How the Visa/MC Settlement Affects You

On Friday, there was a massive settlement in a seven year-old lawsuit between Visa, MasterCard, the banks that do business through them, and retailers. The retailers will get $7.25B in compensation for what was, essentially, a complex price fixing scheme.

But it is not the epic sums due to change hands that is causing the buzz. As part of the settlement, Visa and MC will for the first time allow merchants to add a surcharge to the bill for credit card use. This is a big deal, apparently. The Consumerist led with that facet of the deal. Reuters and AP mentioned it at the top. A clever report at Forbes was entitled $6 Billion Visa Settlement Frees Consumers To Pay More.

The president of the American Bankers Association (a.k.a. the head lobbyist for the banks that are paying serious money to the retailers) was quoted in the Times “Let’s be clear — retailers, not consumers, benefit from today’s resolution.”

I disagree.

The simple fact is that fees to use a credit card are already being paid and there is nothing in the settlement that directly changes the way the system works or the size of those fees.

I buy a shirt for $50 on plastic: $49 goes to the store, and $1 to Visa and the bank. Who is paying that $1? Is it me or the retailer? It is almost a philosophical question. I do not see the fee, so it appears to come out of the retailer’s money. But the store would likely be just as happy to sell the shirt to me for $49 cash, so you can argue I am paying an extra $1 whether I know it or not.

The best answer is that we are both paying it. Like sales taxes and other transaction costs, swipe fees (technically called interchange fees) make doing something that both the consumer and the retailer want to do just a little less attractive than it could be, for both of them.

In any case, I do not think that this deal will make surcharges for using a credit card commonplace. And I have three good reasons.

First, ten states (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX) have laws that prohibit surcharges for using plastic. And no, I have no idea why the legislatures of those great states thought this was worth banning. But they did, and those states make up about 40% of US population.

Second, retailers have for some time been able to give a discount for using cash, which is pretty much the same thing as charging more for using credit. And except for gasoline sales, on which the margins are so small that a swipe fee can be the difference between profit and loss, this is not an option that retailers have embraced.

And third, I think most retailers just do not care about the swipe fees, or at least not enough to rock the boat at checkout. Gasoline aside, retail margins are usually generous enough to handle it. That $50 shirt probably cost the store $25.

Sure, in principle retailers could seize on this as an opportunity to increase revenue, by keeping the price tags the same but adding on the swipe fee on top, essentially charging $51 for the shirt. But I think that most consumers would see this for what it was, a flimsy excuse to raise prices. And if Target did this, but Wal-Mart did not, the results would be predictable and likely much worse for Target than if they had just raised prices by a few percent the old fashioned way.

I would be the first person to agree that the credit and debit card system, as awesomely powerful as it is, contains a raft of peculiar inefficiencies. Debit cards, which provide less of a service than credit, ought to be less expensive for consumers to use. Instead, although they are generally cheaper for retailers, they are more expensive for consumers. And there is something basically irrational about rewards cards, a system by which a consumer buys something, a portion of the money is sent to a bank, and the bank then sends about half of what it gets back to the consumer from whence it came.

In principle, the system would work better if price tags showed for-cash prices and at checkout we were charged exactly what it cost to use our card for that specific transaction. Rewards cards (which have higher swipe fees) would seem less of a good deal and the whole system would be subject to more competition, which would tend to move it towards efficiency.

I just do not think we are likely to get anything like that. As I have said before, when you get down to it, our credit/debit plastic card system works too well to fix.

[Photo – Lotus Head]

Credit Cards, Media, PF Blogs | Frank Curmudgeon | July 16, 2012 11:59 am

17 Comments

By Barbara, July 16, 2012 @ 1:04 pm

Many of the gas stations in the Baltimore area charge more for credit card than cash transactions. Calling this a discount for cash is disingenuous since the cash price is the same as that at stations that don’t charge different prices. Credit card prices are higher than the normal price in the area. I try to avoid the stations with different prices although that isn’t always possible.
By CalLadyQED, July 16, 2012 @ 3:44 pm

Hmm, are you sure about California? My tailor has been charging $0.50 for credit card transactions for awhile now.

And the CA gas stations get away with it by calling it a cash discount instead of a credit card surcharge?

I like that last line. I work in insurance modeling. We often have to ask questions like, Is this close enough? Good enough? Will making it better take too much time and effort for too little return? Will trying to change it potentially make it worse?
By Steve, July 16, 2012 @ 3:44 pm

It’s true that rewards cards (tend to) have higher swipe fees. However, the difference is relatively small; IIRC it’s something like 0.25%. So IF a consumer is going to use a credit card either way, it’s a net benefit between the merchant and the consumer to use a reward card.
By jim, July 16, 2012 @ 4:24 pm

Personally I’d think it would be best overall if consumers knew the cost of the transaction and had the choice to pay cash for a discount.

But I’m not sure if retailers have much incentive to change the system. As Frank points out the gasoline stations already do offer cash prices and most other retailers don’t.

I’ve always heard that retailers are generally OK with the fees because they get more business when they accept cards. Its easier to sell stuff to people who don’t have money if you accept their credit card.

I don’t know if credit cards are usually more or less efficient as far as overhead and losses go. I would imagine that paying that 1-2% transaction cost to take a credit card would be offset some by avoiding bounced check fees, employee theft of cash out of the till, wasted worker hours counting money and making trips to the bank.
By Frank Curmudgeon, July 17, 2012 @ 9:21 am

Barbara:

Yes, a discount for cash is a surcharge for plastic in a thin disguise.

CallLadyQED:

I got the state list from The Consumerist, so it must be right. More to the point, what retailers are legally allowed to do, and what they actually do, are two different things. See my pet peeve about asking for ID for an example. Another reason why I do not think the settlement is going to change much at checkout: if stores really wanted to do this they would have already.

Steve:

I remember the difference for rewards cards a little higher, but I agree it is unmotivatingly small.

Jim:

I think it is worth noting that Wal-Mart has been the driving force behind all this, and they are crazy. They require vendors to have 800 numbers so Wal-Mart does not have to pay to call them. And they do not use wooden pallets when shipping merchandise because they can get just a little bit more into each truck that way. Most retailers are more concerned with the in-store experience than squeezing every nickel they can out of the system.
By jim, July 17, 2012 @ 12:17 pm

Walmart has about a 3% net profit margin. Those credit transaction costs are possibly ~1% of their total gross. So I could see how thats a bigger deal for them. I assume Wmt would like to lobby for laws that mandate reduced transaction costs or at minimum put a squeeze on the credit card companies to limit the costs. Any reduction in those swipe fees would go straight to Wmt’s bottom line OR maybe be used to cut WMts prices and gain more sales.
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