. When I published a magazine, I think it was 3% for Visa/MC, 2.5% for Discover and 3.5% for Amex. The fact that credit card fraud was difficult with magazine subscriptions (the only case I had was for a back issue order sent to Hungary) didn't sway the banks from charging me what was then the going mail-order rate. I suspect it's up now. I also had a minimum monthly charge that I paid to Visa/MC regardless of how many sales (it was $20 or $30 iirc), but not to Discover or Amex. The percentage was divvied up somehow between the processing bank and the card issuers.

Posted by: don hosek on April 2, 2007 at 2:39 PM | PERMALINK

Fraud is borne entirey by the vendor. It's part of why credit card companies are so casual about it. It doesn't cost them anything. If someone buys something with a stolen credit card from my store, and the cc owner reports it as fraud, the money that I received will be taken back from me by the cc processing bank. They'll also charge me a fee to cover their costs.

Posted by: don hosek on April 2, 2007 at 2:42 PM | PERMALINK
Did you know the merchants pay more for corporate cards? & They pay more for rewards cards.
Unless things have changed in the last 6 years, that's just not true. I paid the same rate for any visa/mc card. Posted by: don hosek on April 2, 2007 at 2:44 PM | PERMALINK

If you want a real catalogue of all the ways credit card issuers gouge their customers, listen to Terry Gross's interview with Elizabeth Warren, Harvard Law Professor. The scams go on, and on, and on. You can listen here: http://www.npr.org/templates/story/story.php?storyId=9156929

Posted by: David in NY on April 2, 2007 at 2:49 PM | PERMALINK

Unless things have changed in the last 6 years, that's just not true.

Don, it is absolutely true in my case and I suspect many others.

It is called the Mid Qualified Rate.
In our case it is 19.3 % charge above the "normal" rate.

Posted by: joeis on April 2, 2007 at 2:58 PM | PERMALINK

The no-surcharge rule is imposed in the contracts between credit card issuers and merchants, along with other rules that limit merchant flexibility (e.g. merchants can't set a minimum or maximum amount for a purchase with plastic). It's thus not a law that could be repealed, since it's negotiated between credit card companies and merchants. That doesn't mean, however, that it's an instance of the free market working -- the no-surcharge rule is a fairly obvious antitrust violation.

Adam Levitin has a great (if quite long) article draft on the issue: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=944278

Posted by: James Grimmelmann on April 2, 2007 at 3:01 PM | PERMALINK

There is a difference between charging extra for a credit card and offering a discount for cash. Two differences, actually: one is that there are other forms of payment, such as checks and purchase orders, which are charged the higher price under a cash-discount scenario.

More important is the definition of the posted or advertised price. If you're offering a cash discount, your official price is the higher price, whereas if you have a surcharge, your official price is lower and looks better on your advertisements. It's similar to the situation with sales taxes: generally merchants are allowed to advertise their prices without the tax, then add it on at the last minute as a surcharge. But some commodities, such as gasoline, are typically required to be advertised with all taxes included. Rebates are another example of this. State laws are very detailed about what you're allowed to advertise at the price of your commodities.

Posted by: wahoofive on April 2, 2007 at 3:02 PM | PERMALINK

I know a lot of property/casualty insurers for small business have looked at allowing credit card transactions, and most have not gone for it because of that 2-3% fee. In a business where typical margins are fairly slim (95% is considered pretty good) that fee is just too large, especially given the low cost to the credit card company relative to the individual transactions (all electronic, automated, costs don't scale with transaction size.)

Most would love to. It's a nice service to customers, retention rates go up, and a lot of customers are just used to being able to pay that way. But the cost tradeoff is just too brutal.

There's also the distortion effect - you can charge for bank card transactions, but not credit transactions. Bizarre.

I don't know why so called 'fiscal conservative' types like mhr oppose allowing business to choose whether to pass these charges on to consumers.

Some business would pass the costs, many would not, because the dynamics would differ for different businesses. The cost differential is lower for cash businesses (handling cash ain't free either) and it's a competitive disadvantage.

Allowing business to pass on the fees would enable the free market to do what it does best, which is determine the value of the service.

Posted by: Fides on April 2, 2007 at 3:11 PM | PERMALINK

Credit Card companies gouging people? Tell me it ain't so!!

Posted by: This Machine Kills Fascists on April 2, 2007 at 3:13 PM | PERMALINK

It is very easy to escape paying interest on credit card purchases- don't buy anything that costs a penny more than you can pay off at the end of the month. It is really quite simple. You lefties are overly concerned about people who lack the smarts to take care of themselves
Posted by: mhr on April 2, 2007 at 2:38 PM

We are not discussing interest rates you toad.We are discussing the fees merchants have to pay when customers use credit cards.Typical neo-con bullshit.If your talking points from troll headquarters don't fit you just twist the topic.

Posted by: vbrans on April 2, 2007 at 3:18 PM | PERMALINK

And there's always the Walter Reed medical center in Virginia to illustrate how bad a privatized hospital can be.
Posted by: mhr on April 2, 2007 at 2:38 PM

Fixed it for ya.

Posted by: vbrans on April 2, 2007 at 3:22 PM | PERMALINK

"It is very easy to escape paying interest on credit card purchases"

Wow, a whole post by Kevin and a lot of comments to that effect, yet you still manage to post a comment that has absolutely nothing to do with the topic being discussed.

For those that can't read like mhr here, the topic is about merchant's fees that are charged *to the merchant, not the cardholder* for every CC purchase. On one of our most expensive products, for example, we pay over $13 in merchant's fees alone when paid for via CC. First of all, I have a hard time believing that a) the card issuer's transaction costs go up according to the price of *our* products, and b) their transaction costs are anywhere near $13 for a completely digital transaction that we send to them in an automated fashion and is approved in the same way.

BTW, to those discussing fraud protection, you're right. The card issuers don't do a damn thing about fraud and gladly will process 100% of the orders that we catch as fraudulent and don't send to them. Their fraud protection is a total joke because they don't have the tools in place to accurately determine fraudulent orders. Only the actual merchants have that ability. If this country actually had card issuers that were held to actual free market principles, they would be paying us, the merchants on a per-transaction basis based upon how "clean" our transactions are on an overall basis. Why should I pay to cover the chargeback costs caused by some douchebag, fly-by-night stereo store in Brooklyn when we are screening our orders and performing due diligence. That would take care of the fraud problem overnight, I guarantee it.

Posted by: OhNotAgain on April 2, 2007 at 3:22 PM | PERMALINK

Let the market work. Welcome to the dark side, Kevin.

Posted by: Brian on April 2, 2007 at 3:27 PM | PERMALINK

First of all, I have a hard time believing that a) the card issuer's transaction costs go up according to the price of *our* products, and b) their transaction costs are anywhere near $13 for a completely digital transaction that we send to them in an automated fashion and is approved in the same way.

I have always remembered a figure given by former IBM CEO Akers (?) in a speech.

He stated the cost of a bankcard transaction was about 1.5 cents.

Posted by: joeis on April 2, 2007 at 3:38 PM | PERMALINK

What I think NB is alluding to here is something that I did not learn in Ec101 in college, nor anywhere else, but from reading one book: Galbraith's "Money: Whence it Came, Where it Went"...Which is: any bank or enterprise with the government-granted power to lend money and with a required reserve (what percentage of their deposits they have to keep as cash available for depositors to withdraw) of less than 100% has the de facto ability literally to create money. (I had thought that only the gummint, in the form of the Fed, could create money.)

"Fractional reserve banking" is a pretty basic concept in any introductory class or textbook on banking or macroeconomics, and for that matter I remember getting a pamphlet explaining the concept from the Federal Reserve in business school in the '70s, so I'm sure it is on their website too. So, either you got ripped off by your school, or slept in and missed class that day!

Posted by: Tom F on April 2, 2007 at 3:48 PM | PERMALINK

Small business owners are often Republicans, supporting the pro-business platform of lower taxes and less regulation. This support for less regulation of business has been turned against them by their big business political allies, who have used this policy to gouge their small business clients with increasing transaction fees while doing nothing to protect them from credit card fraud. Like the NASCAR dads who support a masculine foreign policy that jeapordizes their children's future, small business owners support business practices that enourage market consolidation and the monopolization of their markets. It is difficult to feel too sorry for them.

Posted by: Brojo on April 2, 2007 at 3:52 PM | PERMALINK

Costco takes only check cards and American Express - I guess they must have a deal with AmEx for lower fees.

Posted by: EmmaAnne on April 2, 2007 at 3:54 PM | PERMALINK

What makes you think the consumers aren't already paying for the transaction fees? If the merchant that is honoring the credit card is not losing money, by definition the consumer is paying the fees already.

I haven't paid credit card interest for over 15 years when I got my financial act together. One time I mis-paid an amount where I put in .89 instead of .98 to Quicken when I was paying bills. They charged me $30 interest that month, and $15 the next month! I was floored.

Of course I called them and got them to reverse all fees. But for someone who doesn't have the option of closing their account, they would be screwed with thousands of percent interest on "borrowing" 11 cents!

Posted by: Alan on April 2, 2007 at 4:13 PM | PERMALINK

They are allowed to charge for ATM transactions, however.

So this means that merchants are generally charged less for ATM/DEBIT than for Credit transactions.

What do I do? I use ATM whenever I can.

...But I don't use ATM/DEBIT if the merchant charges for it. (Because they always charge more than it costs them)

Posted by: Crissa on April 2, 2007 at 4:17 PM | PERMALINK

It's somewhat amusing that there are 48 comments on here and nobody bothered to note how weak the "33% increase" comment is. Since 33% increase over 14 years translates into an annual profit growth of 2.25%. Over that same time period, inflation ran about 3%. it does not discuss it in the linked article, I am assuming that the GAO did not inflation adjust credit card company profits. If that is the case, credit card companies are actually making less money than they were in 1990. Why shouldn't they try to raise prices? If the numbers are inflation-adjusted, the increase is still below the mean profit growth of the S&P 500.

People are always shocked when prices for things go up after a long period of stability. It's called inflation. It happens.

Posted by: Matthew on April 2, 2007 at 4:34 PM | PERMALINK

Ooops, just realized I misread something so my above comment is not entirely correct. I neglected revenue growth. Ignore the first part of the above comment. The second part is still true.

Posted by: Matthew on April 2, 2007 at 4:46 PM | PERMALINK

I have a web development company in which I only do work for businesses. So I don't take credit cards for the reason that I don't want to hand over my money to the CC companies, especially since many of my invoices are over a grand. I have my clients send me a check. All of them have checking accounts. It costs them the price of a stamp and me nothing. The CC companies are shut out of my loop. Too bad retailers don't really have that choice (hardly anyone carries cash and checks aren't so great when you don't know the person). I like using my debit card for retail.

Posted by: Orion on April 2, 2007 at 4:48 PM | PERMALINK

Not a bad idea. Merchants aren't free to shop around. They have to accept all credit cards. There's no competition. But consumers have a multitude of credit card issuers to choose from. If my Visa card wants to jack up my fee, then I can start using my MC -- or even get one from another bank.

Posted by: bob on April 2, 2007 at 5:09 PM | PERMALINK

A liberal (or left leaner) here that is going to make conservative points...

1.) As others have mentioned, the fees are being passed on to consumers when appropriate. If merchants can't afford the increased fee, you can bet they are going to pass it on...

2.) If the fees come to the point where merchants have to pass them on AND the passed on costs are too much, people will find a way to push back on the CC companies...

This is already happening in certain areas:

1.) Speaking from experience, AmEx does charge a higher fee than other companies. You're not going to see it with large companies, but you will notice that more smaller companies are not accepting AmEx as a result.

2.) Smaller companies (esp. restaurants) are imposing order minimums for using cards. There is a threshold where the cost of transacting via CC is not profitable.

Obviously, the Wal-Marts and McDonalds of the world do not fall into these categories. Then again companies of that size are in highly competitive markets where CC costs are most likely not being passed on to the consumer (and order size / card choice is not being llimited)..

Honestly, isn't this a minor issue to focus on?

Posted by: JF / Philly on April 2, 2007 at 5:34 PM | PERMALINK
...when prices for things go up after a long period of stability. It's called inflation... Matthew at 4:34 PM
What is your rationale increased costs for cases in which prices decrease, as the cost per transaction for credit card companies, for example?

...Britain and Australia recently analyzed actual processing costs and discovered that they amounted to about 0.7% — i.e., less than a penny per dollar....

Posted by: Mike on April 2, 2007 at 5:41 PM | PERMALINK

bob writes: Merchants aren't free to shop around. They have to accept all credit cards. There's no competition.

Not true...No company "has to" accept credit cards. Of course, accepting credit cards will greatly enhance your revenue, but you can choose to go cash only. My doctor will not let me pay my co-pay by credit card (which is one of many reasons why I'm probably switching doctors).

Similar analogy: No private practice doctor "has to" accept health insurance, but they "choose" to accept health insurance because it greatly expands the number of people who will do business with them.

If CC (or health insurance) companies continue to increase costs, there comes a threshold where merchants decide that the cost of using a credit card company is too much and will find other means of transacting with thier clients...

BTW...as a general rule, the government defines monopoly (where choice ceases to exist) as when a particular market has

I guess you could call out collusion, anti-trust and all that, but as someone previously mentioned, the range offees are far enough apart (2.5 to 3.5), that I would doubt that to be the case...

Posted by: JF / Philly on April 2, 2007 at 5:49 PM | PERMALINK

A topic dear to my heart. Perhaps many here think of merchants and credit card issuers as equally in league with the devil, but as the owner of a retail business, let me assure you that small business is as much a victim of credit card depredations as is the consumer.

In an ultra-competitive marketplace, raising prices, either for credit card purchases only, or in general, is impossible, so we small retailers watch as merchant services companies siphon away more and more of our already-slim profits.

The most outrageous example was the campaign to urge consumers to say "credit" as opposed to "debit" when using a card at a store. The reason? Processing fees on the credit card network are a percentage of the purchase, a purchase routed throught the debit network engenders to the card industry only a flat fee, regardlesss of the amount of the purchase. Both networks go to the same consumer account; only the method of getting there is different.

So the bank campaign to entice consumers to say "credit" with prizes and rebates was paid for entirely by merchants with no say in the matter.

Amex is the most toxic of the bunch, with discount rates to merchants far higher than Visa and Mastercard. We stopped accepting Amex; it just wasn't worth it. Bedsides, every Amex customer had a Visa or a Mastercard.

It's easy to hate much about the credit card industry, from many points of view.

Posted by: jrw on April 2, 2007 at 6:18 PM | PERMALINK

"Fraud is borne entirey by the vendor."

Don, that's simply not true. If the vendor follows all laws about checking the signature etc, then it is the issuing bank that takes the hit. That's why a lot of credit card companies DO monitor and fight fraud. For example, a lot of companies will deny an overseas transaction if it's the first time you've ever bought anything outside of the US. You need to call them in order to make it work.

Also, the term "credit card companies" is overly broad. There are a LOT of players involved in making a credit transaction work. There's the merchant bank (bank that the merchant uses), the service provider (VISA, MC, Disc, AMEX), and then there's the issuing bank (CapOne, Citibank, Wachovia, etc). The 2% gets split among all of them. I haven't looked through the report, but it'd be a good exercise to find out which parts are getting most of the increases.

Posted by: Gheby on April 2, 2007 at 6:20 PM | PERMALINK

Adding to Gheby above: Re: Fraud, merchant banks also differentiate pricing to merchants based on fraud experience, and kick out merchants w/ too much fraud. And Re: number of players, the industry has become tremendously disaggregated over the past thirty years. In the good old days only a few large banks dominated the scene and were vertically integrated; now there are a plethora of banks and non-bank merchant processors, as well as small independent "acquirors" who market the merchant services to retailers, are in the mix. Note that KKR is taking FDIC private, suggesting there is more to be wrung out of the value chain.

Also, recall that acceptance of checks and cash involves significant handling and controls expense (and theft risk is high when dealing in cash), not to mention the externality cost of wasted time for those of us stuck in line behind the person writing a check!

Posted by: Tom F on April 2, 2007 at 6:43 PM | PERMALINK

My understanding is that it is not a matter of law that the charge price is the same as cash, but contract. That is, the contract between the issuing bank and the merchant. The law tolerates this under the assumption that merchants are free to negotiate terms of contracts. Of course, unless you're Wal-Mart, the merchant can forget about negotiating contract terms with Visa or Master Card. As a merchant, I also am angry about other credit card fees: if your mag stripe doesn't work, I pay a fee. If you use a corporate buying card, I pay a fee for that as well. Incidentally, I understand that American Express contracts do not forbid the merchant to charge a fee for card transactions.
Perhaps this is an issue that could pry small businesses (think NFIB) away from the GOP. We're all mad as hell about credit card fees.

Posted by: John H on April 2, 2007 at 6:54 PM | PERMALINK

Perhaps this is an issue that could pry small businesses (think NFIB) away from the GOP. We're all mad as hell about credit card fees.
Posted by: John H on April 2, 2007 at 6:54 PM | PERMALINK

My guess is that this issue is one of many that has a potential to pry small business away from the GOP.

- subsidies to large corporations (like agribusiness)
- preferential treatment for large corporations in courts (wrt trademark disputes, copyright, patent etc.)
- special foreign trade deals through the State dept, etc. that don't tend to happen for small businesses, even if you do get their attention.
- hands-off approach to regulating monopolies.

It has me wondering why the GOP was ever perceived to be the "friend of small business". Certainly the Democrats are pretty hostile; but the Republicans are far worse on these big issues.

Posted by: Extradite Rumsfeld on April 2, 2007 at 7:41 PM | PERMALINK

In Australia these things are regulated by the Reserve Bank. Until a few years ago the contract that merchants signed with the credit card companies were basically the same as the US. Then the Reserve Bank changed the rules saying agreements preventing surcharges to recover merchant fees were no longer allowed, letting merchants pass on the merchant fee to the customer if they wanted to.

Two noticable effects.

1) Some merchants started adding surcharges. Mainly on high cost low margin stuff like computers.

2)You probably don't know this but the merachant fees between different credit card providers vary alot. I think mastercard is the lowest, then VISA. American Express's fees are much higher. AMEX had a lot of problems with people cancelling their cards after card holders started getting slugged with the extra merchant fee.

As an aside, I am pretty sure that Adam Smith would have approved of the Reserve Banks action. Not many people know this but when he was talking about barriers to trade in the Wealth of Nations he was mainly talking about domestic barriers to trade, that were as likely to be set up by private enterprise as by government. These unfair credit card merchant charges are exactly the kind of thing he was talking about.

Posted by: still working it out on April 2, 2007 at 7:52 PM | PERMALINK

If that is the case, credit card companies are actually making less money than they were in 1990. Why shouldn't they try to raise prices? If the numbers are inflation-adjusted, the increase is still below the mean profit growth of the S&P 500.
People are always shocked when prices for things go up after a long period of stability. It's called inflation. It happens.
Posted by: Matthew on April 2, 2007 at 4:34 PM | PERMALINK

Well, first of all, nobody's guaranteed profit higher than the mean growth of the S&P 500.

Second of all, given computerization in the past 10-15 years or so, I suspect that transaction costs for credit card companies, who mostly shuffle bits around on hard disks, are probably in rapid decline. Particularly when their major expense, labor, is getting outsourced to call-centers in India.

People are always shocked when a company takes advantage of increasing efficiencies, and turns around and gouges the customer for more money. What's the world coming to when a duopoly (Visa/MC) can't use their market muscle to extort their customers?

Posted by: Extradite Rumsfeld on April 2, 2007 at 7:57 PM | PERMALINK

"Don, that's simply not true. If the vendor follows all laws about checking the signature etc, then it is the issuing bank that takes the hit."

What merchant account provider do you use ? Our provider, Global Payments, socks us for the full amount of the purchase and the fees if a fraudulent order is charged back. Also notice that they don't actually catch the fraudulent order, themselves. Luckily, ever since we received one several years ago, we've been ultra-aware and have caught all fraudulent orders before they get processed with Global Payments.
BTW, we're an online business.

As I said above, the whole scheme of trying to get the banks and/or merchant account providers to do fraud prevention is practically worthless. It's time that they provided the proper financial incentives/penalties so that the vendors themselves can perform the fraud prevention.

Posted by: OhNotAgain on April 2, 2007 at 9:12 PM | PERMALINK

And just asking (as I don't have one) - what about the Bank-issued "Debit Cards"? Certainly there's some overhead riding along with those as well - and based on what I see these days I may be one of the few folks left who uses actually cash money for day-to-day purchases. Those folks who whip out their debit card for a $2.00 cuppa are certainly adding to *someone's* bottom line.

And credit card gas pumps I understand - but credit card fast food drive-throughs? That's sad.

Posted by: Jimmy in Columbus on April 2, 2007 at 9:26 PM | PERMALINK

OhNotAgain,

Full Disclaimer on My End:

I'm not a business, I don't use a merchant account provider, so I can't speak to your specific contract.

I work for a major credit card company (I know I know, I've sold my soul, but I promise it's one of the better ones, just hear me out). It would be bad to say which company in particular, but we're in the top 10 nationwide. And I know for a fact that what we call chargebacks (when a single transaction is written off, as opposed to an entire account, which we call chargeoffs) costs us tens of millions of dollars each year.

I'm not trying to say credit card companies are blameless or perfect (god knows I know we're not), but I just want to point out that the situation is more complicated than just "the credit card companies". I don't know the breakdown of where all the money is going, and neither does anybody else, which is what I'm trying to start a discussion on.

Posted by: Ghebs on April 2, 2007 at 9:32 PM | PERMALINK

From a friend of a friend I have heard that ATMs are being raided nightly by working class criminals using blank cards coded with supplied numbers and pins. They hit as many ATMs as they can, withdrawing max.amout of cash at each one. At the end of the night the take is $40,000.00 to $60,000.00 in cash which is then split up with the leaders of the ring taking 70%. Suppliers of the card numbers rake in megga bucks, and the credit card companies pass these costs to comsumers. It is acceptable losses in the industry.

I would think by carefull monitering in real time that it would be easy to track the movements of these people and catch them red handed at the next ATM. BUT IT DOESENT HAPPEN.

Got any ideas about who could get all these account numbers and the blank cards? Organized criminals working within the system? These wonderfull credit card companies are ripping us off every way they can, even under the table.

What a sorry system we have today. Are there any honest people left in America?

Posted by: arf arf on April 2, 2007 at 10:06 PM | PERMALINK

For those who thought that companies could pass on the cost of credit card fees to customers, or any other cost for that matter: it violates the law of supply and demand, which says that the price is determined by how much customers are willing to pay for a given supply (which yes, could change...) That means sellers can't just charge as much as they want to, to cover whatever costs they want and always keep their profit margin at some desired level. (Logical self-contradiction test: if they can get away with charging more *after* a given cost kicks in, and buyers don't know about that anyway, then why didn't they just charge that extra amount to begin with?)

tyrannogenius

Posted by: Neil B. on April 2, 2007 at 11:01 PM | PERMALINK

33% over 14 years is just over 2%/yr, less than the average rate of inflation over that time. But I'm not sure how the profit vs net breaks out so I'm not sure if profit is really supposed to keep with inflation or not.

The main point of the fee intended to cover a decreasing cost is the same, but I just wanted to put this in perspective. If your wage increased by 33% over 14 years, you might be happy if you're a california public school teacher, but otherwise you'll be pretty upset.

Posted by: PseudoNoise on April 3, 2007 at 2:36 AM | PERMALINK

As an internet retailer, I can tell you that dealing with CC companies sucks. The CC company really has very little risk compared to their volume - in 6 years of taking CC's online, I had no fraudulent numbers come through.

What I had, instead, was someone who tried out about 1600 numbers that wouldn't go through. Did you know you , the merchant, get charged for every incomplete transaction, even when those numbers are plainly false (as in, the numbers themselves correspond to no card service)? Yep, many hundreds of dollars lost, with no warning from the CC company that it was going on over the course of several days.

In fact, the CC company could do it themselves to generate revenue.

Then they kicked up the rates about 25% that same month.

I only take paypal and mailed in payments now. Its a luxury that normal retailers don't get. they cannot skip CC's, because everyone pays with them and debit cards. Screw the CC companies, they don't serve business or customers well.

Posted by: thanesgames on April 3, 2007 at 2:42 AM | PERMALINK

Does the Bush dynasty have ownership of credit card companies or card services ? Does the VP?? If not, who are the biggest names in the trillion dollar industry? OF COURSE, Im just wonderin.....

Posted by: artemiscal on April 3, 2007 at 5:42 AM | PERMALINK

arf, what exactly are "working-class criminals" and how is it that the friend of your friend knows what class they are, if they haven't been caught for crimes that no one but you, your friend, and the friend of your friend have ever heard of?

Posted by: Nancy Irving on April 3, 2007 at 9:39 AM | PERMALINK

P.S. Everybody, try not to use cc's when paying at a small business. If you have to use plastic, use your debit card and say "debit" when they ask, "debit or credit."

By the way, I don't think anybody mentioned that the reason why cc transactions for small amounts are killers for merchants is that the processors charge BOTH a percentage commission AND a flat transaction fee. The flat transaction fee is usually about fifty cents, so transactions of less than $10 will in effect incur a 5% transaction fee on top of whatever percent commission is charged, a real killer.

Posted by: Nancy Irving on April 3, 2007 at 9:43 AM | PERMALINK

>>Galbraith's "Money: Whence it Came, Where it Went" (1974) - smartalek

Absolutely essential reading. But I think a new edition with his son, James, adding consideration of credit and other derivatives, CDOs and vastly appreciated stock as a money equivalent would be in order. There's no denying its out-of-date.

'Over the past generation, banks and credit card companies have made trillions of dollars of high-interest, unsecured debt available, and Americans have scooped it up. Our incomes have risen an average of 1 percent in real terms, while our household debt has increased over 1,000 percent. As a result, we no longer save. We have no choice but to keep spending until our credit is exhausted and we own nothing.'
America, Maxed Out
By James Scurlock, Scribner

Posted by: MsNThrope on April 3, 2007 at 11:20 AM | PERMALINK

As a small restaurant owner I can say that the credit card lobbies have really pushed small business, and customers, in a corner.
I have to raise my prices every time I get an increase in cc fees, which seems quarterly, because I have such a low profit margin.
In California, you can give a discount for cash but then you become, ipso facto, an IRS target.( I know, I was audited the first year we opened even though I didn't have a discount for cash and was told by the auditor not to do it, it was one of the things that they look for when mystery "shopping" for tax scofflaws.

Putting CASH on a menu is just screaming to be flagged for audit.

I pay between 2000-2500 per month in fees alone because everyone in my neighborhood uses plastic. I even have a net negative cash flow which means I have to go the bank daily to take money out for servers' tips!

Posted by: Susan on April 3, 2007 at 7:16 PM | PERMALINK

A friend of a friend is not someone I personaly know. My friend is someone I know well but only in one shared intrest. My friend picked this story up at the funeral of her friends mother. That person is a working class criminal, working in San Francisco with her boyfriend. When not running cc thru ATMs they deal in illegal drugs. Sooo...working class {??} well lets just say they are not upper class criminals.

Do you believe all that fraud in cc industry is the work of "many" one person criminal enterprises, working alone? Not likely. All those fresh cards and numbers must be pretty hard to find. The real dollar amounts lost doesn't add up to small time crime. This is only my opinion. Any others care to tell theirs?

Posted by: arf arf on April 4, 2007 at 1:01 AM | PERMALINK




 

 

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