Credit card swipe fees start Sunday 1/27

[whiskers]

Silly me, thinking that the fees have already been incorporated into the product prices. I recently spent several hundred dollars at Ikea without planning on doing so, we just happened to stumble onto things we needed for the house that we've been looking for. I wouldn't have made that purchase if I had to pay with cash or had to pay an extra 4% credit card fee on top of sales tax.

I absolutely refuse to use my debit card anywhere. It's not secure - 2 weeks ago someone cloned one of my credit cards and attempted to use it in person in another state. The credit card company alerted me to it, but had it been my debit card, I'd have to deal with the bank to get my money returned. Face it, digital currency is convenient and is a way to go. We need a better solution for debit cards - virtual cards, spending limits that can only be adjusted if one has access to the account online, etc. I don't want to feel a greater risk of getting mugged because there's a chance I'm carrying lots of cash on me.

[JMacDonald]

Sometimes surcharging sticks. Consider airlines. We now have surcharges for food, luggage, blankets, headsets, seating preference, boarding preference. Even though there are some airlines that don't charge all these, once the majority do, they tend to stick around and consumers get used to them. They become the new normal.

I agree that some surcharges do seem to stick. However, you do see people who try to avoid the surcharges. More people probably carry on their own luggage now than before the luggage fees. However, these fees do not seem to bother a great number of people. As for myself I do everything possible to avoid the fees. But that is just the Bogleheadness in me.

[marbat]

Silly me, thinking that the fees have already been incorporated into the product prices. I recently spent several hundred dollars at Ikea without planning on doing so, we just happened to stumble onto things we needed for the house that we've been looking for. I wouldn't have made that purchase if I had to pay with cash or had to pay an extra 4% credit card fee on top of sales tax.

I absolutely refuse to use my debit card anywhere. It's not secure - 2 weeks ago someone cloned one of my credit cards and attempted to use it in person in another state. The credit card company alerted me to it, but had it been my debit card, I'd have to deal with the bank to get my money returned. Face it, digital currency is convenient and is a way to go. We need a better solution for debit cards - virtual cards, spending limits that can only be adjusted if one has access to the account online, etc. I don't want to feel a greater risk of getting mugged because there's a chance I'm carrying lots of cash on me.

Well, the fees have been incorporated. It's just that if plastic didn't exist, the products would likely be competed down to ~1-1.5%% cheaper (average between Credit and Debit MDRs). [political/policy comments deleted by admin alex]

I'm with you on Debit - I hate it as a product. The solution to Debit security issues is EMV (Chip and PIN). What we (and consumers) have seen is that instead of a decreased pricing trickling down to consumers, the Acquiring bank simply pockets more of the difference between the MDR and their actual costs. Unfortunately, most Merchants aren't savvy enough to ask for Interchange Plus pricing from their Acquirers, which is what I recommend to all business owners. But although Merchants are slowly adopting Interchange Plus, there are still very few that offer a Debit discount, which is what they should be doing if they wanted to pass the savings on!

[rkhusky]

Sometimes surcharging sticks. Consider airlines. We now have surcharges for food, luggage, blankets, headsets, seating preference, boarding preference. Even though there are some airlines that don't charge all these, once the majority do, they tend to stick around and consumers get used to them. They become the new normal.

I agree that some surcharges do seem to stick. However, you do see people who try to avoid the surcharges. More people probably carry on their own luggage now than before the luggage fees. However, these fees do not seem to bother a great number of people. As for myself I do everything possible to avoid the fees. But that is just the Bogleheadness in me.

I wonder if the airlines have seen an increase in workman's comp claims for their baggage handlers. I know that when we have to check bags, we make sure they are between 45-50 lbs.

[epilnk]

Silly me, thinking that the fees have already been incorporated into the product prices. I recently spent several hundred dollars at Ikea without planning on doing so, we just happened to stumble onto things we needed for the house that we've been looking for. I wouldn't have made that purchase if I had to pay with cash or had to pay an extra 4% credit card fee on top of sales tax.

You did pay the extra 2-4% credit card fee. So did the debit card buyer in line in front of you, though he also received a coupon to use toward his next purchase. Ikea is one of the few chains I know of that gives back a portion of that fee in incentives for non credit card purchases.

The only thing this regulation does is give retailers the option of increasing transparency, to give consumers the choice of whether to pay the visa fee or not. It does not require that they do so, they can continue to embed the fee in prices if they prefer. My guess is that most will continue to keep it embedded. But the regulatory change does not itself change the cost of anything, and all costs are ultimately passed along to the consumer. The price of that svartlund included a share of overhead, from the electric bill to the shipping dock manager's salary, with a profit margin on top of that. Sales tax is added to the subtotal. Now merchants have the option of adding the cc fee with the sales tax, instead of passing it along in the subtotal.

[jeffyscott]

The only thing this regulation does is give retailers the option of increasing transparency, to give consumers the choice of whether to pay the visa fee or not.

I don't think it's a regulation, it's a settlement, but anyway, did they not always have that option but just in reverse. My understanding is they could always offer discounts for cash (debit, check).

I found this example:
In the past, the price tags on store owner Mike Tilley’s merchandise showed cash prices only and included a line stating that the store charged a 3 percent fee for credit cards. Because of the credit card surcharge, Tilley received a cease-and-desist letter from Visa explaining that while he could offer one price for cash, debit and checks and another for credit cards, he couldn’t penalize customers for using credit,...

Read more here: http://www.newsobserver.com/2013/01/21/ ... rylink=cpy

(I'm curious how setting a cash price that that is 3% lower that that for credit is not "penalizing" but adding a 3% fee to credit card purchases is. )

[marbat]

The only thing this regulation does is give retailers the option of increasing transparency, to give consumers the choice of whether to pay the visa fee or not.

I don't think it's a regulation, it's a settlement, but anyway, did they not always have that option but just in reverse. My understanding is they could always offer discounts for cash (debit, check).

I found this example:
In the past, the price tags on store owner Mike Tilley’s merchandise showed cash prices only and included a line stating that the store charged a 3 percent fee for credit cards. Because of the credit card surcharge, Tilley received a cease-and-desist letter from Visa explaining that while he could offer one price for cash, debit and checks and another for credit cards, he couldn’t penalize customers for using credit,...

Read more here: http://www.newsobserver.com/2013/01/21/ ... rylink=cpy

(I'm curious how setting a cash price that that is 3% lower that that for credit is not "penalizing" but adding a 3% fee to credit card purchases is. )

The idea is that with a discount, it's harder for a Merchant to game the system in the short term to take advantage of consumers. If it is a discount, the Merchant is by definition itemizing the cost of Credit processing. With a surcharge, the Merchant likely hasn't adjusted the base price of the item down, and so the 3% (in your example) would effectively just be a price increase cleverly blamed on AXP/V/MA instead of on the Merchant.

[Jack]

The idea is that with a discount, it's harder for a Merchant to game the system in the short term to take advantage of consumers. If it is a discount, the Merchant is by definition itemizing the cost of Credit processing. With a surcharge, the Merchant likely hasn't adjusted the base price of the item down, and so the 3% (in your example) would effectively just be a price increase cleverly blamed on AXP/V/MA instead of on the Merchant.

Sorry, but this it total gobbledegook that makes no logical sense whatsoever. It is just company propaganda.

The credit card companies' motivation was not to protect customers. Their motivation was to conceal their costs from the customers. Pure and simple. They were doing it to maximize their own profits by misleading customers. They spent millions of dollars on lawsuits and lobbyists to protect this rent seeking behavior. The idea that they were doing it for customers is ludicrous.

[marbat]

The idea is that with a discount, it's harder for a Merchant to game the system in the short term to take advantage of consumers. If it is a discount, the Merchant is by definition itemizing the cost of Credit processing. With a surcharge, the Merchant likely hasn't adjusted the base price of the item down, and so the 3% (in your example) would effectively just be a price increase cleverly blamed on AXP/V/MA instead of on the Merchant.

Sorry, but this it total gobbledegook that makes no logical sense whatsoever. It is just company propaganda.

The credit card companies' motivation was not to protect customers. Their motivation was to conceal their costs from the customers. Pure and simple. They were doing it to maximize their own profits by misleading customers. They spent millions of dollars on lawsuits and lobbyists to protect this rent seeking behavior. The idea that they were doing it for customers is ludicrous.

What I wrote makes perfect sense to anyone that is not willfully trying to ignore the fact that merchants will not be decreasing their prices as soon as they start surcharging. Let's do an example:

$100 item, 3% cost of acceptance. With a discount, if someone pays cash, they pay $97. If someone pays card, they pay $100, and the merchant still gets their $97. With a surcharge, if someone pays cash, they pay $100 and the merchant gets $100. If someone pays with card, they will be paying $103 because there is literally 0 chance that the merchants decrease the base price to $97 as soon as they start surcharging. That extra $3 is a price hike disguised as something caused by the payment networks.

Better transparency in pricing (which I am all for) is not the same thing as surcharging. Why don't you tell me why a discount for cash/Debit isn't good enough?

The only reason I can think of is that surcharging allows you to blame a price increase (not just a price recovery for acceptance costs) on the payment networks.

It's not about concealing pricing, it's about making sure surcharges are correctly attributed and not used as an excuse to increase prices at the expense of the payment networks' brand images.

edit: Obviously, their primary objective was to protect their brand image. That happens to coincide with being better for consumers in this case. It doesn't always.

For the record, I don't think surcharging should be illegal. It's a shitty business practice when implemented incorrectly, and the market can easily decide that.

[hudson]

I permit my grandchildren to have a scoop of ice cream for dessert when the come over to my house. If I exempt the four year old, does that mean she gets no scoops or that she gets two? .

In case you haven't gotten an answer, the correct answer is two.

[jeffyscott]

Why don't you tell me why a discount for cash/Debit isn't good enough?

Yes, that is the point. If merchants were always free to offer, say, a 3% discount for payment by cash, check, or debit, then that is effectively no different from using this settlement to cut prices by 3% and then add a 3% surcharge for credit.

In the article it said that to comply with MC/Visa the merchant had two prices on each product. Did it have to be done that way or would MC/Visa allow him to have one price on the product but simply indicate that there is a 3% discount for cash, check, or debit?

[epilnk]

The idea is that with a discount, it's harder for a Merchant to game the system in the short term to take advantage of consumers. If it is a discount, the Merchant is by definition itemizing the cost of Credit processing. With a surcharge, the Merchant likely hasn't adjusted the base price of the item down, and so the 3% (in your example) would effectively just be a price increase cleverly blamed on AXP/V/MA instead of on the Merchant.

I expect the merchant to charge as much as he expects the customer to be willing to pay, regardless of how he justifies and rationalizes the price. That's how free market economics works; "blaming" is beside the point.

[Jack]

Obviously, their primary objective was to protect their brand image.

Finally, the truth comes out. The credit card companies are worried that at least some percentage of people would be shocked and perhaps outraged to discover that they have been paying a substantial sales tax to the credit card companies for every purchase they make. They might even seek alternatives to using credit cards. This excuse of protecting customers is just self-serving obfuscation for abusive corporate practices based on monopoly power.

[epilnk]

$100 item, 3% cost of acceptance. With a discount, if someone pays cash, they pay $97. If someone pays card, they pay $100, and the merchant still gets their $97. With a surcharge, if someone pays cash, they pay $100 and the merchant gets $100. If someone pays with card, they will be paying $103 because there is literally 0 chance that the merchants decrease the base price to $97 as soon as they start surcharging. That extra $3 is a price hike disguised as something caused by the payment networks.

To me the important point is who gets to keep that extra $3. Ideally I'd like it to be me. I'd also be happy splitting it with the merchant - we both benefit. But if I don't get to keep any of it - and in the absence of breakout pricing I'm not offered that choice - then it depends on the merchant. My vet is trying to keep costs down, so I'd rather have her keep the difference and send the $3 into the local economy - Visa and Mastercard don't need to take a cut of our transaction. But I don't feel the same about Target or Amazon, so I use the credit card. At Amazon I'll always use the card, but at Target I'd like the option of avoiding the fee.

[jeffyscott]

I expect the merchant to charge as much as he expects the customer to be willing to pay, regardless of how he justifies and rationalizes the price. That's how free market economics works; "blaming" is beside the point.

Why is it that almost no merchants include sales tax in their prices, instead they add it on at the end? This is certainly not required to be done this way and the tax is a sales not a purchase tax, so it is a tax on the seller, yet nearly none of them want to include it in the price of the products.

[marbat]

Yes, that is the point. If merchants were always free to offer, say, a 3% discount for payment by cash, check, or debit, then that is effectively no different from using this settlement to cut prices by 3% and then add a 3% surcharge for credit.

In the article it said that to comply with MC/Visa the merchant had two prices on each product. Did it have to be done that way or would MC/Visa allow him to have one price on the product but simply indicate that there is a 3% discount for cash, check, or debit?

I probably did a horrible job explaining this, but what I'm trying to say is that it IS different. On the surface it appears to be the same, but from a profit and loss perspective, it's not. See below for the 4 major scenarios (assumptions for this simplification include no cost for Debit and 3% = $3 even when it doesn't exactly). Scenario 4 explains why you'd need 2 prices.

1. No surcharge or discount:
Item price: $100
Credit cost of acceptance: 3%
Consumer pays with cash/Debit/check: $100
Consumer pays with Credit: $100
Merchant receives if paid with cash/Debit/check: $100
Merchant receives if paid with Credit: $97

2. Discount:
Item price: $100
Credit cost of acceptance: 3%
Consumer pays with cash/Debit/check: $97
Consumer pays with Credit: $100
Merchant receives if paid with cash/Debit/check: $97
Merchant receives if paid with Credit: $97

3. Incorrectly implemented surcharge (likely to happen):
Item price: $100
Credit cost of acceptance: 3%
Consumer pays with cash/Debit/check: $100
Consumer pays with Credit: $103 <--- This higher price to the consumer isn't covering cost of acceptance anymore. It's covering an extra $3 in merchant price hike.
Merchant receives if paid with cash/Debit/check: $100
Merchant receives if paid with Credit: $100 <--- This is where you see the markup, compared to other cases where it is $97.

4. Correctly implemented surcharge (unlikely to happen):
Item Credit price: $97
Item cash/Debit/check price: $100
Credit cost of acceptance: 3%
Consumer pays with cash/Debit/check: $100
Consumer pays with Credit: $100
Merchant receives if paid with cash/Debit/check: $100
Merchant receives if paid with Credit: $97

The payment networks want scenario 1, 2, or 4 (in order of preference). Less than honest merchants are salivating at the thought of scenario 3. The honest merchants want scenario 4. If it weren't for the inconvenience of 2 prices, the market would eventually push most of scenario 3 into scenario 4. As it stands, it is more likely that merchants stop surcharging and go back to scenario 1.

I expect the merchant to charge as much as he expects the customer to be willing to pay, regardless of how he justifies and rationalizes the price. That's how free market economics works; "blaming" is beside the point.

You're right, but you have to consider that for the payment networks, their brand strength is extremely important to them and so "blaming" does matter (as they've shown by dropping millions of dollars in court). We'll see how it plays out. If surcharging manages to stick around long enough for the market to dictate scenario 4 (from above), that seems fair.

Finally, the truth comes out. The credit card companies are worried that at least some percentage of people would be shocked and perhaps outraged to discover that they have been paying a substantial sales tax to the credit card companies for every purchase they make. They might even seek alternatives to using credit cards. This excuse of protecting customers is just self-serving obfuscation for abusive corporate practices based on monopoly power.

This "truth" is obvious. Nobody was hiding that. Like I said, in this case it happens to align with what's better for consumers. AXP/V/MA are all publicly traded companies... Either they do what's best for their brand or they get sued by their shareholders. I realize this may be difficult for you to follow because payments is not a simple industry, but there's no need to make belligerent posts without fully understanding what is going on. Relax with your conspiracy theories and have a beer . I'll still be around when you cool down and want to have a reasonable, non-accusatory conversation. I'm half convinced that you're trolling since you're practically foaming at the mouth on this topic while the rest of the people are trying to have a regular debate.

[Jack]

I'm a conspiracy theorist?

The credit card companies just paid out the largest settlement in the history of the world in an antitrust case. I can only assume that they didn't pay out more than $7.5 billion for nothing. Oh, that's right, you're trying to tell me that they are doing it to protect consumers. They should be given a medal for their civic duty. It's all just a misunderstanding.

[marbat]

I'm a conspiracy theorist?

The credit card companies just paid out the largest settlement in the history of the world in an antitrust case. I can only assume that they didn't pay out more than $7.5 billion for nothing. Oh, that's right, you're trying to tell me that they are doing it to protect consumers. They should be given a medal for their civic duty. It's all just a misunderstanding.

V/MA and the banks got sued out the wazoo because of high pricing. That's why part of the settlement was a temporary Interchange reduction (unlikely that merchants will see any of this, the Acquirers probably won't pass it on). It's every business' goal to maximize profits, but in the payments industry it's hard to do so without it appearing to be collusion (every network's costs are similar). Shitty situation, and there probably was evidence of unintentional collusion, but it's highly unlikely that there was intentional collusion, since that doesn't really happen for companies this big and public. The nature of the business does unfortunately lend itself to unintentional collusion. Who knows, really? This isn't my area and I'm not an antitrust lawyer so I won't pretend to be an expert here. Are you an antitrust lawyer?

The initial lawsuit had nothing to do with consumers or surcharging. Surcharging was granted as a concession because the government didn't want to regulate pricing, since they saw how that worked out with Durbin regulated pricing for Debit (badly - it just created more profits for Acquiring banks unless the Merchants registered for Interchange Plus pricing; perhaps eventually this will be competed away, but it seems more likely that Debit pricing regulation will be repealed). Also, regulating prices =/= free market, which it seems you are in favor of as well?

V/MA have a long history of having overly restrictive regulations, which I don't agree with. As a believer in the free market, I agree that it was wrong to restrict surcharging to begin with. Let the market decide.

Read my post. The primary goal has ALWAYS been to protect their brands from being used inappropriately. It just so happened that by not allowing surcharging, consumers coincidentally stood to benefit as well. No medal for civic duty necessary, and it doesn't always work out that. If scenario 3 pans out, as it has in Australia and other countries that permit surcharging, and it isn't able to get competed away, I think we can agree that's a negative for consumers.

[Jack]

It just so happened that by not allowing surcharging, consumers coincidentally stood to benefit as well.

You keep saying this but that doesn't make it true. That is company propaganda. There is no evidence that free market restrictions in this case benefit consumers. Extraordinary claims require extraordinary proof. With the case of free shipping or shipping surcharges for online retailers, we have direct evidence that free competition has benefited consumers on pricing, contrary to your claim.

As Upton Sinclair pointed out "It is difficult to get a man to understand something, when his salary depends on his not understanding it."

[marbat]

It just so happened that by not allowing surcharging, consumers coincidentally stood to benefit as well.

You keep saying this but that doesn't make it true. That is company propaganda. There is no evidence that free market restrictions in this case benefit consumers. Extraordinary claims require extraordinary proof. With the case of free shipping or shipping surcharges for online retailers, we have direct evidence that free competition has benefited consumers on pricing, contrary to your claim.

As Upton Sinclair pointed out "It is difficult to get a man to understand something, when his salary depends on his not understanding it."

1. I already showed you the 4 possible future scenarios... Based off of work that I've done, I believe that the likely path is scenario 3 then back to scenario 1. Do you think that scenario 4 is more likely? What more do you want?
2. I've agreed with you the entire time that it should be legal. I'm interested to see how it works out.
3. My salary doesn't depend on surcharging in the slightest. There are plenty of things I dislike about the payment networks, I'm not some fanboy, and I don't have any company loyalty (left over from my years as a strategy consultant ). I'm just debating from an academic perspective, since these kind of things interest me as a case study.

[Alex Frakt]

temporarily locked for moderator review

[Mel Lindauer]

This thread has run its course and has gotten off topic and argumentative. It's now permanently locked.