Our $48 Billion Credit Card Bill

[one...two...tree 2,762]

By ALBERT A. FOER, NYT

THESE days, it's hard to find anyone who doesn't use credit and debit cards regularly — they're convenient and compact and often come with small cash-back incentives.

But what almost no one realizes is that those benefits are far outweighed by an implicit transaction fee, set by credit card companies and their issuing banks, that costs consumers more than $48 billion a year. As Congress works toward passing consumer financial reform legislation, it should include new rules about how — and how much — credit card companies can charge.

The credit and debit card system is dominated by two companies, Visa and MasterCard, respectively accounting for 47 percent and 35 percent of the general purpose credit card market in 2008. While those firms handle the transactions, they depend on banks to issue the cards to consumers. The result is that Visa and MasterCard compete to deliver the highest returns to the banks rather than offer the lowest prices to consumers.

Card companies generate those returns by charging an "interchange fee" for every credit or debit transaction they run — when a merchant accepts your card for a $100 item, it gets approximately $98 in payment. These costs are passed on to all consumers — even those who pay by cash — in the form of higher retail prices.

None of this is new or controversial information; you can find it in a recent Government Accountability Office report to Congress. What is less well known, however, is that many countries have instituted consumer protections against such hidden taxes, while the United States, which has some of the developed world's highest interchange fees, has left them completely unregulated.

True, there's an antitrust class action suit by merchants pending, but its resolution is a long way off and it's unclear if or how it would benefit consumers. And while several legislative proposals are sitting patiently in Congress, they would at best only chip around the edges of the problem.

Instead, Washington should take two straightforward steps.

First, Congress should recognize the obvious: debit cards, whose use and fees are growing at a rapid rate, are actually no more than plastic checks. Congress and the Federal Reserve do not allow banks to charge their customers a percentage of each check, and it should put the same restriction on debit cards.

Second, Congress should authorize the Federal Reserve to limit credit card interchange fees to their actual cost, fairly determined, plus a reasonable profit. The annual savings to merchants would be in the tens of billions of dollars. Since retailing is highly competitive, most of these savings would be passed on to consumers in lower prices or in the form of improved services by retailers that could afford to hire more people.

How can we be sure this would work? Because other countries have already done it. In Australia, for example, regulation brought the credit card interchange rate down from .95 percent to .50 percent — compared to our approximately 2.0 percent. Five years of experience has confirmed that the payments system works fine; in 2008, the Reserve Bank of Australia estimated the savings during the previous year to have been around 1.1 billion Australian dollars (approximately $1 billion).

If the United States were to reduce the interchange rate from 2.0 percent to 0.5 percent, the savings would be $36 billion per year, less some relatively small offsets.

Not only would such savings make our retail payment system more fair, but it would represent a significant economic stimulus at a time when consumers are just starting to spend again. And best of all, it wouldn't cost Washington a thing.

Albert A. Foer is the president of the American Antitrust Institute.

http://www.nytimes.c...ion/21foer.html

[JohnSmith2007 353]

I have a question that someone here may be able to answer. I have debit cards from two different banks. Each one of them have some sort of reward for using them, one being cash back and the other being points that can be used to by stuff. If I use my card as a debit and input my pin I do not get a reward but if I use it as credit I get the award. Why is that? What is the difference. To me there is no difference other than putting in my pin or signing my name. It all comes out of my checking account with no fee involved.

[one...two...tree 2,762]

I have a question that someone here may be able to answer. I have debit cards from two different banks. Each one of them have some sort of reward for using them, one being cash back and the other being points that can be used to by stuff. If I use my card as a debit and input my pin I do not get a reward but if I use it as credit I get the award. Why is that? What is the difference. To me there is no difference other than putting in my pin or signing my name. It all comes out of my checking account with no fee involved.

From what I understand, Visa handles all transactions when you use your Visa Debit Card as a Credit Card, while your bank exclusively handles all your debit transactions.

[Peikko 1,575]

Looks like BY is vindicated!

It'll never happen. The industry is resisting chip and pin, preferring instead to require merchants adhere to pci security regulations. It's smoke and mirrors but it makes the brands a bunch of cash.

[I AM NOT THAT GUY 5,715]

I have a question that someone here may be able to answer. I have debit cards from two different banks. Each one of them have some sort of reward for using them, one being cash back and the other being points that can be used to by stuff. If I use my card as a debit and input my pin I do not get a reward but if I use it as credit I get the award. Why is that? What is the difference. To me there is no difference other than putting in my pin or signing my name. It all comes out of my checking account with no fee involved.

As Steve said, more, or less, VISA or MC charges the merchant for making a credit card style transaction, up to $2.50 or 4% of the purchase, whichever is greater. Your bank gets a portion of that charge, which is being refunded to you.

As a debit card, the transaction is processed as a checking transaction, which may involve a flat fee, or a per item fee paid by the merchant. Your bank doesn't get any of that, and may actually be charged for the transaction.

[Ali G. 37]

Looks like BY is vindicated!

It'll never happen. The industry is resisting chip and pin, preferring instead to require merchants adhere to pci security regulations. It's smoke and mirrors but it makes the brands a bunch of cash.

On a recent trip to AUS, I had trouble using my credit and debit cards with some merchants. More and more merchants only use chip reading terminals, while others only accept a pin for credit transactions. Obviously here we use neither. I'm not sure why either.

[scandal 951]

1. The credit and debit card system is dominated by two companies, Visa and MasterCard, respectively accounting for 47 percent and 35 percent of the general purpose credit card market in 2008.

2. The result is that Visa and MasterCard compete to deliver the highest returns to the banks rather than offer the lowest prices to consumers.

3. True, there's an antitrust class action suit by merchants pending, but its resolution is a long way off and it's unclear if or how it would benefit consumers.

4. Second, Congress should authorize the Federal Reserve to limit credit card interchange fees to their actual cost, fairly determined, plus a reasonable profit.

1. The industry is dominated by 2 heavyweights. Others (American Express, Diners Club, Discover) don't have the muscle that Visa/MC have.

2. True. The system is geared for the CC companies and banks, not for merchants and consumers.

3. That would be my preferred route. When you have an effective 2-company monopoly in a crucial industry, I would want to see the playing field leveled to allow existing players (Amex, Discover etc.) as well as new entrants be given an opportunity to compete. This would mean changing the incentive rules so that there is a business model for a card company to offer its service at the LOWEST price it can, not a model in which increasing its operating margins has no effect on its business volume (as we have now). The current margins came from an era before wide scale computerization of POS terminals, when the bulk of credit card purchases were hand entered from those old carbon-backed slips. They were justified then, they're not justified in today's automated era. If Visa/MC didn't have 80% share and thereby stifle the market, you might see a Discover, say, be able to offer merchants lower transaction costs which could be passed on to consumers.

4. This is effectively a wage and price control. It's government telling a market participant what a "fair" profit should be. I'd rather the marketplace make those pricing determinations through fair competition.

What we need is trust-busting to create a level playing field for new entrants, not government-set pricing.

[Peikko 1,575]

Actually American Express act quite independently and set their own rules and rates which are generally higher than the other brands. Typically Discover is the cheapest.

[scandal 951]

Actually American Express act quite independently and set their own rules and rates which are generally higher than the other brands. Typically Discover is the cheapest.

How would you know? (Unless you're a merchant who submits card payments to be processed).

That's really the point - the price a retail consumer pays at POS already has the card fees built into the retail price. When you ring up that DVD player at Walmart, the price you pay is the same regardless of which card you pull out of your wallet. That's where the disincentive to drop fees begins for the card companies.

[Peikko 1,575]

How would you know? (Unless you're a merchant who submits card payments to be processed).

That's really the point - the price a retail consumer pays at POS already has the card fees built into the retail price. When you ring up that DVD player at Walmart, the price you pay is the same regardless of which card you pull out of your wallet. That's where the disincentive to drop fees begins for the card companies.

From the consumer point of view, the only effect is overall higher prices due to the merchant recovering the fees they pay for the ability to accept credit/debit cards. However, my point was that Amex typically charges higher fees than visa/mc and Discover typically charges lower fees, although that is not counting whatever fees the underwriting bank or ISO might add to the cost. What the merchant pays may or may not reflect these differences depending on what deal the merchant strikes with the underwriting bank.

[SMR 368]

I agree this is a problem.

What I think should be done, and I have seen some gas stations already doing this, is that retailers should offer a cash or check discount (if pin code debit transactions avoid this extra cost, then they should also be eligible for the discounts). That is, they should pass those costs onto consumers directly and make people realize how much Visa is taking off the top. And if different companies have different fees, then I would even like to see retailers giving a smaller discount to customers who use a lower fee credit card.

As long as these fees are effectively invisible to the consumer and, more importantly, not something the consumer can control by paying with a different means, the system is not going to change. I buy things with my debit card using it as a credit card because I get points back. I'm well aware that the retailer is getting less money that way but it's no skin off my nose. If they'd give me a discount for cash, I would bring cash since the discount should be larger than the cash I am getting back from the credit card company.

Of course, this will likely not happen and the reason is that retailers and credit card companies are in bed with one another. Retailers understand that credit cards encourage a lot more compulsive buying that would not happen in a cash society (you can't compulsively buy if you don't have the cash on you). Retailers survive by moving a lot of merchandise. If they have to eat a couple dollars in margin to increase their gross sales, it's a win in the end.

For this reason, I am a little suspicious of the OP claim that, in the end, cash consumers are really also paying for these fees. If there were no credit cards, retailers would move less product and thus prices on individual product would have to be increased to cover overhead.

[Ali G. 37]

Due to recent government regulation in AUS, depending on the card you use, the merchant can now charge a fee on top. Various outlets don't accept AMEX anymore or will add the merchant fee to the tab. As a result, numerous banks now issue you with an Amex and a VISA or MC linked to the same account.

What puzzles me in terms of security is, why don't US issued cards have a chip in them? Furthermore, why have we not enabled pin or pen for credit transactions?

[Ali G. 37]

Check out this new card with an RSA token equivalent LCD built into the card. Of course it's in Europe.

[mawilson 2,133]

What puzzles me in terms of security is, why don't US issued cards have a chip in them? Furthermore, why have we not enabled pin or pen for credit transactions?

Credit card fraud is rampant in Europe - less so in the US.

If banks were losing a lot of money to fraud, they'd implement chip and pin in a heartbeat.

[I AM NOT THAT GUY 5,715]

One of my cards actually bars any foreign transactions. I had to book a flight from the Philippines to the US, and the card kept getting rejected. The issuing bank agreed to give me a five minute preauthorization for a specific USD amount to make the purchase. A couple months later, they issued me a new card, because of "an unauthorized foreign tansaction".