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.
Many 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.
Published or updated July 17, 2012.