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Are You Ready for a Cashless Society?Credit Card Interchange Fees and Reward Checking Accounts
POSTED ON BY Ken Tumin
There has been a lot of coverage on credit card interchange fees in the last few weeks. 7-Eleven has organized petition drives at its stores, and merchants are on the offensive trying to get Congress to pass legislation that would help them against these credit card fees. This New York Times article reviewed the issue of interchange fees and what the retailers are saying.
This can have an impact not only on credit card customers but also reward checking account customers. As I described in my post on the math behind reward checking accounts, the debit card usage requirement is a very important reason why banks can afford to pay the high interest. The New York Times article provides some more stats which show how much banks make on the interchange fees:
Another thing mentioned in the article is that more customers are using credit and debit cards for small purchases. Reward checking accounts are definitely encouraging this. The article didn't provide any numbers on the interchange fees of small purchases, but I was able to find numbers at MasterCard's Interchange Rates & Fees page. On the right of this page, they provide The MasterCard Interchange Rates and Criteria (PDF). The interchange rates vary by product and service. One example is on page 19 for the supermarket category. The interchange rate is 1.42% + $0.05. So it appears they add on 5 cents no matter the size of the purchase. So for a $1 purchase, the interchange rate would be almost 6.50%. For other categories like service stations an extra $0.10 is added. So for reward checking customers, we can feel good that we're helping our banks even when we make small purchases. However, merchants may not be too happy.
What will happen if Congress passes legislation to crack down on interchange fees? It may not be good for credit card customers and reward checking account customers who profit from the rewards. The NY Times article described what happened in Australia:
Thanks to the reader who mentioned this NY Times article.
This can have an impact not only on credit card customers but also reward checking account customers. As I described in my post on the math behind reward checking accounts, the debit card usage requirement is a very important reason why banks can afford to pay the high interest. The New York Times article provides some more stats which show how much banks make on the interchange fees:
Every time a consumer uses plastic, about 2 percent to 3 percent of the charge goes to banks and payment networks, which price the fee differently in different countries. Of that, the interchange fee is paid to the cardholder's bank, and at roughly 1.8 percent of each purchase in the United States, according to June report by J.P. Morgan, it is the largest and most controversial of these costs.
Another thing mentioned in the article is that more customers are using credit and debit cards for small purchases. Reward checking accounts are definitely encouraging this. The article didn't provide any numbers on the interchange fees of small purchases, but I was able to find numbers at MasterCard's Interchange Rates & Fees page. On the right of this page, they provide The MasterCard Interchange Rates and Criteria (PDF). The interchange rates vary by product and service. One example is on page 19 for the supermarket category. The interchange rate is 1.42% + $0.05. So it appears they add on 5 cents no matter the size of the purchase. So for a $1 purchase, the interchange rate would be almost 6.50%. For other categories like service stations an extra $0.10 is added. So for reward checking customers, we can feel good that we're helping our banks even when we make small purchases. However, merchants may not be too happy.
What will happen if Congress passes legislation to crack down on interchange fees? It may not be good for credit card customers and reward checking account customers who profit from the rewards. The NY Times article described what happened in Australia:
In Australia, where regulators required banks to cut the interchange rate for Visa and MasterCard purchases to 0.5 percent from 0.95 percent, the banks offset their loss by reducing rewards programs and raising annual fees, according to a 2008 report by the Government Accountability Office.
Thanks to the reader who mentioned this NY Times article.
Of course they realize that many shoppers would shop elsewhere, but that is the price they would have to pay. You can't have your cake and eat it too.
Lowering the fees would not be past on to the consumer. This reminds me of a refrigerator manufacturer when they lowered their refrigerator compressor warranty from 10 years to 1 year. They said it will be easier for consumers to remember the warranty. It was in the "best interest" of the consumer they said. Does anyone believe that lowering a warranty from 10 years to 1 year is in the best interest of the consumer? If so please leave me a response; I have some prime land in Florida that I would like to sell to you.
>> The solution for stores is
>> simple. If they don't want to pay
>> credit card fees, don't accept
>> credit cards.
Not quite.
If stores want a behavior modification then they can start offering a flat discount when customer uses a 'store' credit card rather than V/M/A/D cards. Perhaps even print what the price would have been had the customer used 'store' card. If customers see the difference if it likely they will look to using more of 'store' cards (and s-l-o-w-l-y maybe even cutting-up V/M/A/D cards)!
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Like the first commenter said, if merchants don't want to pay the fees, then don't offer to accept the cards. If the fees really were so onerous, they wouldn't be taking them, as it wouldn't be overall profitable.
>> Every time a consumer uses
>> plastic, about 2 percent to 3
>> percent of the charge goes to
>> banks and payment networks,
Really? Then it is interesting how Schwab, PenFed and USAA manage to give consumers such hefty cash-back rewards on purchases they make using cards issues by them.
.
Another way to avoid the small charges is that merchants can impose a 'minimum' amount for the purchase to be made using a card for all the manual purchases.
I know ... having such a 'minimum' is not approved my V/M/A/D ... but the merchants perhaps can negotiate with V/M/A/D to impose such a 'minimum' at least for manual transactions.
.
>> Store cards? These went the way
>> of the dinosaur some years ago.
>> Nearly all "store cards" these
>> are simply co-branded Visas,
>> Mastercards, etc., issued by
>> regular banks. Stores do not want
>> to be in the credit business; it
>> is too risky.
Retailers already are in a risky business - that of retailing. Where there is a will there is a way, so if the stores are really hurting by this then they can find a way ... 1) Negotiate with one bank and have them offer favorable terms for 'store' card. 2) Create multi-store cards - Maybe a store card that will work at 7-11, WalMart, Kinkos, Starbuck ...
.
I would love it if stores just offered a cash price that was a few percentage points cheaper. Every time I see that, I just pay with cash. Bypasses the bank and interchange fees altogether for the vendor.
The psychological effect of saving upfront could help sales, versus offering higher prices for credit card users a few percentage points above the cash price. Both do the same thing. Cut the credit/debit middle man. However, they can have different psychological effects on customer sales.
Sure seems like businesses were encouraging using plastic a few years ago...Now they're all complaining, not that I can blame them if they are getting charged 2-3% on every size sale.
Regarding cash discounts, I agree this is the key to get people off cards (if the rules are changed and stores can easily do this without having to post the different prices on every item), but I still would rather not deal with cash and get my 1% back, and I don't think stores would go higher than that for a discount, unless they are also skirting taxes with their cash sales.
Also, I still think a small subset of businesses are ok with people using cards for any sized purchases if it speeds the line through or if not dealing with cash means they can't get robbed and don't have the expense of hassles of bank deposits. I'm curious whether a business like a large supermarket chain would prefer to have no one pay with cash and then not have any robbery risk (or employee theft) or bank deposit hassles / costs in return for paying higher interchange fees. This is not possible since stores have to accept currency by law (I think) by law, but an interesting hypothetical situation.
They also accept my $1 payments.
For my each 10 transactions they get only $3. How sweet it is.
>> is not approved my V/M/A/D ...
>> but the merchants perhaps can
>> negotiate with V/M/A/D to impose
>> such a 'minimum' at least for
>> manual transactions.
The stores would negotiate if they could, but the credit cards won't budge. If 7-11 can't get a negotiation, a regular mom-pop store sure can't.
>> The solution for stores is
>> simple. If they don't want to
>> pay credit card fees, don't
>> accept credit cards. Period. The
>> end. Done.
That's why many stores (especially the smaller ones) don't take AmEx or Discover. Visa/MC is the cheapest, and not accepting any would really hurt their business. To businesses, it's just another tax put on them. The stores that are not "too big to fail" just can't get any leverage. There isn't any free market competition in the credit card industry, or credit reporting for that matter.
There are stores that offer a "cash discount," but merchants can't tack on a fee for using a credit card. Some of these stores consider debit cards as cash, since there is such a big difference is merchant fees from CC to debit cards.
The only place I know that does add a CC usage fee directly to the customer is the University of Texas. They would not accept any plastic until about 8-10 years ago.
There used to be stores that would have a minimum purchase amount required to use a credit card. Those have gone away. I don't know if it's because of changing CC terms or they lost too much business from that.
Lately I have seen many bars start to impose a minimum tab to use a CC - usually $10.
The merchant fees on using a debit card are much less than using a CC. They are still noticeable, but much smaller.
I would bet that the reason banks with reward checking accounts require you to use your debit card as a credit card so many times is not so much that the bank will make money from the cc fees, but that people will get careless and either not complete the requirements, or people will overdraft, and these $1-$5 cc fees are nothing compared to $39 overdraft fees.
Debit cards usually only let you withdraw money that is in your account at the time. Most banks won't let you overdraw on a debit card. Reward Checking accounts don't count debit transactions, so this is why I'm pretty sure it's just a game of getting consumers to overdraft.
If you can accept a new method of payment, attract more purchases, and the additional cost is more than offset by the additional gains; that's good business. If it doesn't, then drop the additional cost.
This doesn't take a brain surgeon, people!
http://www.strunklp.com/custom.asp?id=128274&page=28
Thanks for the link selling banks on setting up reward checking
"Increases Overdraft Revenue. Without exception, every financial institution that has introduced Reward Checking has seen a significant increase in overdraft related revenue."