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Credit Card Checkout Fees Are Here

I’m currently in California, visiting my mother, who as I mentioned in a previous article is in the hospital. While articles this week will likely be slow on shizennougyou, one thing I won’t have to deal with while visiting family is the relaxed regulation on merchants who accept credit cards. Starting this week, retailers in many states are now explicitly allowed to charge customers who wish to pay with credit cards an extra fee. My home state of New Jersey will be affected, while California has state laws preventing such consumer discrimination.

Here is how this came to pass.

The Credit CARD Act of 2009 directed the government to regulate swipe fees for debit cards, sending companies involved in payment processing, from Visa and MasterCard to the smaller companies that handle the transaction technology, scrambling to ensure the lost revenue could be made elsewhere.

The CARD Act set the stage for pro-consumer changes to the credit card industry as the empowered government agency, the Consumer Financial Protection Bureau, began changing the landscape for the financial industry and its consumers.

In July 2012, Visa, MasterCard, and several banks settled an anti-trust lawsuit that alleged the companies fixed prices — the prices these companies charge merchants to accept credit and debit cards. Merchants generally pay for each swipe of a customer’s card — “swipe fees” or interchange fees — so off the top of a large number of transactions, the payment processors, the banks, and the card issuers stand to earn 3 to 4 percent of the transaction price in total. The settlement opened the door for retailers to begin passing the cost of the credit card transactions onto their customers.

But wait. Retailers were always passing these costs onto their customers. It just so happened that the cost was spread out more or less evenly among all customers, regardless of payment method. So customers paying with cash were helping subsidize the cost of accepting credit card transactions. The figuring can’t ignore, however, there is a cost to a retail location’s acceptance of cash. Someone needs to handle the cash, and a responsible employee needs to count it at the end of the day. Someone needs to bring the cash to the bank to deposit it, and the bank surely charges fees for business deposits. Have an armored guard service? You can bet there is a cost associated — a cost no business would have to deal with if all transactions were effected with plastic or electronics.

The cost for a business to handle cash is significant, and I wouldn’t doubt that cost is much higher than 4 percent of a transaction, particularly for a business that deals with small transactions.

All of these expenses are already built into the price point a company determines when looking at the figures. This surcharge is a way retailers can charge a higher price for some customers and blame the price increase on someone other than their own management.

From the smart consumer’s perspective, a 4 percent fee for using a credit card does more than negate the potential cash back rewards you could earn from taking advantage of some of the best credit card offers. Even the cards offering 5 percent cash back do so only on restrictive product categories and up to a low spending limit.

Those who use credit cards because of a cash flow problem — and this group of people is more likely to be people who have fewer purchasing options available to them — will be most negatively affected by this surcharge. It’s bad enough that groceries in low-income communities cost more than the same groceries in affluent communities, regardless of the reasoning behind the price discrimination. This credit card surcharge is going to make financial situations more difficult for the most vulnerable.

Like California, New York has restricted its businesses from this type of price discrimination — though similar policies haven’t stopped some businesses from using the “cash discount” trick to charge credit card customers more. Here are the ten states that have outlawed this practice already:

  • California
  • Colorado
  • Connecticut
  • Florida
  • Kansas
  • Maine
  • Massachusetts
  • New York
  • Oklahoma
  • Texas

Any store with a retail location that charges a credit card surcharge must post a notice at the store’s entrance. The notice does not need to indicate the amount of the fee, but it needs to be clearly shown on the purchase receipt. Online retailers, however, don’t need to inform their customers until they reach the check-out page.

Customers who use debit cards will not be affected by the surcharge, but debit cards don’t offer the same kinds of protections as credit cards. It comes down to what we’ve always known: despite credit card rewards and benefits like purchase price protection, extended warranties, and certain kinds of insurance, cash is still king.

Despite what some reports are saying, customers using American Express credit cards and Discover credit cards can be charged this extra fee for their purchases. Most American Express cards are actually “charge cards” — cards without interest rates that require a balance to be paid off in full every month, and they may not have the surcharge, but a retailer is within his or her new rights to charge all credit card users extra, regardless of the branding, the processing network, or the bank.

Are you willing to pay 4 percent more for your groceries, entertainment, electronics, household items, prescription drugs, clothing, subscriptions, and so many other products and services just because you use a Visa or MasterCard? Do you want your state to prevent retailers from price discrimination? Do you believe the fantasy that cash customers will benefit from lower prices if credit card customers pay more?

Photo: Flickr

Updated February 5, 2013 and originally published January 29, 2013.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 18 comments… read them below or add one }

avatar 1 Anonymous

If retailers started charging 2-4% fees for credit cards then I’d stop using a credit card and probably switch to debit.

I don’t think this is “discrimination” in any unfair sense. I think its reasonable and proper to allow merchants to pass along the fee if they want to. I don’t however expect this to all add up to lower prices for consumers.

In fact merchants have generally been allowed to charge LESS for cash but not allowed to single out credit cards for a higher fee. And the only thing governing that is generally just Visa/MC merchant rules, and not laws. So if merchants wanted they could have given a cash discount. You generally only see that at gas stations. This new law may prompt some merchants to add credit card fees but I don’t expect it will be the norm.

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avatar 2 Anonymous

Hope you get to use your debit card for a while before your identity and bank info get compromised. I’m afraid it won’t be as long as you think.
Best to use that only at your bank’s ATM. That’s the only place it’s safe to use it.

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avatar 3 Ceecee

I will definitely use cash if a store charges a fee, especially the whole 4%. Or, I may shop at another location that does not charge the fee. In that way, customers can “vote” with their dollars as to whether they dislike this fee. I would definitely tell the merchant that I was going elsewhere because of the fee, too.

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avatar 4 Anonymous

I play the cash-back rewards game because it’s available, but I always thought it was silly. The credit card companies overcharge the merchants on the transaction and then kick back a part of it to the card holder while the cost is being subsidized by all customers. I do see your point about additional costs for merchants to deal with cash, but what is the true cost of the credit card transaction – pennies?

Even if the consumers don’t get the savings, I would much rather see the money go to the merchant. The way I look at it, I’m buying the product and not the transaction.

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avatar 5 Anonymous

One thing that a lot of people are missing is that this won’t affect a majority of stores or consumers. The reason being that the credit card companies (at least Visa and M/C) have a policy that all stores have to use the same pricing procedures. So, if any store accepting those cards as payment operates in a state that bans credit card surcharges, none of the stores in that chain can charge a surcharge. Plus, the NRF has said that none of the stores in it’s organization that it had contacted will be taking part in adding a surcharge to customer transactions.

Seeing as how so many people do a majority of their shopping at the big box, national chains, it’s a safe bet that most folks wont have to worry about this impacting their rewards or budgets.

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avatar 6 Anonymous

I should also add that Amex has a policy which states that a merchant must treat all payments they accept the same, meaning that if one cannot have a surcharge added, then none of the payments they accept can have one. This reduces the number of places that can add a surcharge even further than before.

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avatar 7 Anonymous

Credit card companies also have a policy that a merchant can’t set a minimum amount for being able to use a credit card, and then charge consumers a fee if they are below that minimum. But that doesn’t stop many from doing it.

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avatar 8 Anonymous

Are you kidding. Is it required to appear on a receipt if a business does this. As “credit card processing fee” of some context? What about online retailers… Can they charge the fee?

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avatar 9 Luke Landes

Yes and yes.

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avatar 10 Anonymous

I love to use my cards both for the rebates and to specifically not carry cash. I will decline to do business where cards are surcharged, so long as I have an alternative. I may also pay for small purchase with inconvenient cash to send a message; ie use combination of only small bills (will stock up on $2.00 bill), $1 coins, and small change.

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avatar 11 Anonymous

I’m in California, but I would not be willing to pay the fee. Nobody will benefit from lower prices. I use a debit card for most things and say “credit”, signing for the purchases.

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avatar 12 Anonymous

“Do you believe the fantasy that cash customers will benefit from lower prices if credit card customers pay more?”

Do you always poll people in such a non-biased manner? When you ask someone if they believe in a fantasy you do realize that if they say yes you are communicating that in your opinion they are an ignorant fool who easily believes in non-sense, the types of things only children are allowed to entertain.

So I will attempt to explain why what you describe as a fantasy is not only not a fantasy but an absolute certain fact in a market economy.

In fact you already admitted to it in your post when you said that the extra fees for credit cards are already passed on to consumers via higher prices in the products that all consumers pay for. So what you have stated is that you do believe in a market economy that companies cannot afford to sell below costs so they will have to get the money somewhere if they do not make enough.

But if it is that easy to get more, why only get a little more, get a lot more. No one even knows the fees are being embedded in the prices so you don’t need to justify it, just raise the prices and keep raising the prices. Why don’t all merchants do this?

The answer is simple and of course you know what is. Competition does not allow them to do this. If they try it their competitors will sell at a lower price and they will lose business. In the end, setting prices too high will cost them money.

So if they are allowed to charge a premium for credit cards you are saying that cash buyers will pay the same and credit buyers will pay more I presume. As such there will be no benefit to any consumers only costs to some consumers which will accrue exclusively to the merchant.

So lets presume that the average merchant profit margin is 10% and lets presume that 75% of their transaction are credit cards and they are now going to charge a 4% surcharge. For simplicity lets say everyone does this and no customers change their buying habits. As a result every single merchants profit margin will jump to 13% (75% times the 4% surcharge)

So now by this one single act these merchants have increased their profit margin from 10% to 13% for all time? Holy Crap! They need to think of a few more of these ideas and then they will be getting 20% profit margins.

Of course this is utter nonsense. To believe this is the true fantasy. Now does that mean that merchants will immediately lower their prices by 3%. No it does not. Price adjustment is uneven, lumpy, and slow to react at times and would likely be so here as well. There may be some price lowering after a little while but likely what would happen is that over the course of a year or two prices would simply not rise until the profit margin fell back to the 10% range. In fact if the merchants had larger profit margins for a couple years the profit margin might fall below 10% for a while as they lived on sustained earnings. This would mean that after a few years, the prices would be about 3% lower than they would have been without the surcharge policy. At that time credit card users would be paying the 4% surcharge on 3% lower prices which would amount to about 1% more than they used to pay and cash users would be paying 3% less than they would have been paying.

Competition works by finding the place capital can get the best return. Industries have a standard profit margin that holds relatively steady throughout time. When the profit margin in a certain industry gets above its norm, new competition comes in as money moves from other areas that are less profitable and the competition drives prices down until the margin’s return to normal. The new competition often drives margins below normal until some are driven out of business and the balance is restored and then margins return to the typical level for that industry.

That is what happens in market economies and that is exactly what would happen here.

So yes, I absolutely believe in that fantasy. The tooth fairy explained it all to me very clearly.

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avatar 13 Luke Landes

Perhaps I worded it wrong. No business is going to suddenly decrease prices for cash customers just because they are allowed to charge an extra fee for credit card customers. Maybe in the long term cash customers will subsidize less of the cost to process credit cards. That would make sense. But there will be no immediate savings for those paying cash at stores that add the credit card surcharge.

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avatar 14 Anonymous

Yes I think that is mostly true. First of all the change is so dis-locative and potentially risky that it could make them lose business so until a large segment was doing this it would be unclear what the effects would be. Merchants would definitely be slow to adjust prices.

The merchants all complain about the high transaction fees but if they can charge for them or even if they were taken away within a few years at the latest, their margins will be back where they were. They will be no better off. The current benefit mostly accrues to the card issuing bank and that is why the card issuing bank gives all the rewards they do. They are bribing people to use their cards with the people’s own money. That alone is evidence of excessive fees in the system.

The fees are excessive but with only 3 or so large credit card networks, there is not enough competition to drive the prices to their natural rate. if the card networks were required to allow third party credit issuers to use their network for clearing without being required to use their transaction fee model then we would find out what the market rate of these fees really should be.

That’s exactly how we found out what the market rate was for long distance in the late 90s. When the 3 big long distance carriers were required to lease their lines to third party providers long distance dropped from 20 cents a minute to 3 when all the 10-10 numbers popped up. Markets set the right rate if they are open to real competition. Monopolies do happen naturally all the time in market economies. When they do their rates are no more valid than if they were set by a two-bit dictator because in effect, that is who is setting the rates.

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avatar 15 Anonymous

Apex really hit the nail on the head here.

When reading this article, I wondered if Flexo deliberately chose provocative wording. Reasons he might have done so (in my musings) were to stimulate discussion; or to act as a mechanism to overcome a natural bias towards the opposite point of view (the one that I would have written he article in, thus making it the “obviously correct” point of view.) Basically, I wondered if Flexo was just messing with us or really believed some of this stuff.

There are also the “obvious” (as in, my own, personal, knee-jerk reaction), twin truths that a) these fees should absolutely be allowed, by law if neccesary, and b) few merchants will dare to charge them.

Even if competition doesn’t make such fees untenable, the truth is that spending money on credit is easier than spending cash. (That doesn’t prove, IMHO, that using credit cards makes us spend more, just that it makes it easier to spend at a given store.) So, it seems to me that any merchant with the profit margins to do so, will accept credit cards because that will give them the most business.

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avatar 16 Anonymous

There are also costs beyond processing credit cards. Merchants have to wait a day or 2 to actually get the money. Cash does not have a waiting period.

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avatar 17 Anonymous

I have not yet absorbed all the comments here, so my point may be redundant. But wouldn’t it make more sense for merchants to offer a discount for cash, rather than a surcharge for credit? That way there’d be no occasion for a customer to get annoyed by any “new” fees.

If a vendor is being charged, say, 3%, for card service, and reckons the cost of handling cash at, say, 1%, then offering a 2% discount would make no change to the profit margin, but might entice more customers to patronize that vendor, since an effective price reduction would be available to those who care more for savings than convenience.

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avatar 18 Anonymous

The Federal Reserve also recently tried to double the transaction fee cap on Debit Card transactions from 12 cents to 24 cents. Retailers sued and a Federal Judge ruled against the Fed, the current cap of 12 cents remains in effect for now.

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