July 19, 2009

Missing Something in the Battle Over Bucks

Justin Katz

Perhaps somebody can explain what I'm missing in this:

Merchants across the nation, from powerhouses like Wal-Mart and Home Depot, to gas stations, mom-and-pop restaurants and 7-Eleven, have spent years unsuccessfully fighting the biggest of these costs, known as an interchange fee, which generates an estimated $40 billion to $50 billion in income annually for banks that issue credit cards.

But after Congress passed a law last month to protect consumers from excessive fees and interest on credit cards, merchants are mounting a fresh offensive.

This time, they believe the momentum in Washington has turned in their favor. Legislation is winding its way through Congress, a government audit has been ordered and petitions are surfacing in hundreds of convenience stores, including Ms. Orzano's 7-Eleven, encouraging customers to voice their opposition to the fees. "Congress sort of already illustrated the willingness to take on the credit card companies and the big banks," said Keith Jones, a lobbyist for 7-Eleven. "We just feel like the job is half done."

In a nutshell, just under 2% of every credit card purchase is divided unequally among the merchant's bank, the customer's bank, and the credit card issuer (Visa, Mastercard, Amex, etc.). With customers using credit cards more extensively, greater percentages of stores' total sales are going to the card issuers, so the stores are hoping the federal government will redirect the money back to them.

Here's my question: Is there some reason that the stores don't simply tack a fee on sales completed with credit? That $1.50 coffee would therefore cost $1.53, with the explanation being that three cents is the cost of using credit. If stores such as WalMart and Target can work together to petition the government, they should be able to agree to this practice, and banks would surely decrease their take to an amount that preserves the incentive for customers to whip out their cards.

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I think the credit card companies put language in their contracts barring merchants from passing along the fees to their customers.

Posted by: David at July 19, 2009 7:08 PM

Yes, as David said, it is expressly prohibited in their contract. When you see gas stations with two different prices, they either worked out a different contract, or are in violation. In addition, merchants may not set up a minimum purchase to use a credit card either.

Posted by: Patrick at July 19, 2009 7:27 PM

So, in the merchants' estimation, they gain financially from accepting this system (otherwise they'd decline to accept the cards), but they're approaching the federal government to tilt it more in their favor?

Posted by: Justin Katz at July 19, 2009 9:28 PM

"they gain financially from accepting this system (otherwise they'd decline to accept the cards),"

And what do you think the reason is for "they don't take American Express"? It is because their fees are higher. I know of several stores that will not accept plastic on sales below a minimum amount. Profits are erroded.

"credit card companies put language in their contracts barring merchants from passing along the fees to their customers."

What an absurd contractual provision, are the merchants supposed to "eat" the fees? Of course they pass them along, just as they do taxes (not sales tax, but property and income taxes). The credit card companies are just trying to keep the public from knowing what they are paying in card fees.

I have long wondered why merchants do not offer a "cash or check" price.

I very recently decided to pay my electic bill online with a card, I found there was an additional $5.85 charge for using the card. IIRC, the "charge" for a "paperless" check was $1.50. This is a "regulated industry" so the credit card charge probably comes right out of their pocket.

When I studied marketing and economics, some time was devoted to the "green stamp" mania of the 50's (with each purchase you received "green stamps" depending on the amount spent. These were put in "books" and could be redeemed for merchandise at "green stamp" stores). Initially, while the stamps gave the merchant a marketing advantage, the cost was absorbed in the way advertising costs are. When it reached the point that all merchants were offering "green stamps" and there was no longer a marketing advantage, the "cost" of the stamps was incorporated in the price. The cost became excessive and Green Stamps disappeared. Now cash has disappeared and there is no longer a marketing advantage to credit card acceptance. So the merhants want to recover the cost. Why not, aren't we accustomed to paying for convenience?

Posted by: Warrington Faust at July 20, 2009 12:25 AM

Could the merchants raise their prices by a few cents on the dollar, but provide a discount for using cash? It wouldn't be a fee for using plastic, rather a bonus for using cash.

Posted by: mikeinri at July 20, 2009 9:42 AM

This reminds me of my many visits to the semi-annual CCRI Computer Show back in the 90's, where every merchant (and I mean ALL of them) would charge you 3% more for an item if you paid with a credit card.

Posted by: Chris at July 20, 2009 12:49 PM

I have never studied large scale retailing, but I suspect that WalMart has a profit of about 3%. I can see why they are galled by the card people making the same, for doing much less. WalMart squeezes all of its suppliers, why not the card companies. Makes sense to me. Of course, it makes sense to me because in the end I am paying it.

In India they have a solution to this, payments can be made over their wireless phone system. People stand at the cashier and transfer funds while they speak. This is the result of high card fees. Much as here, there is a diffence in high margin "upscale" stores. In those stores the cards are accepted and costs passed on.

Posted by: Warrington Faust at July 20, 2009 5:15 PM

I think the merchants figure that they benefit from accepting credit cards because it generates more business. The credit card fee gets folded into the prices of the merchandise. Because price differentials are disallowed by the credit card agreements, everyone pays for the convenience of using plastic - cash customers included. Merchants can avoid this by not accepting plastic but this creates its own problems.

There is a gas station near my apartment that sells gas at a very competitive price. Last year, when gas was selling at around $4 per gallon, they stopped accepting credit cards for gas purchases. I have stopped buying gas there because the convenience of not having to carry cash sufficient to fill my tank as well as being able to purchase gas at the pump without having to enter the store is worth the extra few cents per gallon that I pay up the road.

By the way, for those of you who have hit on the realization that the credit card fees are passed on to the customers, remember that taxes work the same way. Corporations don't pay taxes, they collect them.

Posted by: David at July 20, 2009 6:32 PM
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