I’m currently in California, visiting my mother, who as I mentioned in a previous article is in the hospital. While articles this week will likely be slow on Consumerism Commentary, one thing I won’t have to deal with while visiting family is the relaxed regulation on merchants who accept credit cards. Starting this week, retailers in many states are now explicitly allowed to charge customers who wish to pay with credit cards an extra fee. My home state of New Jersey will be affected, while California has state laws preventing such consumer discrimination.
Here is how this came to pass.
The Credit CARD Act of 2009 directed the government to regulate swipe fees for debit cards, sending companies involved in payment processing, from Visa and MasterCard to the smaller companies that handle the transaction technology, scrambling to ensure the lost revenue could be made elsewhere.
The CARD Act set the stage for pro-consumer changes to the credit card industry as the empowered government agency, the Consumer Financial Protection Bureau, began changing the landscape for the financial industry and its consumers.
In July 2012, Visa, MasterCard, and several banks settled an anti-trust lawsuit that alleged the companies fixed prices — the prices these companies charge merchants to accept credit and debit cards. Merchants generally pay for each swipe of a customer’s card — “swipe fees” or interchange fees — so off the top of a large number of transactions, the payment processors, the banks, and the card issuers stand to earn 3 to 4 percent of the transaction price in total. The settlement opened the door for retailers to begin passing the cost of the credit card transactions onto their customers.
But wait. Retailers were always passing these costs onto their customers. It just so happened that the cost was spread out more or less evenly among all customers, regardless of payment method. So customers paying with cash were helping subsidize the cost of accepting credit card transactions. The figuring can’t ignore, however, there is a cost to a retail location’s acceptance of cash. Someone needs to handle the cash, and a responsible employee needs to count it at the end of the day. Someone needs to bring the cash to the bank to deposit it, and the bank surely charges fees for business deposits. Have an armored guard service? You can bet there is a cost associated — a cost no business would have to deal with if all transactions were effected with plastic or electronics.
The cost for a business to handle cash is significant, and I wouldn’t doubt that cost is much higher than 4 percent of a transaction, particularly for a business that deals with small transactions.
All of these expenses are already built into the price point a company determines when looking at the figures. This surcharge is a way retailers can charge a higher price for some customers and blame the price increase on someone other than their own management.
From the smart consumer’s perspective, a 4 percent fee for using a credit card does more than negate the potential cash back rewards you could earn from taking advantage of some of the best credit card offers. Even the cards offering 5 percent cash back do so only on restrictive product categories and up to a low spending limit.
Those who use credit cards because of a cash flow problem — and this group of people is more likely to be people who have fewer purchasing options available to them — will be most negatively affected by this surcharge. It’s bad enough that groceries in low-income communities cost more than the same groceries in affluent communities, regardless of the reasoning behind the price discrimination. This credit card surcharge is going to make financial situations more difficult for the most vulnerable.
Like California, New York has restricted its businesses from this type of price discrimination — though similar policies haven’t stopped some businesses from using the “cash discount” trick to charge credit card customers more. Here are the ten states that have outlawed this practice already:
- New York
Any store with a retail location that charges a credit card surcharge must post a notice at the store’s entrance. The notice does not need to indicate the amount of the fee, but it needs to be clearly shown on the purchase receipt. Online retailers, however, don’t need to inform their customers until they reach the check-out page.
Customers who use debit cards will not be affected by the surcharge, but debit cards don’t offer the same kinds of protections as credit cards. It comes down to what we’ve always known: despite credit card rewards and benefits like purchase price protection, extended warranties, and certain kinds of insurance, cash is still king.
Despite what some reports are saying, customers using American Express credit cards and Discover credit cards can be charged this extra fee for their purchases. Most American Express cards are actually “charge cards” — cards without interest rates that require a balance to be paid off in full every month, and they may not have the surcharge, but a retailer is within his or her new rights to charge all credit card users extra, regardless of the branding, the processing network, or the bank.
Are you willing to pay 4 percent more for your groceries, entertainment, electronics, household items, prescription drugs, clothing, subscriptions, and so many other products and services just because you use a Visa or MasterCard? Do you want your state to prevent retailers from price discrimination? Do you believe the fantasy that cash customers will benefit from lower prices if credit card customers pay more?