How Credit Cards Tax America
priceonomics.com
priceonomics.com
Now, what should a very efficient electronic system cost? Very little, a few tenths of a percent. But it doesn't, merchants charge the fees that businesses will pay for that convenience, even begrudgingly, because access to the millions of consumers with credit cards is worth it.
If Silicon Valley wants to disrupt the business, do it. It is possible to come in and take on an established industry. But so far I'm less than impressed with the payment start-ups that are out there, and imho all they're doing is introducing yet more fragmentation. Sorry, I have no interest in paying with my phone - especially not with Snapchat. My Chase Sapphire card doesn't run out of batteries, and I get lots of cool perks with it.
You are paying for indemnity. People forget about the power of purchase protection. I can pay with a card and feel safe I will not get screwed by a merchant. Merchants are scared of chargebacks, so they rarely screw the customer.
Card payment is vastly superior to cash payment the fees are not out of line.
Except the fee goes to the issuer and not the network.
> You are paying for indemnity. People forget about the power of purchase protection. I can pay with a card and feel safe I will not get screwed by a merchant. Merchants are scared of chargebacks, so they rarely screw the customer.
Then the cardholder should pay for this, certainly not the merchant.
> Card payment is vastly superior to cash payment the fees are not out of line.
3% is out of line for incrementing an integer in one mainframe and decrementing it in an other mainframe with virtually not risk.
There are basic insurance for card stealing that covers `some' things and you can buy larger ones if needed.
Why is the credit card the default in the US ?
The article states the reason: interests, over-due payback fees. Banks in the US don't have any incentive to provide their customers with debit cards other than to generate a shitty small fee.
Banks make real money by borrowing the customer (e.g.) 1000$ and collecting it either in full or in partials, and they hope that the customer pays in partials because they can earn interest for long(er) time.
A debit card, on the other side, allows for maximum 3-4 days (due to interbank settlement weirdness) and thus the profit from interest falls away.
Debit cards: if it gets compromised, you start losing cash out of your account
I don't see why it is in anyone's benefit to use a debit card, unless they lack self control.
Who pays for these 2% cashback? Most definitely not the card networks, and not the merchants. It's the CONSUMERS who pay for their own cashback.
> Also, has insurance and foreign exchange fee benefits
That "insurance" stuff is highly questionable imho, and most people don't ever need the forex benefits.
> Debit cards: if it gets compromised, you start losing cash out of your account
Chip and PIN. It's not hacker proof either, I admit, but way better than CCs.
I understand that my credit card has very strong protections by law, since the bank has loaned me money and people do not have to pay back debts that are not theirs, the bank is at risk of losing money in the event of fraud.
Debit cards claim similar protections, but since my actual money was transferred I am the one at risk of losing money in the event of fraud. The bank isn't as motivated to investigate my case, since they're not at risk as much.
For a similar reason, I'm scared of checks. If you write someone a check, that's enough information for them to drain the associated account. It's free to query the bank to see "Does this account have $X?", so a binary search will let you know the balance of any account on a check. Then they can withdraw it at any time. It's especially bad for checks written against business checking accounts, since they're not protected by consumer protection laws that allow for 60 days to find fraud but rather by the Uniform Commercial Code that only allows a single day to catch fraud. Do I really want to check on my bank account every single day? For now, I just live with that terror and only write checks to people big enough to sue. No SaaS app will ever get a check from me without me doing some restructuring on my bank accounts.
I tend to use my debit cards more than credit cards. I've occasionally had to make chargebacks for fraudulent use and there's been no perceptible difference between a credit card chargeback and a debit card chargeback. The bank does the job equally well no matter the type of account. It's all fairly seamless and has always been done quickly by phone.
The biggest risk I foresee is losing my wallet, not a fraudulent transaction. That's why I have two wallets with two set of cards, so I can easily failover to that wallet while replacement cards are being generated.
The only interesting event that the bank couldn't/wouldn't fix was the time when Best Buy somehow auth'd my card dozens of times in a row for a reasonably expensive laptop. They managed to reduce my available balance far, far into the negative. Obviously they were just authorizations, not final sales, so the money never actually came out of my account, but it was interesting how my bank was happy to let me go many thousands overdrawn and their fraud systems didn't kick in at all. That card was useless until the authorizations dropped off the account.
Not only are checks not an anachronism yet, in some cases a bill payment done through online banking will cause a check to be printed by the bank and mailed to the payee.
In the US, when I was an exchange student in the late 90s, I could pay with my local banks ATM card (so, a debit card) in the local supermarket. I can't remember how far that network extended, but it certainly existed.
The reason credit cards are a thing is because processing payments between a global set of debitors and a global set of creditors, instantly and securely (and yes, despite various problems and shortcomings, on the margin, it's very safe), is a pretty hard problem, much more so 20-30 years ago when the current systems came of age. The credit part is necessary because until recently, the technology simply didn't allow for online processing of payments, all the way from the debitors bank account. The payment would clear against your credit, the expectation that you're good for it, not actual cash in your account.
Running such a network is complicated, thus the fees.
In the past 5 or so years, both Visa and MasterCard have introduced proper debit cards, that is, card where payments are instantly processed against your bank account balance. This is still complicated, but essentially a new, much simpler and more modern network, and thus fees are much lower. Despite the security of the legacy network, this is safer yet, which is good for both merchants and bank (and, indirectly, consumers, though arguments can be made over whether the lower fees outweigh the cost of taking on a higher liability).
I expect expensive credit cards to largely go away, if not by regulation, then competition, and be replaced by debit cards and decoupled credit products and travel-benefits/insurance products. On the margin, the vast majority of users will (and economically should) prefer to save ~2% on their spending to earning airline miles.
I've been on a fairly extensive trip of Europe recently and I had to use my credit card only on the French toll routes, everywhere else my regular debit card worked. As opposed to previous trips where far more than half the expenses ended up on the CC.
Visa debit cards have been available in the UK for nearly 20 years. The changes you noticed came about because of the Single Euro Payments Area initiative, which is standardising payment systems across the EU.
Nope, that's not at all how MasterCard/VISA debit cards work. They are not processed online, you just have an online authorisation.
> Running such a network is complicated, thus the fees.
Except the fees go to the issuers and not the network.
> In the past 5 or so years, both Visa and MasterCard have introduced proper debit cards, that is, card where payments are instantly processed against your bank account balance. This is still complicated, but essentially a new, much simpler and more modern network, and thus fees are much lower.
Nope, MasterCard/VISA debit cards work just the same way and are processed the same way as credit cards. The only difference is that the issuers charges the card holder later and allows him to overdraw.
The flip side of this for the customers is that the card rewards/kickbacks are decreased as well.
The real difference between Visa/Mastercard and Amex/Discovery is the the former only provide the payment network (the interchange is used to give a cut to issuing banks) while the latter issue their own cards.
So far the U.S. hasn't been so successful in taking the power away from these payment networks, but at least there's a chance. I could see someone like Square coming in and dominating the market with a consumer product in 5-10 years.
The cost got down around 25% for merchants since the regulation, which is significant but not that much.
This is so true, and a weakness in cc wth the rise of marketplaces.
I started a side project, a marketplace due to very low margins of suppliers the max we could get in transaction fee including cc processing was 10%.
We did not want to add markups on in store price so had to absorb the costs.
Take a transaction of $100 , e.g you pay 3% fee/$3. For the merchant it is 3% but for you its actually 30%
The main source of business income is interest. And interest is so high because it has to offset losses from card members that stopped paying. Remember that credit cards are unsecured products. Banks typically recover only about 20% of the default amount, the rest is gone.
I wish stores would simply charge the credit card fee outright as a line item to dis incentivize usage of the credit card (many gas stations do something similar in charging a cash vs credit price).
I've certainly chosen to use alternate payment methods to avoid the surcharge when convenient, so this must be putting some competitive pressure on the CC transaction fees.
"the Board is proposing to change the Bank's surcharging standard with the aim of ensuring that customers cannot be surcharged any more than the cost of accepting cards."
"It is proposed that no credit card interchange fee will be able to exceed 0.80 per cent and no debit interchange fee will be able to exceed 15 cents if levied as a fixed amount or 0.20 per cent if levied as a percentage amount."
Charge backs can happen up to 6 months later and the last time I had a merchant account the permitted response time for a merchant was just 1 day or the full amount plus penalty was taken.