A Problem with Using the Plastic

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!