Denialism

A Problem with Using the Plastic

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by

Chris
in

I have a love-hate relationship with credit and charge cards. They’re incredibly convenient, but my few puritan instincts tell me that they’re the spawn of satan.

And the fees! The fees! No, not the ones for paying your bill late, or for paying your bill on time over the phone, balance transfer fees, application fees, balance transfer fees, overlimit fees, or even annual fees. (Did you know that banks make more money from fees now than from investments?) I’m talking about the fees that the card networks charge to merchants. Jane Birnbaum explains in Thursday’s Times:

A typical merchant card payment has two parts: an “interchange fee,” which includes an average 1.7 percent of the sale price and a flat per-transaction fee, and a separate fee that goes to the merchant’s bank. Take, for example, a driver who pays for a $1,000 car repair with a credit card. The bank that issued the consumer’s card receives an interchange fee of $17.10 (including a 10-cent flat fee), while the repair shop’s bank gets $4, or four-tenths of 1 percent of the total sale. The repair shop pockets $978.90.

On a large, $1,000 sale, one could just consider this a cost of doing business. Who is going to walk around with $1,000 in cash in their pocket anyway? Checks are dowdy and raise unmanageable fraud risks (a subject for another post). So, the card is most excellent in that situation.

On small transactions, these fees can have a large impact; they cause merchants to lose money on a sale. Because credit cards are used more than cash now in the US, the fees add up to an enormous tax on consumers. Birnbaum continues:

In 2007, merchants paid $61.56 billion in electronic payment fees, up from $48.58 billion in 2005, according to the Nilson Report, a payment systems industry newsletter…

Obviously, this is passed onto the consumer. But instead of passing it onto just the plastics, merchants spread the costs among all customers, even those who use cash or checks. This is because under the guise of consumer protection, California and other states have laws that prohibit businesses from charging customers more when they use plastic (however, merchants can advertise “cash discounts”). Agreements between credit card networks and merchants prohibit policies setting a minimum amount for credit transactions.

Straight outta Locash!

So, next time you’re in line at the 7-11 behind the 18 year old using plastic for a $2.32 purchase, remember that you are paying for it with both your wasted time and money!

Comments

  1. The Perky Skeptic

    Jeez, no wonder coffee’s so expensive.

    Reply
  2. The Chemist

    Don’t blame the eighteen year old, blame the ATM fees and the rise of the debit card. I don’t have a credit card, but I do run around using my check card. Considering that I ride public transportation, go to an urban campus, and that there have been armed robberies in my neighborhood: Cash seems like a luxury I’d rather nor risk having. Meanwhile my bank, Wachovia, is very bad about having ATMs near the places I shop.

    Meanwhile everything on a bank card is insured although in GA I do encounter credit card minimums at various businesses.

    I do agree with the basic premise that small-business is getting screwed. I did some translation related work for a friend who runs a small business out of his home and the bank took $5 off of my $100 check because he hadn’t made a “special-arrangement” with the bank. $5 is nothing between friends so I didn’t make him give it to me, but it seems like an indefensible fee.

    Welcome to our neoliberal world.

    Reply
  3. Paul Murray

    These fees and many others – such as the fee you pay to get a copy of your birth certificate – are a relic of the days before computers, when they would have to send a runner down to the filing dept to retrieve your manilla folder.

    Reply
  4. Matt Penfold

    Here in the UK it is common to see a sign in smaller merchents either saying they do not take card payments for sums under £5 or £10, or that transactions under such amounts will have a surchage applied, normally 50p or £1.

    Reply
  5. alias Ernest Major

    Ithe UK at least, banks also charge businesses cash handling fees, and businesses also have their own cash handling costs. The first scale of charges I found charged 0.5% for depositing cash.

    Reply
  6. Dr. Kate

    I’ve had smaller merchants politely ask me if I would mind paying cash for small purchases to save them the credit card fee. But most places don’t have the time or gumption to do that (and my guess is they’d probably get a lot of flak if they tried it).

    Chemist, what bank do you have that insures debit card transactions? A big part of the reason I use a credit card instead of a debit card (aside from the fact that I get cash back) is because, from my understanding, if someone steals your debit card and drains the account, you’re covered (i.e., not responsible and your bank gives you the money back) only for charges incurred after you report the theft. So if you don’t notice it’s missing–or someone takes it off your computer–and you don’t report it right away, any money you lose is gone. But most credit cards have a flat $25 (or $50) liability for fraudulent charges, no matter when you report the card stolen.

    Reply
  7. Moopheus

    I try now to use cash whenever I can. Recently Citibank started a promotion to encourage its customers to use their debit cards as credit cards (i.e., you sign for it rather than use a PIN), solely because credit transactions make higher fees than debits.

    Remember when it used to common for stores to have minimums for credit purchases? The banks forced through a law prohibiting that practice.

    Also, every plastic transaction becomes a trackable event in a database. How much do you trust the folks who might have access to that database? Banks have reportedly begun making credit decisions based on associated buying patterns–i.e., they’ll cut your credit limit if you shop in places that are associated with customers who’ve defaulted.

    Let’s face it–the banks made it easy and convenient to use your plastic everywhere and for everything more for their benefit than for yours. It’s just another way to drain money from the productive economy.

    Reply
  8. KristinMH

    Cards also encourage you to spend more than you should – since you can’t see the money disappearing like you would from a stack of cash, small purchases can easily pile up into a greater sum than you realize. Paying cash for all purchases under a certain limit – say, $100 – is a good way to get your spending under control.

    Matt Penfold, it’s not uncommon to see those signs here in Canada either.

    Reply
  9. Brian Puccio

    As someone who is familiar with the expenses incurred in credit card transactions on the merchant’s end, I always pay cash for everything under $50 at local businesses because I don’t want to see them take the hit. (I tend to not care about large multi-national business since, as mentioned above, if all of their customers are using plastic and I don’t, I’m paying the price for it, but not getting the benefit of it.)

    Besides, aren’t we supposed to be a cashless society any time now?

    Reply
  10. Dave Ruddell

    I was under the impression (from being a regular reader of consumerist) that the Merchant Agreement for both VISA and MC forbid the merchant from charging a higher price for using their cards (although the cash discount loophole is there), and also forbid minimum purchases.

    Reply
  11. Moopheus

    Another thing I just remembered that I don’t like about plastic is the digital signature pads some shops use now. That always strikes me as something that would be very easily abused by someone less the scrupulous with a digital copy of your signature. Admittedly, I don’t know of that actually happening, but it does seem like a bad security hole.

    And yeah, KristinM is right about the spending. A big part of the push for plastic is so people feel less constrained in their spending, which is not really to their benefit. Not feeling constrained in spending is what’s led us to where we are now.

    Reply
  12. skepdude

    Ok, let’s look at this issue. A lot of problems with CCs have been raised, and quite of them are valid.

    Nevertheless the “CC fee will be passed on to the customers” argument that the author gives doesn’t make the best argument against the use of CCs.

    The other alternative is to use cash. Cash needs to be deposited in the bank account. Someone has to count it, prepare the deposit and physically go to the bank and make the deposit. That someone has to be paid for the time, and that includes wages, PR taxes, insurances etc etc. Those also are costs that would have to be incurred if cash was used instead of CCs.

    I have not done, and don’t intend to do, the math, but at the very least whatever the CC processing cost that the merchants pass on to us would be greatly offset by their savings of the personnel costs I mentioned above.

    See, there are two ways to manage profit. Increase revenues or control/decrease costs. An increase in costs in one area does not necessarily translate to increased revenues (which are achieved by increasing prices) if there is a corresponding cost decrease.

    Reply
  13. Chris H.

    @KristinMH & Moopheus, you’re right about spending. The industry has a term for this: “spend.” So, one often hears that a new card, technology, etc, “increases spend.”

    One of the driving forces behind RFID “contactless” credit cards is that it causes consumers to spend significantly more.

    I think the problem here is that in moving to plastic, one is divorced from the ceremony of handing over cash (a possession that palpably disappears as one spends it). Maybe we need shrinking credit cards, or cards that display the balance on the actual card.

    Reply
  14. Nemo

    my few puritan instincts tell me that they’re the spawn of satan.

    It’s because they’re not labelled “In God We Trust”, right? 🙂

    I generally pay cash for small purchases, unless I’m dealing with a machine. Which is often the case now (self-checkout at the grocery store).

    Re: signature pads, when I’m at that self-checkout, I often sign myself “X”.

    Reply
  15. Moopheus

    “I have not done, and don’t intend to do, the math, but at the very least whatever the CC processing cost that the merchants pass on to us would be greatly offset by their savings of the personnel costs I mentioned above.”

    I think it’s pretty clear that merchants who deal with it are of the opinion that the credit card fees are more than the cash processing costs. Merchants complain all the time that CC fees cost them too much; I’ve never heard them complain about cash.

    Reply
  16. Adela

    When I had my small business all Visa transactions had a commission on the slip total including the government tax collected on the sale, the bank’s account fees, the sub contractor’s account processing fees, rental of the imprinter fee, merchant insurance on the transactions(which was a giant loophole lie), cost of the processing stationary and service charge for manual processing(though digital and POS systems also would have had a fee).
    So that $20 sale we would end up with less than $10 in pocket before costs of the actual item or business overhead so profit was impossible on visa transactions.

    Reply
  17. davidp

    In Australia we recently introduced a law requiring credit cards to allow merchants to charge a fee for using cards – it outlawed the restrictive clauses Visa, Mastercard, etc put into the agreements. The law was introduced to encourage competition between card providers on the merchant fees end. Mostly it means some organisations charge significantly (2% extra) for using American Express cards, and some encourage direct bank account debit (very easy and cheap in Australia, but the customer bears the cost). Our airlines abuse the new rule by charging fixed dollar amounts for each flight leg, rather than a cost related fee. Everyone else seems to use it reasonably.

    Reply
  18. Gary

    Boo hoo. With my cards, I get 1% back on most charges and up to 3% at supermarkets, drug stores, and gas stations. Given that one of my biggest expenditures every month is at the supermarket and that I pay my bill in full every month, this sounds like money in *my* pocket.

    Credit cards are convenient and I pay the same amount for products with either cash or credit. Given that I get money back on every purchase and that my giving up on credit cards isn’t going to make any difference (the vast majority of people will continue to use them), I can’t see the drawback.

    Reply
  19. Chris H.

    Boo hoo. With my cards, I get 1% back on most charges and up to 3% at supermarkets, drug stores, and gas stations. Given that one of my biggest expenditures every month is at the supermarket and that I pay my bill in full every month, this sounds like money in *my* pocket.

    Merchant margins are even smaller with “reward” cards, because merchants pay for those rewards with even higher fees! This is from the Times article:

    “Various factors make every interchange fee unique. If the magnetic strip on the consumer’s card does not work and a cashier has to enter its number manually, for example, a higher charge results. If the card “rewards” the consumer with cash back or airline miles, that, too, has a higher charge.”

    The point is that WE ALL PAY MORE. Money doesn’t grow on trees. You (and everyone else) pays for those “rewards.”

    Reply
  20. Skepdude

    “I think it’s pretty clear that merchants who deal with it are of the opinion that the credit card fees are more than the cash processing costs. Merchants complain all the time that CC fees cost them too much; I’ve never heard them complain about cash.”

    Partly true, depending on the merchant, I’ll give you that much. Nevertheless, don’t forget that CC fees are clearly labeled as such, whereas the cost to process cash are hidden within your PR and Fringes expenses. As such it is much easier to be aware of your CC expenses (you see the number in your monthly statement anyway) than it is to separate the cash handling costs from your general costs.

    Smaller merchants may not be able to harvest these savings due to their size. Larger merchants will, and they will even be able to associate a number with the savings, because trust me there are savings there. The savings may not totally wipe out the new cost, but there are savings there.

    Lastly, this is capitalism people. The firms/business’s purpose is to make money and to protect those profits, so don’t be surprised that they’ll be passing additional cost on to the consumer. We as consumers on the other hand do have some limited power and choice. We can choose not to shop to certain stores for certain items.

    Reply
  21. Natalie

    The firms/business’s purpose is to make money and to protect those profits, so don’t be surprised that they’ll be passing additional cost on to the consumer. We as consumers on the other hand do have some limited power and choice. We can choose not to shop to certain stores for certain items.

    Unfortunately, the credit card companies have gotten the government to help them in this little capitalist endeavor. As someone mentioned above, it’s illegal to charge fees to credit card users and illegal to require a minimum purchase. That means that all of those fees we pay are hidden rather than being out in the open. Allowing the merchant to pass the CC fee directly onto the consumer would allow people to actually do the math and decide whether or not paying with plastic is worth it.

    Reply
  22. minimalist

    Allowing the merchant to pass the CC fee directly onto the consumer would allow people to actually do the math and decide whether or not paying with plastic is worth it.

    Yup. I was under the impression that free-market/lolbertarian capitalism required informed consumers, so in that sense it might not be a bad idea (the sheer improbability of consumers being fully informed at all times aside).

    On the other hand, allowing businesses to charge CC fees may hurt the small businesses who try it; more people would probably shop at places that don’t charge fees, even if they spread the cost around via higher overall item prices.

    I am nowhere near a lawyer or economist so I freely admit to talking out of my ass, but it really doesn’t seem like a simply-resolved issue to me. At least, not one that boils down simply to credit card companies being evil (which they are, usually, just not necessarily in this case).

    Reply
  23. Tikaysha

    A lot of banks strongly encourage use of your card verses cash when shopping, so it’s not just credit cards but debit cards too. Which I believe incur just a flat rate which is cheaper for large purchases than the percentage, but most people for some reason would rather sign than type in their pin. So when you get only a certain number of free ATM uses per month, and a fee to transact with a teller at your bank, and a limit on how much cash you can get back at the grocery store, it gets really hard to use cash. (and this is why I don’t bank with BOA)

    Meanwhile, as someone who has gone back to using cash for most things (and if you don’t want to carry all that cash around when you don’t actually want to spend it, take most of it out of your wallet and leave it in a safe place at home!) I’ve found a new snag to the switch: cashiers. When I’m handed back bills, change, and receipt all in a pile, and then STARED AT while I sort it out (I keep these in three different places) I’m very aware of the negative social feedback I’m getting for using real money instead of plastic.

    On the other hand, I’ve managed to eliminate all but my student loan debt and not freak out if I’ll make it from paycheck to paycheck by being able to actually see and physically handle my money, so I guess a little bit of negative social karma is a fair trade for being able to sleep at night again. plastic = dangerous. especially for a generation whose parents didn’t teach them how to handle money (the number of my friends who are in worse straits than me is terrifying).

    Reply
  24. njmalhq

    About a decade ago I made an off handed remark in a conversation somewhere that the credit card system seems to me like a move towards privatization of currency. It wasn’t received too well by the group I was talking to, someone said something along the lines that one always has the option to pay with cash.

    Since then I have watched credit card usage become more and more ingrained into consumer commerce, and it is even becoming increasingly non-optional. The percentage of transactions that one can no longer enter into without a credit card have gone up quite a bit in the last few years. Only last month I was in a flight where the crew announced food/beverage purchases MUST be paid with card (I wondered about the legal implications of consuming a beverage while one’s card is being run, and upon denial, offer to pay with cash. Technically it is still legal tender that cannot be denied in discharge of debt). It doesn’t seem so far fetched to conceive of a fairly near future when no one will take cash anymore, and the dollar bill would have silently passed away.

    In anycase, the point I wanted to get to is that if we think of credit cards as privatized currency that in effect replaces government issued legal tender, then the fees amount to a privately collected commerce tax. The implications are quite disturbing.

    Reply
  25. Grep Agni

    If using a credit card increases a customer’s willingness to buy stuff, that must at least partially offset the additional transaction costs. Indeed, I thought that was why businesses accepted cards in the first place.

    Reply
  26. Lindsay Beyerstein

    One of the more objectionable things about the consumer credit system is the lack of transparency. Credit agencies don’t have to tell you what factors influence your credit rating, and they can change the rules of the game at any point without telling you. Not that you knew what the rules were to begin with… These changes can affect the rate of interest you pay on money you’ve already borrowed.

    Credit card companies are quite upfront about the fact that they design their loans to become permanent income-generating assets. I.e., they structure every aspect of your payment and repayment plan to maximize the chances that you WILL NOT be able to pay it back and will therefore continue to pay the debt at usurious interest indefinitely.

    Their tricks include shortening the billing period to less than a month and attaching exorbitant fees to every transaction. My biggest pet peeve is the artificial 3-day waiting period that my credit card companies impose for online payments. There’s absolutely no reason for them to do that, except to ensure that customers rack up late fees. I’m a freelancer, so my cash flow is unpredictable. I remember once, a few months ago, I moved heaven and earth to get paid before my credit card payment was due. The funds finally cleared on the day my payment was due. But the credit card company wouldn’t let me pay online that day. I called them up and yelled at them and they finally relented and took the money out of my account instantly, allowing me to pay the bill on time. So, I know know for a fact that the 3-day holding period is just a cynical cash grab. (This was an Amazon Visa.)

    We need more robust consumer protection laws for credit cards. There is no reason that a credit card company should be allowed to make it HARDER to pay what you owe and impose its OWN exorbitant penalties for non-payment

    Reply

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