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Customers Say Retailers Are Not Living Up to Durbin Amendment Promise

This article was written by in Consumer. 14 comments.


Retailers, represented by the National Retail Foundation, promised that consumers would benefit when retailers, particularly small businesses, were to benefit from regulated interchange (swipe) fees charged by Visa and MasterCard. The regulation, commonly called the “Durbin Amendment to the Dodd-Frank Act,” would lower the cost for businesses who were subject to an effective duopoly between Visa and MasterCard, paying a percentage of every debit card transaction to the processor.

These fees are higher for transactions with any card that is more than just vanilla, and retailers have dealt with this high cost of doing business in an age where an increasing number of transactions are handled electronically mainly by increasing the costs of products overall.

Cashier checkout at WalmartThe National Retail Federation claimed last year that consumers would see the benefit of reduced interchange fees. Regulated cards — and not every issuer is subject to this regulation — carry interchange fees with a maximum of 0.05% of the transaction plus $0.21. The standard fee for a non-regulated card (reviewing Visa’s schedule of interchange reimbursement fees as of October 2011 [pdf]) is 1.90% of the transaction plus $0.25 for every swipe of the card.

If retailers intended for the consumer to benefit, the only way for that to happen would be in the form of lower prices. Here are a few comments from representatives of the retail industry, as compiled by the Electronic Payments Coalition:

  • “The reform will save each franchisee in the country almost 50% of the cost of a debit transaction, which ultimately will be passed on to the customer… It is simply a fact that lower merchant costs will lead to lower consumer prices.” (Bruce Maples, Chairman, National Coalition of Associations of 7-Eleven Franchisees)
  • “Merchants are ready to pass lower swipe fees along to consumers in the form of discounts and other benefits as soon as reform goes into effect…” (Mallory Duncan of the National Retail Federation)
  • “Merchants are making a wide variety of plans to pass the savings along to customers who use debit cards, ranging from discounted prices to benefits and increased services such as free delivery at an appliance store…” (National Retail Federation press release)
  • “Secondly, to the extent that a merchant receives a benefit, I do believe that from a competitive standpoint, they will bring that through to the consumer.” (Robert Donovan, Corporate VP & U.S. Assistant Treasurer, McDonald’s

If you’ve been shopping throughout the past year, particularly since October 1, 2011 when the regulation went into effect, you probably haven’t noticed prices decreasing. In fact, I would say prices overall, from my anecdotal experience, have continued to rise. Recent research confirms this suspicion, to the tune of a 1.7% increase across a list of common items.

According to a consumer survey conducted by Ipsos Research, only 7% of consumers believe that retailers are passing these savings onto customers. 76% of retailers have increased their prices or kept them constant since October 1, 2011.

At the same time of these increases for customers, retailers have saved $2.28 billion as a result of the regulation. When we discussed this on Consumerism Commentary, most readers didn’t expect retailers to lower prices. Why should they? Small retailers have the opportunity to reduce their costs while not affecting revenue by keeping prices steady. That’s how businesses can survive in difficult times. Large retailers may have healthier profits due to volume, but the ability for large retailers to offer low prices is their strength, and don’t have the margins to reduce prices much.

Could it be possible that these promises of savings for the consumer were promoted by the industry to garner more public support for regulations?

Photo: Walmart Stores
Electronic Payments Coalition

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Chase Freedom Review and Comparison

This article was written by in Credit. 6 comments.

From a branding perspective, each credit card issuer looks to group similar offers with a catchy name, helping consumers to immediately identify a type of credit card with the associated benefits. Chase offers quite a few slightly different cards under the Chase Freedom banner, and while the core features are the same, the offers differ in several details.

All Chase Freedom configurations include one percent cash back on all purchases, beginning immediately. This cash back is earned in the form of points. For example, if you spend one dollar, you earn one point. If you buy two CDs from Amazon.com for $10 each and return one, you earn ten points, not twenty, because the points are based on the net spending. You can cash in the points you earn to receive a check at the rate of one dollar per hundred points. With 2,000 points accrued in your account, a result of spending $2,000, you could request a check or statement credit for $20.

Chase FreedomIn addition to the guaranteed one percent cash back, there are several ways to earn more points.

  • 5% opportunity. If you enroll once a quarter in Chase’s five percent cash back program, you will earn an extra four points per dollar (five points total) in certain spending categories, like gas or restaurants on up to $1,500 spend each quarter. Keep in mind that each merchant must classify the retail establishment correctly in order for Chase to trigger the five percent bonus.
  • 10% opportunity. If you shop online through Chase’s portal, you can receive up to ten percent cash back in addition to the cash back above.

In its television commercials, Chase compares the Freedom card with “the largest cash back card,” a thinly-veiled reference to the Discover More card. One of the points for comparison in the commercial is the fact that the Discover More card offers the five percent cash back tier on up to only $300 in spending. The most you can earn in one year from this benefit is $15, although Discover is increasing this limit. Chase, on the other hand, allows you to earn five percent cash back on up to $1,500 in spending, resulting in a maximum benefit of $75. There was a time when the best cash back cards offered unlimited five percent back on all purchases, but that isn’t the case today.

The points you earn in the Chase Freedom program can be redeemed at Chase’s Ultimate Rewards center. You can trade points in for a check or statement credit as mentioned above and get the typical exchange rate ($1 for 100 points), or you can cash in your points for other benefits like gift cards, sometimes at a better exchange rate.

Chase Freedom comes with some important fees to consider: Read the full article →

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10 Cash Back Credit Card Traps

This article was written by in Credit. 16 comments.

For my own finances, I’ve been a fan of credit cards with cash back programs. Some financial experts advise avoiding best credit card deals completely, even those cards that offer rewards like cash back or offer on best gas credit cards and small business credit cards. I’ve never been a fan of this approach — again, for my own finances — because I see a credit cards as just another tool for personal finance. A hammer is inherently neither good nor evil; it’s a tool that someone can use to fix a roof or to send another person to the hospital.

For a large portion of consumers, credit cards cause trouble. That may not be a reason to avoid credit cards entirely, as consumers can learn how to use credit cards effectively. Those of us who do believe we use cash back credit cards offers responsibly, paying bills in full every month, never paying interest, and buying only what we can afford, are relatively comfortable with the use of this tool, but even the best of us are subject to issuers’ traps.

Cash back credit card programs include traps that help issuers recover the cost of paying out benefits to their customers. While some traps can be avoided by managing finances closely, other traps take advantage of the psychological aspects of using plastic rather than cash. These traps can be more difficult to avoid, because consumers cannot control their subconscious tendencies. Here are the cash back traps to avoid, if you can.

1. Credit card users spend more

Cash Back Credit CardsThe process of taking cash out of your wallet and handing that money to another person is a very deliberate activity, both physically and mentally. Parting with cash has psychological ramifications. In most people, particularly those who best understand the value of having money saved, the act of giving the cash away triggers the same reaction as a painful activity. Spending money and pain are linked in the brain.

When you use credit cards, you add a buffer between your cash and the process of parting with it. Spenders are less likely to hesitate and less likely to get that twinge of pain associated with handing over bills and coins. People familiar with computer science would call this a layer of abstraction. You’re controlling your money by using a representation of that money, not the cash itself, and that makes the process feel better. In addition, cards with a rewards program like cash back encourage higher spending, because that cash back is seen as a reward that can be maximized by spending more.

Avoid this by making a concerted effort to buy only what you could afford with cash at any time.

2. Late fees and interest negate any cash back benefits

Read the full article →

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American Express’s Small Business Saturday

This article was written by in Consumer. 30 comments.

I’ve avoided writing about Black Friday this year. In the community I follow, promoting the day after Thanksgiving for shopping has gotten completely out of hand. I wrote an article for PC World a few years ago, The Insider’s Guide to Black Friday Bargains, where the tips are still relevant for today’s shoppers. I’m not going to write a new article every year about how to find the best Black Friday deals.

As if Black Friday weren’t enough of a marketing scheme, a few years ago consumers were blessed to receive Cyber Monday, yet another day of hype encouraging people to buy more. I’m not always anti-consumerism, but I just find every year’s increased holiday sale hype, designed as a last-ditch, end-of-year effort to make up for poor sales since January 1, annoying. Doorbusters, bait-and-switch, and worst of all, and crazed Wal-Mart shoppers who are willing to kill others just to be first to grab some sale item that will be worth a tiny portion of its sale price in five months, make me embarrassed to be an American consumer.

American ExpressThe opposite approach is to put faith in Buy Nothing Day. The message of Buy Nothing Day is good, but like any temporary boycott, it just time-shifts spending; what you don’t spend on the day after Thanksgiving you’ll likely spend the next day. And if a sale expires, you’ll spend more.

The worst thing to come out of the holiday hype is “Small Business Saturday.” (Let’s just stop naming the days following Thanksgiving, also known as Turkey Thursday.) This is American Express’s effort to get consumers to patronize local stores in favor of national chains. On the surface, this isn’t a bad idea. Support business owners in the community by visiting smaller retail establishments who otherwise have a difficult time competing with large box stores like Best Buy, Wal-Mart, Target, and Home Depot. Your neighborhood appliance or hardware store generally charge more money for the same products offered by national chains because small stores have little leverage to negotiate with wholesalers. Working with a small business based in the community you live, having a friendly face who can help answer your questions, and building a relationship with a business owner might be strong enough reasons to settle for a higher priced item.

This is coming from American Express. Many small business owners simply can’t afford to accept payments using American Express cards. It costs more money for a retailer to accept most American Express cards than most Visa or MasterCard credit cards. When you do use your American Express cards at a small business, you are not helping the store as much as you would if you were to pay with cash. American Express interchange fees can take an unhealthy bite out of a small business’s profits. Also, unlike Visa and MasterCard, who generally split merchant fees with banks that issue their cards, American Express cards are generally not issued by third parties, and the company keeps the entire interchange fee.

The “Small Business Saturday” campaign was not created for the good of the overall economy. American Express offers this message, “The 2nd annual Small Business Saturday® is a day dedicated to supporting small businesses on one of the busiest shopping weekends of the year,” but the day supports American Express, which is not a small business. Through this campaign, American Express is offering small businesses that accept their cards to prominently display an advertisement that offers a $25 credit to any customer who uses an American Express card to purchase items totaling $25 or more at the location. There is little in this campaign other than self-interest and self-promotion on American Express’s part.

Is this bad? It’s hard to say. If you want to do your part to support local businesses that are in danger of closing partly due to the high prices credit card companies charge, shop there but pay cash. Forget about the 1% cash back or less you can earn, paid for by the small business owners. The $25 credit in the offer doesn’t support small businesses because this isn’t extra money that can be used to purchase more in a store. It’s a statement credit, designed to thank card holders for using American Express and requiring retailers that accept the cards to pay more to AmEx through fees.

American Express is, thanks to capitalism, allowed to promote almost anything it likes in order to increase profit. That’s how corporations compete, build value for shareholders, and help upper middle class households stay upper middle class and wealthy households increase their wealth. The company reports that small businesses saw an increase in sales due to last year’s Small Business Saturday campaign (but note that they didn’t see the same large increase in profits). Look past the marketing messages at who is most benefiting from this campaign.

When the sun goes supernova and engulfs the Earth, marketers will promote the event as the hottest party since the big bang.

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We Did It: Bank of America Dropping $5 Debit Card Fee Proposal

by Flexo

After Wells Fargo, Chase Bank, SunTrust Bank, and Regions Bank dropped their plans for debit card fees yesterday, the largest bank in the United States, the only bank holding onto its policy of eliminating unprofitable customers by annoying them with inconvenient fees, dropped their own plans to enact a $5 monthly debit card fee in ... Continue reading this article…

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More Banks Drop Debit Card Fees

by Flexo
Chase Bank

Consumer outrage and backlash does work, apparently. Wells Fargo Bank and Chase Bank have been testing debit card fees in a small number of locations within the United States, but due to the anger unleashed after the largest bank, Bank of America, announced it would add a $5 debit card fee in 2012, the two ... Continue reading this article…

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Bank of America Charging $5 Debit Card Monthly Fee

by Flexo

Last month, I noted that Wells Fargo was to begin testing a $3 debit card monthly fee in some areas of the country. Since the recession, banks are looking for more ways to generate profits from depositors. Historically, banks turned deposits around and approved loans for borrowers at higher interest rates than what was paid ... Continue reading this article…

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Wells Fargo Testing $3 Monthly Debit Card Fee

by Flexo
Wells Fargo

Wells Fargo Bank, the primary brick-and-mortar bank I’ve been holding onto for my branch-based banking, ATM deposits, and immediate check-writing, is jumping on the debit card fee bandwagon. Chase was one of the first banks to start playing around with fees and debit card changes. Chase increased its ATM fee to $5, eliminated the short-lived ... Continue reading this article…

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