In Which I Am Legitimately Baffled, From an Ethical Point of View

I hate credit card fees and rates as much as the next guy. I am also a responsible, read-the-fine-print kind of gal who rarely gets hoodwinked, and if I do, I tend to blame myself. I've never felt preyed upon...until I read this little tidbit on triplepundit's article about credit card practices,

According to a recent expose hosted on the PBS show Frontline and sponsored by the New York Times called

The Card Game,

In the U.S., merchants pay 1.8 percent of every credit or debit card transaction to have the payment cleared. Last year, interchange fees cost them roughly $35 billion, according to The Nilson Report, a newsletter that tracks card payments. It’s the second-highest expense for many businesses, after labor costs, and some merchants say that the fees hurt, especially when they’re struggling to survive the recession.

Currently, consumers do not notice the effect of interchange fees on retail prices, since most credit card companies, such as Visa and MasterCard, restrict their vendors from charging lower prices for customers paying with cash, afraid that more people would use cash if they realized that it was actually cheaper.
Don't get me wrong. I'm not saying I agree that credit card companies are doing something shady. I really don't know. I mean, credit card companies need to make a profit somehow. If, in exchange for their services, they require a business owner to charge the same prices for goods/services purchased with cash or credit, that seems to be entirely reasonable to me. However, it also seems reasonable that a business owner should be able to charge whatever price they'd like for a good, and that lowering the price for a cash transaction is well within their rights. The problem is that we cannot have both options, which the quoted article seems to indicate is geared entirely towards making credit card companies' excessive profits.

This is an overstatement. I'm certain that credit card companies would not go out of business if they allowed different price points for credit vs. cash. I'm also guessing this rule is to avoid a finicky business owner who wants to have things both ways - wants to encourage customers to use cash, but still wants to be able to swipe the old plastic card if a customer wants that choice.

I think we have to remember, first and foremost, credit card companies are providing a service people want! If you don't like using credit - you are free to not do so! If you are a business owner sick of paying the high fees, you are also free to do so - educate your customers about why. In fact, it could be your whole schtick: a modern day David and Goliath. As a result of not taking credit cards because of your highly principled rationale, you might get a huge flock of capitalist-hating customers to your place of business simply because you turned away the big bad credit card companies!

Anyway.

People should understand that the extension and use of credit, or even debit services, is a convenience service, meaning, no one is obligated to provide it. Furthermore, if you are using credit at all, people should be cognizant it is because they cannot afford the good/service with current cash reserves and they need the aid of the credit card company to help manage their short-to-medium term cash flows of consumption and income. In short, this also means the consumer using credit shouldn't get all in a tizzy for paying service fees for the above-referenced privileges.

However, this does seem to set up a weird triangle between consumers, goods/service providers, and credit card companies who help them transact their business. I think the primary thing I still feel is "wrong" would be lack of transparency and flexibility. Store owners provide credit services because most people are like me: they never carry cash. However, I do think it is not unreasonable for said store owners to be able to tell their customers they could get a Pay by Cash discount since the credit card fees are admittedly high. I mean, many places do this informally by putting up a scraggly sign saying, "Credit Card minimum purchase $10" or whatever. They actually are forbidden by law from doing that, but should they be? Am I in left field here?

I cannot make a final assessment on this whole thing, so I hope some people more familiar with the issue can shed some light on it.
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9 Comments:

  1. Like you, I'm torn between the understanding that using plastic (in any form) is a convenience and that businesses pay through the roof for the transactions. Often times, there is a per-transaction fee in addition to the percentage of total sale.

    Technically, a business putting up a 'credit card minimum' is violating the merchant agreement between them and the credit card company. But I know why they're doing it, and I don't personally mind. TheConsumerist.com has been all over this topic for a while now.

    I've made it a point in the last year to always keep $20 in my wallet and only use credit / debit when over a certain price point.
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  2. I understand being torn because it is a complex issue, but let me advise you of a couple of more facts and then ask you a couple of reasonable questions: FACT: Mom and Pop Retailers lose money when you come in and buy a candy bar or a newspaper on a credit or debit card--the fees they have to pay for that transaction exceed the small profit they make. They would be better off if they just gave you the candy bar. However, Visa rules prohibit these retailers from requiring a minimum transaction amount before accepting a card. This seems wrong to me. It seems like Visa is mandating that businesses lose money, and that is doubly wrong in the current economic environment. QUESTION: I believe in free consumer choice as well, but how can a consumer make a choice if they do not know the cost of their choice? If my wallet contains a $20 bill, a debit card that gives me 1 mile for every $1, and a credit card that gives me 500 miles for every $1, and the candy bar I am going to buy will cost me $1 no matter what tender I use, what am I going to pull out of my wallet? Easy call: The 500 mile credit card! When everything looks FREE to me, how can I assess the true value? What if the candy bar cost 75 cents for everyone, but there was a 25 cent fee to use your 500 mile credit card? Then I as a concumer get to decide if my 500 miles are worth the extra 25 cents. That seems more fair to me. You mention 'ethics,' so I think it is unethical for poorest people in our communities who can never even qualify for a credit card, to pay higher prices for goods and services in order that rich Americans can get their miles or points. I can't begin to comprehend how that could be seen as "fair." I really see it as wrong, a sin, unethical and even unconstitutional.
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  3. Common Sense above points out that there are additional fees per transaction aside from the clearing fee, which is assessed every time you "close" a day's worth of sales via electronic transfer. Other hidden merchant costs include a monthly minimum from the processor, which is assessed when you come under an arbitrary number of transactions, as well as upcharges for certain types of cards, such as American Express - whose fees and processing are separate and higher than visa/mc. If you want to take AmEx you need a specific merchant number from them. In my experience, the money showed up a little faster from AmEx.

    The most insidious of these hidden costs is float, in my opinion. You as a merchant may close the transaction electronically each day, but it generally takes several days for the money to transfer into your business account. It's immediately debited from the carduser's balance or available credit, though. Float is the real money maker, even in times when interest rates are less.

    All in all there is big money being made by credit card companies from both parties to a transaction. Don't forget that as a cardholder, you get dinged with overlimit or insufficient balance fees, late payment fees, and until recently interest rate increases justified under draconian policies such as universal default (which sunsets with recent federal legislation) and transaction stacking to levy the most penalty should you go over limit or have insufficient funds for more than a day.

    It's hard to muster sympathy for financial institutions when they've been raking it in with no impunity.
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  4. Betsy,

    This comment is puzzling,

    "It's hard to muster sympathy for financial institutions when they've been raking it in with no impunity."

    (I'll assume you meant 'with impunity' not 'with no impunity'.) So, for what should they be punished?

    The reason they are not impugned is because they are 'raking it in' per a contractual agreement. By your reasoning, my plumber has been raking it in with impunity when I hired him to fix my sink. If one doesn't like the service that credit offers, one can choose not to use it.

    Common Sense,

    You say unconstitutional. To what constitution are you refering?
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  5. Anonymous (i.e., Lawyer from Visa or MasterCard),

    I am referencing the Constitution of the United States whose purpose is to "establish justice," "promote the general welfare," and "offer equal protection under the law." The current model harms consumers and small businesses and unjustly penalizes small businesses and the poorer citizens of the United States. My intent was not to enter into a legal debate--all I have to do is look at my thirty page cardmember agreement to see that the banks and visa and mastercard have effectively manipulated the laws so that consumers and business always lose the legal debate when the banks are involved. My point was one of ethics or morality and the fact that you and your banks have manipulated the free market and corrupted the founding principles of the US. I noticed that you did not dispute the fact that the current model makes the poor subsidize the rich and rather you berate another person for their use of the word impunity? Rather than discuss the fundamental issue, you prefer to focus on irrelevant semantics? I apologize in advance for any misspellings and gramatical errors. Will you apologize for forty years of acting with impugnity as you rake it in from small business and forcing consumers on food stamps to pay higher costs for everything the buy?
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  6. CommonSense,

    I am not a lawyer nor do I work for a credit card company, not that that would have any bearing. Check on that thirty page cardmember agreement, do you see any signature there? If you found the agreement so distasteful and unjust, why did you sign it? Also, I don't believe that 'force' means what you think it means.
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  7. @All - thanks for all the comments.

    I hope you don't mind, as blog owner and de facto moderator, if I try to redirect and refocus the conversation a bit.

    I thought of an interesting example today as I cut and colored my own hair. I'm no longer able to afford to go to the salon. Now, while hair coloring is not a service everyone needs, haircutting is. You have to get a hair cut, but even that costs upwards of $40 at a regular salon. I'm sure a barber shop would cost less, but even going to the salon and paying someone else is a cost I was not willing to incur.

    So, I started cutting and dying my own hair a year ago - because I could see the benefit in paying the fees at hair salons. However, what I did not do was get all mad and incredulous at hair salons for their fees - I get it, they have expertise, rent, overhead, supplies, loss and damages, insurance, etc. to pay for. I just said, "Well, I'll change my habits."

    In a conversation with a beauty supply owner today, we chatted how this is a big trend she sees in her store: tons more women learning to do their own hair.

    I think that what I notice most of all out of this brief comment exchange is that people feel powerless against what they deem to be the injustice of businesses - but the reality is - they have a choice! I think we should start an All-Cash Consumers movement. We should reward business that don't use credit and lower their prices to do so.

    For example, I can already take advantage of this All-Cash concept: I shop at the local farmer's market and pay cash for a great discount on bulk produce. Sure, it means I have to plan my grocery shopping trip for Saturdays and cook in larger batches - but can you see my point?

    In short, my suggestion is - if you hate credit cards - stop using them! You have that freedom of choice. This would send the clearest signal their business practices are unsustainable.

    I have to agree with @Anonymous that the rules of credit card companies are contractual, i.e. voluntary. No one forces you to get a credit card...it's just evolved into the way we do business. We should perhaps evaluate our lifestyles and spending habits...
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  8. Whoops - that should have been "could NOT see the benefit in paying fees at hair salons."

    Carry on. ; )
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  9. Anonymous,

    Sorry for the massive insult of calling you a Lawyer--I know there aren't many things worse to call a person. I got fired up that you were nitpicking around the edges instead of addressing the heart of the issue. My cardmember agreement does not have a signature line--I just seem to get one every 6 months or so with a notice that they are raising my interest rates.

    Milena,

    I think you are right about the frustration of not being able to control the costs. Full disclosure, I own a pretty trendy restaurant and while I do OK, the economic slowdown has certainly hurt me and traffic here. About 18 months ago I noticed that my credit card fees started going up month after month after month. Now, they are my second highest expense after rent--my wait staff works on tips, I cover the front so my labor costs are mostly in the kitchen. I see my credit card fees as a cost of doing business, but I started searching on the internet for ways to control my credit card fees and I discovered that there really is nothing I can do to control it--NOTHING. If I tell my customers that I don't take AmEx or Visa, they will go next door to a place that does accept them. What am I supposed to do? If my electricity goes up, I can switch to energy efficient light bulbs or cut off the TVs in the bar in the middle of the afternoon. What can I do to control my credit card fees? Grin and bear it. Should I raise my prices? In the middle of a recession? I had to do that last year when my food costs went up because of gas prices going up. Seriously, anybody else tell me what am I supposed to do besides eat it? I would absolutely love it if every single one of my customers paid in cash--LOVE IT! But I can't risk losing customers or sales because I go all cash. Today I pay double in credit card fees, from what I paid three years ago and my sales are lower than they were three years ago. These fees are out of control! So, I would support an all cash economy. For what it is worth, I found a website that is doing a petition to force congress to act on addressing these fees. I follow this issue a lot because it takes money out of my and my family's pocket. The website is www.thecreditcardcon.com. I appreciate the opportunity to air my grievances.
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I'm curious to see what you are thinking...

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