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Credit Card Users May Pay an Additional Fee

This article was written by in Consumer, Credit. 22 comments.


When retailers and credit card issuers argue about fees, does the consumer win?

The consumer is generally ignored in these discussions. Businesses are controlling the dialogue. Businesses, particularly small businesses that rely on profit margins more than volume, were successful in getting regulators to restrict “swipe” or interchange fees. The fees credit card transaction processing networks charge merchants for each swipe of certain debit cards have been limited since the regulation change was enacted last year. As a result, every type of company involved with a debit card transaction, from the middle-man payment processing service to the company that owns the processing network to the bank that issues the card stands to have reduced revenue than they would have had otherwise. Small business merchants argued they would pass the savings onto their customers, but you can be sure that didn’t happen.

Now merchants have another type of fee on their minds. Rather than passing those savings onto customers, retailers want to do the opposite: charge credit card users more than cash users. For years, agreements that retailers have signed with third-party payment processors prohibited merchants from selling products at different prices depending on payment method. In order to encourage credit card use among the public, Visa and MasterCard did not want stores to up-charge customers who wanted to use their convenient tools for purchases. When merchants can’t charge customers according to the cost of processing a transaction — cash is basically free while accepting a credit card costs a percentage of each transaction plus a flat fee — they raise the price for everyone.

Credit cardsMany business owners have been able to easily circumvent this rule in the contracts by offering what they often call a “cash discount” rather than a “credit surcharge.” I was surprised when a local gas station starting charging customers a much higher price per gallon when using a credit card, but angry when they didn’t list or advertise the higher prices until the drivers were at the pump. My local camera store will match the low prices on everything in the store that you can find online, but if you want to pay with a credit card, the store adds 3 percent to the total payment.

According to the Wall Street Journal, analysts predict that Visa and MasterCard will eliminate the no-surcharge rule from their agreements. The companies will also allow businesses to reject credit cards with higher interchange fees, like Platinum cards, Signature cards, and other rewards cards. These two new changes in the credit card landscape will have consequences for credit card users who have followed the issuers’ rules and have found ways to profit through their use of credit cards through cash back rewards and frequent flier miles.

The formula for a consumer was simple. Buy a $100 item with cash and the equation is easy: the final cost the consumer is $100. Buy a $100 item in 2002 with a credit card offering 5 percent cash back and as long as you pay the credit card bill on time and in full, the cost is effectively $95. Buy a $100 item in 2012 with a credit card offering 1.5 percent cash back if you spend over $3,000 or 0.5 percent otherwise, and the cost is either $98.50 or $99.50. Buy a $100 item in 2013 with a credit card offering 1% cash back with an automatic 3% surcharge, and the cost is $102. Cash back rewards and miles will be rendered mostly useless — or at least much less valuable — if businesses adopt a credit card surcharge.

What will most likely happen is that consumers will gladly pay a 3 percent or similar fee in exchange for the convenience of not needing (or not having) cash. It costs more for businesses to accept credit cards, so why shouldn’t businesses be allowed to pass the cost of accepting credit cards onto the customers who take advantage of that convenience? The only argument against this is that for a long time, Visa and MasterCard did not officially allow this to occur, and many consumers believe that fairness or equality is a virtue that should be extended from retailers in commerce.

Once my finances were in stable shape about a decade ago, I switched from cash to rewards cards. I hardly use cash for any purchases today. If, however, I am charged an extra fee to use my credit card — or if my more expensive rewards cards are rejected by businesses — it would be wise to consider moving back to a cash or debit card system. Many people won’t. We’re entering a period of time where technology is advancing payment options. You can link credit cards to cell phones to pay for an item by just being in the vicinity of an RFID receiver. As paying by credit card becomes less intrusive, with no need to open your wallet, any new fees are going to be mostly transparent and ignored.

Photo: Philip Taylor PT
Wall Street Journal

Published or updated July 17, 2012. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 22 comments… read them below or add one }

avatar Christian L.

Luke,
Consumers always lose when merchants and credit card issuers go head to head. If consumers aren’t paying just to use the card, they’re paying the merchant so the merchant can provide you the “service” to use the card. It’s almost laughable to me.

Living in a small town where my ATMs are easily accessible, I pay with cash just as much as I do any type of card. I don’t mind it, especially because I frequent so many local establishments.

-Christian L. @ Smart Military Money

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avatar Ceecee ♦796 (Dime)

I have a rewards card which I use regularly and pay off at the end of every month. If I have to pay more for something in order to use the card, I will go back to using cash, no question. The card issuers are the ones who will lose in this situation. Like Christian, I live in a small town which has banks on every corner, and I can easily get cash.

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avatar krantcents

I predict that this could change the whole reward card system. Given a choice, I will not pay more to receive a reward either. Back to cash or check for me.

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avatar Steve

I predict that pretty much nothing will happen. A subset of merchants will had the newly allowed fee, including merchants with especially thin margins and merchants who seem to actively dislike their customers (such merchants do exist!). However all the merchants who could have added a cash discount today but chose not to, will not suddenly start charging this fee just because they can.

Anyways, the new ruling just means that Visa and MC can’t disallow the fee. A number of states disallow the fee by law (including CA, which contains 1/8th of the countries consumers).

On the off chance that this does somehow shake up the industry enough that fees become commonplace, my expectation is that most consumers would eat the fee, most merchants would nor lower prices and would just add on the fee, and that personally I would be amongst those would would start using a debit card.

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avatar Steve

Thank goodness I live in California. Businesses better not take my state for granted. Otherwise, they may lost a LOT of business.

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avatar Squeezer @Personal Finance Success

I hope this act bites merchants in the face when they see their revenue decline because people are limited to what they can buy with cash on hand.

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avatar Apex

Cash back cards should not exist.

They indicate that money is being squeezed out of the system somewhere. Consumers like it because the money is not being squeezed out of them. Although for the most part it is because over time prices for most merchants has had to be raised to cover the cost of doing business which includes merchant fees.

There was a time when glass companies used to be offering a free box of steaks with a replaced windshield all at zero cost for the steaks or the windshield because insurance was paying. Consumers thought this was great. But where did the money for the steaks come from? Well the glass company was just good guys and took less profit right? No, because soon tons of companies were offering the same deal. So they all agreed to take less profit for no reason right? Wrong. Prices were raised to reflect the cost of the steaks. Ah so then the insurance company paid it right? No hurt to the consumers. Wrong. Insurance companies raised the premiums to cover the higher cost of windshields due to them now having a “beef” component to them as crazy as that is. And eventually states got wise to this and attorney’s generals shut this process down. But why, no one was getting hurt right? Wrong, the consumers were because everyone was paying for steaks with their glass insurance whether they wanted it or not.

That is what cash back cards are. You are paying more for your products to be given some of it back in cash rewards. It’s exactly the same as the steaks with windshields scam and that is what it is, its a scam. You are being bribed to use their cards but the bribe is coming directly from you.

If interchange fees were lowered to less than 1% there would be plenty of profit left in the system for the card providers so long as there were no cash back cards. That is the real solution.

As to the comment made by flexo that “Small business merchants argued they would pass the savings onto their customers, but you can be sure that didn’t happen.”

This is just typical consumer hatred of business that shows a lack of understanding of economics. Did the merchants immediately lower their costs by 1% when fees were dropped by 1%. No, just like they don’t immediately raise them 1% when their costs go up 1%. What happens is that overtime competition drives the profit margin to its typical levels and prices reflect that. If fees go down, over time either competition will slowly drive down the price or more likely as inflation comes the prices will rise more slowly than normal until the profit margin is back to the typical level for that industry.

When the attorney’s generals stopped the steaks for glass scam did insurance costs immediately drop by the cost of a box of steaks? No, it doesn’t work like that. But over time that excess was squeezed back out of the insurance cost. That is how prices adjust. They do not change immediately but they will eventually reflect the actual cost of the product plus typical profit margin.

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avatar Lance @ Money Life and More

I read somewhere (so not super reliable) that certain states have banned these fees in law. I live in Florida and supposedly that is one of them. Hopefully these fees don’t make it down here where I live.

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avatar qixx ♦1,819 (Half-Dollar)

There are three consequences of this i see. One, premium cards (looking at you Visa Black) that charge a few hundred annually that might just operate without charging these interchange fees but will raise the annual fee. Two, shopping patterns will change for a small portion of the population. Some will move to debit or cash. Some will move to businesses that don’t overtly tack on these fees. Most people will not be bothered to change. Third, alternate payment systems will grow. Things such as the Target Red card will grow in popularity and the possibility of a new system taking a chunk out of credit card payment system.

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avatar csdx

If this does come to pass I’m seeing more people switching back to checkbooks. Given that I already hate standing behind the odd person or two who still uses them, I’ll be that much more likely to avoid such merchants all together.

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avatar Steve

csdx: You stated, “Given that I already hate standing behind the odd person or two who still uses them, I’ll be that much more likely to avoid such merchants all together.” That is an excellent idea. Thank you.

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avatar Apex

It’s unlikely that more than a handful of niche merchants are going to slap on a surcharge for using credit. It’s just not going to be palatable to most people so they won’t do it because it will cost them business and that’s bad business.

They don’t need to slap on a surcharge. Most of them have already raised their prices over the years to account for how much this fee eats into their profits. As more people used credit cards, prices slowly crept up a little more to account for it. If 75% of their current sales are via credit cards and their interchange fees are 2% then their products all cost 1.5% more on average than they would if they weren’t paying the 2% fee. All of you who are complaining are already pay a surcharge. It’s just priced into the product so you don’t think you are, but you are. That’s how markets work.

This is mostly an uproar over nothing. Most people will see little to no change. So calm down. You won’t have to pay anymore than the hidden surcharge you are already paying to cover credit card fees.

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avatar qixx ♦1,819 (Half-Dollar)

The place i think you will actually see start separating out the surcharge fees will be gas stations. Many already list separate cash and credit prices. This would allow them to go back to listing one price. You pay the transaction costs when they exist. I doubt many other businesses will be so obvious in charging the fees.

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avatar Holly Samlan

I, for one, will NOT pay cc surcharges. Either I will shop where there are none or I will write checks. Let the dumb merchant who wants to surcharge me have the extra costs of employee time processing checks (and MANY banks have a per item deposit fee on business accounts) plus the dangers of NSF checks.

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avatar Steve

Holly: I completely agree with you. The truth is that some merchants are greedy! Hopefully, the greedy merchants will go out of business, especially if many of their customers write NSF checks.

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avatar Joyce

If retailers start charging for using a credit card then, if possible, stick to using a debit card where there are usually no charges. And of course there’s less risk of getting charged for not clearing the full balance each month.

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avatar Bob

I think it’s very interesting that so many people say that cash is costless. For many businesses, handling cash is a potentially significant cost. Cash must be tracked and counted in at least a semi-manual fashion. It is more subject to employee error or theft. In addition, cash has to be manually handled to be deposited, etc. I would certainly be willing to grant that the interchange fees may represent a greater expense for a business, but it seems disingenuous to portray cash as costless. There are some significant benefits to electronic forms of payment, which must be balanced against the costs or downsides versus cash. It’s almost never as simple as one is good and the other is bad.

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avatar Ian

A potential side-effect: paying with cash (and checks if accepted) will most likely SLOW the lines at the stores (think Walmarts, grocery stores, Targets, and others with mass people and not many registers open). This slowness could upset customers;. If I walked in a store and saw all registers with lines, then, I’d leave immediately without shopping. Like another user, I’d also write checks, if accepted, if the store decides to have an upcharge for credit card use. I would try to avoid stores all together, too. I’ve avoided gas stations, like Valero, BP, Safeway and others, that had two-pricing for ‘cash’ and ‘credit card’ gas prices for ~2 years. Previously, I’ve used them. They lost my business. I’ll avoid other merchants too. And, why are debit cards that are swiped and “used as credit” (no pin entered) not part of it?

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avatar Joe Morgan

I’ve (so far) only encountered 1 merchant who charges different prices based on method of payment. It is a gas station about a mile from my job. I pulled in one day when I first started this job and saw that they charged more for credit. I pulled right back out again and haven’t been back.

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avatar Luke Landes ♦127,386 (Platinum)

Some gas stations have been doing that for a few years… and count on people not noticing until they’re at the pump, at which point they are likely to decide it’s better to stay and pump the gasoline than to find another station to save ten to fifteen cents a gallon.

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avatar Joe Morgan

Yeah, I know. But it doesn’t do much for return customers. Gas stations are one thing, especially one near interstate exits but coffee shops are a different creature and I think that practice would hurt them more if the competition was not charging extra..

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avatar Steve

With the exception of gasoline stations, since I almost always go to only Arco (which does not accept credit cards at all) and Costco, I will avoid businesses that have one price for cash customers and a higher price for credit card customers. If a business treats me as a second-class citizen, then that business does not deserve my business, period!!!!!

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