Sunday, February 3, 2013

Merchant Credit Card Fees

I have several posts lauding the benefits of credit cards for consumers, especially those with no annual fees and reward programs.  Assuming that you treat your card like cash and only spend enough to pay off your monthly bill when it comes out, there is only positive benefits: you get a 1-5% cash reward on all your spending, you delay your payment for a month which allows you to earn interest (albeit small in the current environment), you decrease the risks with carry cash like losing it or getting it stolen, and you establish/improve a credit history for future use with other loans.  However, credit card companies still need to make money.  Thankfully (in some aspects), not all of us are as careful with our spending and those who miss their payments or spend more than they can afford will be paying these banks and credit card companies high interest rates.  However, if in some magical world the majority of people were to become more responsible with their credit cards and paid all their bills on time, the only source of revenue for companies on these cards will be from fees merchants pay to accept them.  And even that is slowly going away.

This past July, Visa and Mastercard announced a settlement with millions of merchants to settle charges that they were fixing credit card processing fees in a non-competitive market.  They would reduce these fees for 8 months and allow retailers to charge consumers an extra surcharge for using a credit card to cover the processing cost (usually 1.5%-3% of the purchase amount).  Debit cards are unaffected and certain states forbid this extra charge regardless, including:  California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

Does this mean we will all see higher prices for using our credit cards in the near future?  This may still be unlikely given the competitive businesses of many restaurants and retail stores.  To be fair, many places do derive a greater benefit from increased consumer spending by accepting credit cards than the cost of these fees and most merchants would not want to risk driving away business.  Many small merchants already only accept credit cards if purchases are in excess of a certain threshold (like $15) but this may become even more prevalent over the next few years.

The merchants who know a bit more about consumer psychology will probably come with unique ways to frame this increase in price for using a credit card.  There are a few merchants I know of who already offer a discount for consumers using cash.  Given that this discount is usually larger than the cash back rewards I get from my credit card, I am inclined to use cash as well and it puts me in a positive mindset.  Merchants who start tacking on extra fees for using credit cards risk angering consumers since they are framed with paying extra, even though the two effects are the same.

There is some debate about whether the costs of credit cards are already priced into the products we purchase already.  Since businesses determine their price and take into account their costs each year, the cost of processing credit cards should already be factored in to what we are paying.  Of course, even if this is true, in some ways there is more of a reason to use credit cards since people paying with cash pay the same price and in some sense will be subsidizing credit card users.

In the end, I still believe credit cards are very beneficial for society and consumers if used correctly.  It is important to be wary of fees that are charged for using credit cards by merchants and by your card provider in order to prevent unnecessary charges.  Merchants are going to try to avoid paying too much for accepting credit cards and credit card companies are going to need to find ways to keep the business profitable.

No comments:

Post a Comment