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Comment by habosa | Hacker News Reader

The credit-card model is spinning out of control. I have a good income and decent credit. So I have a credit card that gives me 2-3% cash back on everything, low or zero fees, and tons of other bonus perks (various kinds of insurance, airport lounges, whatever).

So I should be excited right? Well, not really. The 2% cash back barely makes up for the 2% that MC/Visa take out of the middle in the first place! So the goods I buy cost more than they should and I get a "kickback" on the backend.

And if you're someone without access to great cards, then you still pay the same price in stores but you get no cash back, high APR, low credit limits, and crazy late fees.

It's regressive taxation.

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According to [1]:

> On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general.

[1] https://www.bostonfed.org/publications/public-policy-discuss...

I have to say, I have never thought of it this way but it seems so common sense. Every deal has a cost associated with it of course but if only a certain subsection of people can appreciate that deal (see: non low income earners), then those who can't will eventually end up paying for it. The most egregious example would be over the top ceo bonuses. I always thought that the major problem with the unbanked or this who didn't have access to lines of credit were that they didn't have as much upward mobility but now I can see they're actively being made poorer with essentially accelerated inflation of the prices of everyday goods. I wonder if other services like Amazon Prime have a similar effect.

You're forgetting that it costs merchants money to handle cash; between miscounting at the till, plus petty theft, plus counting cash at the end of the night, plus time to take cash to the bank, plus time to take cash from the bank back (say when rolls of coins are needed).

I'd be surprised if the cost adds up to 2% of the cost of all goods, but it's still there.

> And if you're someone without access to great cards, then you still pay the same price in stores but you get no cash back, high APR, low credit limits, and crazy late fees.

That's an entirely different discussion, and completely misses out on debit cards (no APR, typically includes some form of rewards), when the bad cards should be used to build a good credit history, not as a daily driver.

While paperwork is easier with a cc, and the ~1.75% charge that processor's apply is valuable, there are additional risks that follow cc processing.

Fraud. While you may have an individual pay for $10-$500 in goods with counterfeit currency(rare), you'll definitely encounter $10-$5000 purchases with stolen card numbers. This means you not only lose the sale income, but you get charged a fee because there was a filing against you (charge-back).

Depending on your line of business, this can be as high as %0.66.

https://www.ns8.com/en/solutions/case-studies/industry-repor...

>You're forgetting that it costs merchants money to handle cash

Not that much. Which is why all-cash businesses invariantly offer stuff cheaper.

They also invariably evade taxes. Go wild on that downvote button, guys, but there's no need: everyone already knows it, and there is never going to be a political will to do something about it.

Do you believe in a right to privacy regarding purchases? (every electronic transaction can be tracked for all time) If so, how does that weigh against the small amount of tax evasion that takes place?

I do think there's a right to privacy, and I do hope it's difficult to gather political will for taking away rights.

In my country, many retailers now have to connect their cash registers directly to the taxman. The law behind this was enacted last year to counter tax evasion.

Does it work?

I mean, it's much easier for a tax inspector to simply go to the store, when it's busy, and wait for the slip up (when the clerk accepts money but does not use the register).

But in my opinion this was rare even before. And in really small operations, they don't have a register anyway. (Or take the gamble and don't use it.)

> Does it work?

There's no reason why it shouldn't.

> I mean, it's much easier for a tax inspector to simply go to the store, when it's busy, and wait for the slip up (when the clerk accepts money but does not use the register).

Why would a lowly clerk break the law for his multi-millionaire employer? And why would a customer do business with a company that didn't provide receipts?

That's not how it works. The fraud happens further up the food chain. However, if the taxman knows exactly how much money came in from customers by monitoring the cash register, he knows how much to expect in taxes from that business.

> But in my opinion this was rare even before.

Perhaps in your country. A few years ago whistleblower protections and a reward system were enacted here. So anyone who dobs in a company that's been evading taxes gets a percentage (IIRC 10%) of the unpaid taxes subsequently recovered. Since then there's been a string of highly-publicised cases of the taxman coming down on tax evaders. They recover taxes and squeeze more out of them in penalties and fines, and the whistleblower (probably some low-paid bean counter in the company) get's a huge lump of cash for his troubles.

Anyway, as a result of these events, now the taxman monitors the tax registers of large companies that accept cash. Certain categories of commerce and small businesses are exempt.

You think Arco evades taxes? They're a pretty large gas station chain and they don't accept credit cards.

Arco is not an all-cash business though - they accept debit cards.

There's a lot of correlated factors in all-cash businesses. Yes, they don't pay CC processing, but they often sell lower-end goods, are in worse neighborhoods with lower rent, may acquire some of their merchandise in sketchier ways, etc...

are we at the point where we are criminalizing the behavior of people who choose to avoid credit cards and only accept cash?

Right or wrong, it's a fairly common stereotype: a merchant who insists on cash-only transactions is dodging taxes or selling something illegal (or both, I suppose).

On the topic of criminal behavior, it's also worth noting that doing business cash-only makes you a more tempting target for robbery; if you did almost all of your transactions via credit or debit cards, you'd have very little in the till for someone to steal.

Being a cash-only business also means they can pay their employees in cash - often because their employees aren't authorized to work in the country.

We hit that point a long time ago when having a large amount of cash with you became a justification for civil asset forfeiture.

IRS forces card processors to issue 1099-k for any card processing payments. That's how it goes.

Could you please explain this for someone not familiar with the US tax rules and forms/numbers?

In old days when cash was king, many small businesses used to under report income. Then came credit/debit cards, which require of businesses to sign up with credit card processing companies, who take the fees out and reimburse monies to your bank account.

Since old habits die hard, these small businesses used to under report income despite the trail of evidence left by credit card processors. So, IRS came in and imposed a rule on these processors: send us a copy of payments paid to Mr Small Business X--and that copy is called 1099-K. This is like W2, 1099-MISC, 1099-INT.

Basically, the tax man wants records from the third parties, since self-reported ones are mostly under reported.

All processors ( FDC, Worldpay, Global Payments etc) are required to report credit card sales for each of their customers through 1099 reporting , This reporting is done on what is called a MID ( Merchant Identification)number. Every merchant accepting credit cards has one ( sometimes multiple)

Some processors charge merchants for this reporting services to the IRS which further drives up Merchant Services cost.

"...plus petty theft..."

I know people who work in hospitality. Employee theft is endemic. Via both cash and card.

Card? How?

Just a story of one, but here goes:

Back in the 90's, my parents were making a purchase with a card, and the cashier told them that the machine was down, so he had to take a copy of the card to run it later. A quick swipe of their card throughv something that impressed it on carbon paper and off they went.

Not long after, police showed up at their door informing them that said cashier's apartment had been raided and a whole stack of copies of cards had been found; for every one he made for the store he kept one for himself.

Mind you, this was before ubiquitous cell phones, internet access, and way before chips in cards for encryption. Whether a similar tactic could work now I have no idea.

Back in the 90s when our family went on a big vacation abroad we were always advised to never agree to have our card carbon copied for exactly that reason. Though I think there was one gas station where we had to, because we were out of cash. (Back then ATMs were new, and POS was only for the rich foreigners. Strange that nowadays we run around with everything RFID/NFC and multiple cards. And yeah, this was before smart phones. Those were simpler times :) )

Add or inflate the tip, then cash out.

Customer A has an open tab, customer B pays with cash, put B's drink on A's tab and pocket the cash.

Ah, yeah, that happens with or without customer B unfortunately. (And of course drunk people are easier to trick with cards, but then they are easy to simply rob of cash too.)

I would ditch credit cards the moment all the merchants I use would give me a 2% discount for paying cash. Using credit cards is perfectly rational until then. What's more, it's rational even for credit cards that don't earn any rewards or cash back, let alone ones that do.

Pro tip: if you go to a Chinese restaurant that offers credit card payments, counteroffer with cash and you can get a discount as high as 10%.

Credit card fees are about 2-3%. So if they are doing this, it must come from not charging tax.

Yup a small chunk of off the book income which goes straight to cash is worth 10% to them

They are doing this. Also, there are fees from credit card fraud as well to factor in.

I was under the impression that was factored into the 2–3%. Not true?

Merchants are usually liable for fraud losses (both the loss in good or services + a fee imposed by the bank for the privilege...). This is on top of the transaction costs. Those transaction costs do not cover fraud liability or losses.

>I would ditch credit cards the moment all the merchants I use would give me a 2% discount for paying cash. Using credit cards is perfectly rational until then.

Only if you don't fall behind on payments and start paying the card their exorbitant interest, as most people end up doing.

I use a debit card. All the convenience, but if I overspend, the transaction just gets blocked, end of story.

(I always have money in other accounts for emergencies, but this keeps day-to-day spending in check.)

Incidentally, debit cards ('check cards') in the US are more expensive than credit cards as a ratio of processing costs to fees (they charge %~.75.
These fees are more in line with costs in Canada (~$.03 a transaction).

https://www.cardpaymentoptions.com/fee-sweep/debit-fees-expl...

These numbers align with my experience when working for a processor in the US.

I'm surprised, because there's a couple of local stores that have a purchase minimum for credit cards but not debit cards (I'm in NYC). Also, I remember Jet.com used to offer a (very small) discount if you paid by debit card specifically, although I think they've stopped that in recent months.

If they have a purchase minimum, it's because they generally have low ticket values, sub $25 average receipt value. They exchange a low percent (as low as 1.00% on average vs ~%1.75) for a per transaction flat rate (say $.25-$.50 per transaction). The minimum is a way of keeping the processing costs in line (sub 3% for example).

The debit cards have different regulations which as far as I understand, don't exist (ie, it's like the old credit card contracts where they didn't allow you to charge a separate price for cash transactions). This is only my assumption.

There was no discussion on what regulations we had to follow for our merchants when it came to bank network transactions(the deals are brokered on a per bank basis, you can see which networks your card supports by looking at the back of the card for instance). Because of the segregated nature of the debit networks, they have less clout than visa or mastercard.

Businesses actually aren't allowed to impose minimums on debit cards. Some still try it, but technically you can report them.

But why would you want to do the credit card company's work for them? That regulation is in place purely because of political bribery by the credit card industry.

The consumer-friendly thing to do is to charge proper rates for things with higher processing fees, like credit cards, and not subsidize them by punishing everyone else.

>But why would you want to do the credit card company's work for them?

I'm not sure I'm following. The reason you'd do it is because you want to pay for a small purchase with your debit card. Like if you run into a gas station and buy a soda and a bag of chips but don't have cash on you.

>That regulation is in place purely because of political bribery by the credit card industry.

It's in place because it was determined that people shouldn't be subjected to a minimum purchase amount for paying with their own money through their debit card. (As opposed to paying with borrowed money through a credit card.)

>The consumer-friendly thing to do is to charge proper rates for things with higher processing fees, like credit cards, and not subsidize them by punishing everyone else.

Again, I'm not following. We're talking about minimum purchase amounts. What's punishing someone else?

Debit cards lack the same fraud protection that credit cards have. They have a weaker version.

I've never had issue with a bank refunding fraudulent debit charges. They catch them within minutes to hours.

https://news.ycombinator.com/item?id=1206859

The merchants would probably love to do that if cash handling related costs were lower.

Their contracts with credit card companies forbid different prices for credit card and cash. It's slightly insane IMO.

That used to be true, but it was ruled illegal and so it is not anymore. See https://www.washingtonpost.com/business/capitalbusiness/as-r...

I had around $25K stolen via a skimmed debit card from my Chase checking account (in a few hundred separate transactions). I finally noticed after about 6 weeks; they never did until I told them. This despite the fact that all the fraudulent transactions took place at least 100 miles from my residence, some as far as 2000 miles away. I did get all my money back eventually, but it took a month or two and a ton of back-and-forth in person and on the phone to sort out the bad transactions from the good ones (mostly due to their lack of attention to detail). I stopped using debit cards after that (and started monitoring my daily balance).

Is there a reason more merchants don't do this?

I've seen it done at gas stations (of all things), but never anywhere else.

As a small business owner in a past life, it’s probably because you don’t need to; not many businesses have customers looking to shave pennies off the price. The margins and competition in gas stations don’t happen elsewhere, I think.

And you don’t want to. Adding another set of prices and complication isn’t worth it to the business owner.

My 2c

It is my understand that Visa/MC won't be happy if you offer discounts for Cash (meaning they won't let you process any Visa/MC card).

The posted price has to be the CC price, but retailers can offer a cash discount. They don't want to see a CC surcharge.

https://www.cardfellow.com/blog/cash-discount-eliminate-proc...

Nah, they've been fine with cash discounts for a long time. They only became okay with surcharging / adding a fee for cards as a result of a lawsuit in 2013. They'd still prefer businesses offer a cash discount, though. They know customers generally don't take them up on it, but also don't feel punished like they do with a surcharge.

Mastercard and Visa take very little out of the transaction compared to the interchange fee that goes to the issuing bank. I believe the issuing bank would take $2.50 on a $100 dollar transaction vs $0.10 for Visa and Mastercard roughly.

In europe it's more like $0.35 on a $100 transaction for standard personal Mastercards and Visa due to regulation, the rest goes to the issuing bank to cover their costs and card rewards, and to your merchant bank to cover their costs and risk of chargeback. In US and Asia the interchange fees are much higher due to lack of regulation, thus it's not unusual for small business to pay a bundled rate of upwards of 4% if little credit history

To my knowledge the network and the bank take roughly a 50/50 split of the transaction fee. Visa and Mastercard are the ones with market control, so you wouldn't expect them to get only a tiny slice.

Visa and MasterCard began as consortiums of banks, so they made the system in banks' favors. Good rewards cards pay 2% cash back on all purchases, while transaction fees on rewards cards are in the 2-3% range, which necessitates that most of that fee go to the issuing bank, or the rewards programs would be money losers... they're not.

They actually only do get a tiny slice.

Interchange fees to the issuing banks start around 1.5% while Visa's volume assessment is only 0.13%.

But they get a tiny slice on an ungodly amount of transactions, so it adds up.

Actually Visa's Credit Assessment rate is .14%. They raised their prices by 1bpt in January 2019 and wrote themselves a $500 Million check by doing so. This is one of the reasons why Visa's stock performs so well over time.

I can't remember the exact figure, but I believe there is roughly only a two basis point spread between what the network providers take versus the operating costs to run the network. Therefore, any "disruptor" trying to enter would have to burn cash to not only build out the network but to also lower prices to try and steal market share. And the result would really only be 1 BPS saved on each transaction for the consumer.

Yeah, credit assessment is .14, debit is .13.

On top of that, I wonder what the average length of time credit card rewards spend accumulating and not being used, and how much depreciation that represents w.r.t. inflation, not to mention the opportunity cost of having invested it for the same amount of time.

And to boot, you pay a yearly fee for those non-interest-bearing funds to sit around!

But if you get 2% and they charge 2% you're stating their fee is approaching 0.

$0.25 and 2% is much less than the fees for Bitcoin, even cheaper than the ethereum gas.

If you only want to compare to cash, the cost of one bad employee greatly exceeds 2%, then employees needing to transfer money to and from a safe, and the guards and trucks required to transport that money.

As long as you do cash, you need to handle that anyway. And usually the people who want to pay with a card don't want to pay with cash. So if you don't accept cards at all, you'll likely see fewer sales. So it's probably worth it to have a POS terminal in your shop.

It isn't just the card brand taking a slice.

At best it's a 3 party system between the Gateway (Auth), Acquirer (person actually paying the merchant), and the card brand. I don't think it's uncommon for their to be middle-men between the acquirer and merchant.

Your argument that people with good credit pay less to use the network is sound, and in that sense it almost constitutes a minor poverty trap. But to call it taxation ignored all of the remarkable innovations that the card brands have made. They have successfully managed to connect nearly all of the worlds banks together in a way that facilitates almost instantaneous payments between them. Sure this innovation is old, but that doesn’t make it any less valuable to consumers. It’s still so valuable today, that a lot of our modern day payment innovations are still based on those very networks. Try and think back to a time before payment brand networks, and how tedious payments were then (especially international one) before dismissing the value of the card brands.

> But to call it taxation ignored all of the remarkable innovations that the card brands have made.

So something is only taxation if the money is wasted in your view?

> So something is only taxation if the money is wasted in your view?

Sometimes I wonder if half the problems we have in this century stem from our eagerness to slap labels onto things instead of just letting them be themselves.

I think a tax is any compulsory fee levied by the state. Even if you generalise the concept to all compulsory fees, I don't think it fits in here. You're free to not use the card brands payment networks, and pay them no fees. You can say that it's not practical to do so because that would severely limit your ability to pay for goods and services, but that's what transactions were like before the card brands innovated the industry. They render a service that provides extraordinary convenience for consumers, that's what you're paying for. It's no more a tax than any other expense that's factored into the margins of the goods and services you buy.

It is compulsory fee if merchants don't offer a cash-discount.

Visa doesn't collect any fees on cash transactions. This argument gets contrived pretty quickly. When you go to a restaurant, technically the cost of toilet paper is factored into your bill whether you go to the bathroom or not. If you shop online, technically the cost of rent for the retailers brick and mortar stores will be factored into the price. Transaction fees aren't a tax, they're the price paid for consuming a service.

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