My former student Sean Harper has put together a nifty little web site, truecostofcredit.com, that allows you to see how much merchants are charged when you use your credit card.
I was surprised at how high the fees were. For instance, in this example of a Mastercard, when you buy a $1.50 pack of gum at a convenience store, the credit-card company gets 28 cents. Even on big-ticket items like airline tickets, the credit-card company collects nearly 3 percent.
This is not to say that there is anything wrong with those fees. I presume that the issuing banks can choose their own fees (within reason), and that there is more or less free entry — which suggests that the industry should be pretty competitive. Merchants accept credit cards, which implies that the benefits of doing so outweigh the costs.
Nonetheless, credit-card fees turn out to be a big cost of being a retailer. According to the numbers at the web site, if everyone used a credit card when shopping at Best Buy, credit-card companies would collect roughly $1 billion a year in fees from Best Buy.
(See also a nice post on Consumerist.com about truecostofcredit.com.)
and 
. You can also watch it on 
As a consumer, I wonder if there is some way to take advantage of this cost by paying in another method with lower transaction costs. Since haggling is not common in the US, and fixed prices are the norm, how could a consumer request a discount for paying with another method (as with the Maestro card discussed above).
The issuing bank makes most of the interchange amount. The credit card company and merchant bank make a relatively small slice. Out of the issuer’s share comes the cost of money (typically about 25 days), fraud/bad debt losses, processing costs, and rewards.
This is why I have switched over to paying small local merchants and service providers with cash.
I suppose retailers can’t really complain about the cost of processing credit cards. But when banks *encourage* people to use their debit cards as credit cards, I take issue.
Case-in-point, Wells Fargo. I recall a few years ago they had a marketing campaign encouraging people to “tell the cashier to push the ‘credit’ button” when they used their debit card. “The money comes from the same place.” The gimmick was that for every time you used your debit card as a credit card, you got entered into a drawing for something. The only true winner was Wells Fargo. Each time someone used their Wells Fargo debit card as a credit card, the retailer had to pay the credit card processing fees. So essentially Wells Fargo was ripping-off the merchants who use their card processing service.
I think that many businesses can’t afford NOT to accept credit cards. I use credit cards for convenience (paying off my balance every month) and hardly ever have much cash, if any, on hand. So if a business doesn’t take my credit card, I go somewhere else. I think there are a lot of other people like me.
My family has to watch what we spend because we don’t have unlimited funds. We shop at Aldi Grocery and one of their cost saving methods is no credit cards (debit cards run as debit, yes.) If we used to spend $100 for groceries now we’re spending $50 to $75 and the quality of food is great – we haven’t sacrificed anything. I hope you change your mind so you can have more money to keep for other things you’d like!
As a consumer who is very close to living completely cashlessly, the convenience of using a credit card for almost all transactions trumps all other considerations. I would happily pay the 3-5% more for most items/services to cover the transaction fee.
The solution is obvious: forbid the banks to charge the merchant so that the person chooses his credit/debit card as a function of the fees.
“This is not to say that there is anything wrong with those fees. I presume that the issuing banks can choose their own fees (within reason), and that there is more or less free entry – which suggests that the industry should be pretty competitive. Merchants accept credit cards, which implies that the benefits of doing so outweigh the costs.”
Actually, that isn’t quite right. Card issuers and the banks that set merchant fees are different in most transactions. So the direct cost is set by the merchant acquirers. Card issuers do receive part of that cost through interchange fees paid to them by the acquirers. But individual card issuers don’t get to set those. They are set by the system — MasterCard, Visa, AmEx — and so are the same regardless of which bank’s card you actually hold. It is the whole two-sided thing that leads to them agreeing to interchange fees that continually mean higher charges for merchants. Competition does not constrain this. The only thing that does is merchants choosing not to offer card payments (unlikely) or regulation of the interchange fee (as we have in Australia).
And also, don’t be too sad for the retailers. They built those fees into prices and competition between them means that those credit card costs are spread across all consumers. What that means is that when you choose a credit card purchase you are imposing costs on your fellow consumers that don’t have or use credit cards.
According to many IO analyses (most notably, Rochet and Tirole), the benefits do not likely exceed the costs. And the costs manifest themselves in card issuers sending out more than a billion card solicitations each year. Not a paragon of efficiency.