It seems that you're harboring a little bit of hostility, so I hope that we're able to keep this conversation civil because I'd love to give you guys an insider's perspective while at the same time listening to how outsiders perceive things. Let's try to be friends! The last thing I want to do after a day of work is argue about work
Jack wrote:Surely you must be saying that you do not believe in free markets.
I most certainly do believe in free markets over the long term
. What I described is what will happen in the short term, as another poster picked up on. In the long term, what we've seen is that the surcharges go away because Merchants find that their customers become unwilling to pay them and shop at the Merchant's competitors. The problem with driving prices down is that surcharging is only on Credit, and not Debit. For most Merchants, it is very cumbersome to keep track of two different prices. And if you're doing product-level surcharging (think Visa Classic vs. Visa Signature or American Express Gold vs. Platinum), the problem gets even worse! Also to be clear, I wouldn't be against surcharging on all plastic (Debit included), but I still think surcharging wouldn't take off. From a psychological perspective, people don't respond well to penalties, but they do respond well to rewards. Why not offer a cash/Debit discount instead? It's the same thing, except with less potential for short-term Merchant abuse of the customer because of the greater transparency. Surcharging serves the same purpose, except, makes our brands look bad while doing it.
Jack wrote:If you believe that merchants as a whole can arbitrarily add a 4% surcharge to their products, your must also believe that merchants can arbitrarily add 4% to their prices even without surcharges. Do you think customers are too stupid for free markets to set prices?
I believe that if a Merchant added a visible
4% surcharge to their products when paying with Credit, customers will do anything they can to avoid paying with Credit, including shopping elsewhere. If a Merchant adds a visible
4% surcharge across the board, customers will also do everything they can to shop elsewhere. The price of the item wouldn't decrease because Merchants can't surcharge Debit, so if anything, the surcharge would just go away. I guess that's the setting prices you're referring to? I don't think the customer is too stupid at all - in fact, in our studies, they're pretty good about going to the Merchants that don't surcharge instead. Again, why not do a discount for cash/Debit? Same effect, except without damaging our brand by making the cardholder feel like they are being penalized.
shipping fees for Merchants that already accept cards
have free shipping will let them run an extra fee as a profit center and try to blame it on V/MA
FedEx. If you think that the price of goods will go down because surcharging
shipping fees are now allowed, you are unfortunately delusional."
Yet we have functioning markets in which some retailers include shipping in the price and other retailers add shipping fees on to the price for the same product. And customers are perfectly capable of figuring out which is the better deal. And they also have the choice of avoiding shipping charges entirely by picking up the item at the store. You want to prevent merchants from competing and prevent customers from having choices.
I see your point, and I've considered it before. To be clear, I'm not against surcharging except in specific exploitative short-term cases that will, like you said, eventually be competed away (like the airline example). I just don't think it's a good business strategy if you're a Merchant because of the associated customer-facing optics. People are used to paying or not paying for shipping. They aren't used to paying or not paying for using a Credit card. Although you and I may be smart enough to figure out when it makes sense to pay the surcharge, not everyone is. Like it or not, Credit cards are much more complicated than shipping, and it's easier for a Merchant to take advantage of someone that doesn't understand them than it is for a Merchant to find someone that doesn't understand shipping
. The reason that V/MA fought so hard for reasonable surcharge caps to be put in place is because "in the wild" Merchants had long been turning illegal surcharging into a profit center. For example, even if they were paying a 2.75% MDR, they were charging upwards of 10% for use of a Credit card. That's damaging to a payment network's brand, and I do believe that the networks have a right to limit that.
Jack wrote:Visa and MasterCard don't charge you fees! They are paid by the banks!
That's exactly what front-load mutual fund salesmen say. I don't charge you commissions! I'm paid by the mutual fund! It's the same dishonesty. Visa and MasterCard charge a fee on each transaction that is added to all the other fees merchants must pay. It eventually comes out of the customer's pocket.
Average V/MA pricing to Issuing and Acquiring banks combined
is about 0.20% (Debit) to 0.25% (Credit). I think it's safe to say that's fairly small compared to the average Interchange rates. The effect of passing it to consumers is minimal in comparison to the rest of the Merchant Discount Rate - Interchange and Acquiring bank markups. I don't think the comparison to loaded mutual funds is fair, because front-load mutual funds are pure commission with no benefit to the fund buyer (no expected outperformance compared to indexes). By choosing to use a card, cardholders have a more convenient experience, rewards programs, insurance, etc. By choosing to accept a card, Merchants are shown to encourage larger ticket sizes, faster check out times, and low overhead eCommerce, while decreasing internal theft and the cost of handling money.
Jack wrote:Visa and MasterCard are the ones who set the interchange fees. Visa and MasterCard are the ones who set the anti-competitive rules that prevent transparency and hide their fees. Visa and MasterCard are the ones who lobby state legislatures for laws to prevent the visibility of credit card charges. Visa and MasterCard are the one who have spent millions to prevent customer choices.
V/MA do "set" Interchange. However, it's completely dictated by the banks, and is a balancing act. This is a very good example of a free market (except in the case of Durbin regulated Debit that we won't go into). Interchange has to be low enough so that Merchant acceptance (Acquiring) is encouraged, but high enough so that Issuers have an incentive to Issue cards. It is completely set by what Acquiring banks are willing to pay and what the payment demands are from Issuing banks. What exactly are the anti-competitive rules that you're referring to? What fees are hidden? If a Merchant gets Interchange Plus pricing, everything is visible to them. I'm genuinely curious about this, so please don't take this as me being argumentative! I'm just not sure what to respond to.
As a side note, personally, I HATE lobbying, and I wish AXP/V/MA didn't do it. It seems like mostly a preventative measure, because I believe that all three have incredibly useful, commerce-enabling businesses without which the state of the economy today would be very different. I've always been of the opinion that if people want to surcharge, we should let them. They'll figure out on their own that it's not a good idea, or the market will adjust eventually and it won't matter.