Judge Approves Interchange Fee Settlement with Visa, MasterCard
paymentsnews.com
paymentsnews.com
Essentially this ruling allows retailers to pass on bank card payment fees to customers. Previously these fees were hidden, and the retailer had to swallow the fees, and of course ultimately pass them on to ALL customers equally as a cost.
Now, customers themselves get to pay the fees directly, and thus have a choice, and consequences, in which payment methods to use. And of course this will likely have downward pricing pressure on the payment service providers, so in a reverse of the usual story, consumers in general will benefit at the expense of the banks.
This is the way free markets are supposed to work, as opposed to the current cosy backroom agreements that only benefit the banks.
Why shouldn't they be allowed to charge customers different prices depending on which payment method they use, given different methods have different costs to them.
Now they can.
There was a base fee, and most cards would fall in to that - 2.1% in my case, IIRC. But, if someone used some 'get 2% cash back on all purchases!' card, I'd be charged 4.1% (again, IIRC, might have been a bit more or less). When you don't know what the price is going to be, you end up needing to err on the high side, and factor in higher overall fees to every price, raising the price for everyone along the way. And the banks make more money because the whole 'free air miles!!!!' mentality gets people to use their card more.
The banks get their fees on a per transaction cost (and interest on balances that carry on month to month) - the merchants effectively paid for all your 'free air miles'.
The payment processors used this asymmetry to force merchants to hide their costs from the market at large. The market can't affect something when it isn't allowed to set different prices for using the service or not!
Yes, merchants could stop using the payment processors. But, crucially, consumers can't: if a merchant used a payment processor under the old scheme, even customers paying in cash had to pay a higher price to subsidize this!
Couple this with the fact that the payment processor market is entirely dominated by a bare handful of large companies, and you get something really far from a "free" market.
While they may not have been "free" in the strictest sense in the laws of economy, miles and cash back are a big part of savvy shoppers. I'm still shocked when I find out someone using a traditional credit card with no rewards, or worse, their debit card.
When we got to this point I don't know, perhaps I wasn't young enough, but you would be fiscally foolish not to take "advantage" of them while you can.
Thinking to yourself "sure, I'll spend a few extra bucks - I'll be getting 2% cash back next month/year!" or "hey - I almost have a free flight - sure, buy a bit more!"... encourages spending more than you need.
I know there are people that do extreme gaming of the system, paying utilities and such with every rewards card out there, transferring balances and such to get a free flight. These are the outliers, much like extreme couponers spending days per week figuring out how to get $200 in groceries for -$18. It's not reality for most people.
It's far easier to not spend on frivolous stuff, save up, and buy a plane ticket when you want it vs buying extra crap then trying to figure out which 10% of the days you can use your 'free miles' on. My wife's got 150,000 miles with an airline, and they have no 'air mile' seats available on any flight she needs for the next 12 months - it'll be 2015 at least before she can use all these 'free flight' miles (earned from travel, not from rewards cards).
http://seekingalpha.com/article/20333-guide-to-credit-cards-...
"A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash."
Most people you know might be an extreme minority when it comes to the range of financial habits targeted by credit card companies.
"McDonald's found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash."
I have a certain amount of money in my pocket. If the bill is higher than that amount, I will definitely pay by card. If it's lower, than I'll choose card or cash. So, even if the card/cash choice had no impact on my spending patterns, you would expect my cash transactions to have a lower average value.
However, I need to buy groceries, I'm sure you do to. Are you getting 6% cash back?
I don't live in a big city and require a car which requires gas. 5% cash back there
I sure do buy a bunch of the things off Amazon and get 3% there
Then you have 2% for your everything else bucket and 5% in those rotating categories cards
There is a reason Coin was invented: https://news.ycombinator.com/item?id=6733615
I'm not buying anything I wouldn't and I am getting easily over $1500 in total cash back each year. To me that is being savvy when you purchase something you need at the expense of very little effort.
Anywho, like I said, when I old enough to have credit cards we were already in the state of rewards. You can take "advantage" of it or not, either way you are (or were until this law goes in) paying the same as everyone else. $1500 isn't exactly making me rich, but why not take it while you can?
I'm certainly not going to use a rewards card if it costs me more net money in the future.
technically you can get more than 3% with Amazon but involves converting points to giftcards or something and I'm too lazy :P
Buying anything on a credit card (accepted almost everywhere) encourages many people spend more than they originally intended/budgeted for.
http://seekingalpha.com/article/20333-guide-to-credit-cards-...
"A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash."
No doubt you are the special snowflake exception, but the majority of people overspend and carry a balance. Paying interest on stuff they bought that they don't need to get rewards that are a fraction of what they'll owe.
We use the target card and simply get 5% off everything at target. That's it - no gas cards, no anything else, no flyer miles, etc. And it seems to me that target's approach is such that they're simply keeping the savings of involving a merchant bank by processing the transactions themselves from my debit account - that's saving them 2-3% right there, so the 5% isn't really much skin off their nose.
I'm a bit torn on the interchange rate argument altogether. Here's how I see it:
- From a merchant's PoV, the service credit cards offer to them is "customers can purchase something now for up to $XXXX (or higher), the merchant will get paid and won't have to worry about credit risk."
- On one hand, you have your "essentials" merchants, such as grocery stores. Such merchants sell products that consumers would be purchasing no matter what, whether they pay via CC, check or cash. They aren't getting much value for that interchange fee.
- On the other hand, you have more luxury merchants. Think along the lines of Apple. How many $2000 computers does Apple sell simply because of the pay-over-time ability? I'm willing to bet it's a decent amount. Obviously, merchants like that are receiving a lot more value from the credit card system.
I think the fairest way of doing this would be to classify merchants into those two categories. Even doing that can be difficult, though, because what is "luxury"? For example, is McDonald's "luxury"? IMO, the best answer would be "does the merchant actually benefit from customers being able to pay over time?" Going by that definition, McDonald's doesn't - nobody buys a burger and expects to pay for it over time, even though McDonald's may be considered by some to be a luxury for a less-than-middle-class person.
Finally, you have the issue of coming up with a fair rate. It's not fair to directly compare with cash and checks because those have their own expenses too. Counterfeit cash, bounced checks, and the expense of processing both, not to mention having cash on hand is a robbery risk. Also, cash does have "processing" costs - someone has to deposit that in a bank usually every day, and for larger stores that would normally be an armored car service which costs money.
Here's my take on fair rates: Capital One has a Visa CC that offers 1.5% cashback on all purchases with no limits. (That's the highest rate I'm aware of for Visa/MC besides the "loss leader" category rewards or promos.) Obviously the rates are currently high enough for that. Going by the current rates being in the 1.6%-2% area, it would seem 0.3-0.5% should be a fair enough rate to adequately cover the CC companies operating costs, make a fair (not exorbitant) profit, etc.
Now, should there be a premium over that for "luxury" merchants? Debatable. And so is the issue of what it should be.
Except... the card issuers will almost always side with a customer over a merchant in a dispute. They still have to worry about that credit risk.
"Give me a refund or I'll initiate a chargeback!" is a threat with a lot of weight behind it. Mutiple chargebacks and your rate goes higher or you're just dropped altogether.
At the expense of the majority.
But what you're missing is that the guaranteed winners are the ones doing the muddying, and at everyone's expense.
This change will make the price of using a credit card more transparent to the customers and will stop non-customers from subsidizing Visa et al. It's more fair and lets the market react much more efficiently to payment processors.
This change is a net positive for the market and therefore people in general.
You say that as if this new policy of charging extra for the airmilers will result in lower prices for everyone else, including people not using credit card. I don't think so.
Well, no. Interchange fees come out of retailer profits. That's why retailers care about them.
If someone was selling a $10 pizza before and paying 60c in payment processing, he's most likely gonna charge $10.60 for the pizza now and call the 60c additional profit. I'd be very surprised if most merchants decided to keep charging customers with cards $10 and give a 60c discount to cash customers.
In an efficient market, competition would force retailers to reduce prices. But efficient markets don't exist, especially not in the short term.
I'm most interested in the long run effect. How would a shift in CC fees play out over the long term and through the whole supply chain.
My point is, I think this judge can rule whatever he wants, but as far as I know, there is no way to technically implement these fees.
The last time I dealt with a bank for a merchant account (in the UK), there were only two tariffs: one for debit cards, and another for credit cards. (We accepted only Visa/MC.)
The sentence above suggests that the fee structure differs among credit cards.
Can anyone share their experience of paying different rates for Visa vs. MC and, in particular, different rates for different credit cards from a single network?
Here is a link to the interchange rates for Visa (10 pages of rates):
http://usa.visa.com/download/merchants/visa-usa-interchange-...
One more question: when you say 'interchange plus pricing', is the 'plus' uniform across all transactions (i.e. the same $ or the same % or the same %+$)?
Also if you are a millionaire and are having a hard time finding a place to rent, why not just offer to pay 6 to 12 months of rent up front? Even in NYC that tends to work.
The only reason I have a credit card is in case I need good credit in the future for a mortgage or something. Otherwise a debit card would suit me fine.
It will start with credit cards but soon it will be for debit cards and there will eventually be a "cash handling" fee if you insist on paying with cash.
These will never be included in the listed prices and they will be just small enough that its not worth it for you to put the items back.
1. A surcharge for certain kinds of cards.
2. A discount for certain kinds of cards.
In either case, I think this is just a logical step in a progression that makes it so that a merchant can recover a portion of their credit card fees from the consumer. Good or bad? It might create an opportunity for competition among credit card processors to offer their services for the lowest possible fee.