Merchant costs on 2% cash back cards

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Merchant costs on 2% cash back cards

Postby lhl12 » Sun Jun 30, 2013 3:38 pm

I carry a Fidelity Visa card that I use for all credit card purchases. The card pays 2.0% cash back on all charges (except for the first $15,000 annually, on which it pays only 1.5% cash back - equivalent to a $75 annual fee.)

I am curious what the economics of these cards are for the merchants and for the issuers. I was under the impression (perhaps incorrectly) that merchants paid between 1.0% and 1.5% on all Visa charges. That must not be correct, since Fidelity would then be losing money on every Visa charge I make.

The fact that there is at least one Visa card that pays 2.0% on all purchases implies that the total merchant cost must be higher than 2.0%, since Visa itself must make something too.

Can anyone clarify how Fidelity can pay 2.0% cash back but still have that be economical for Fidelity, the merchants, and Visa itself?
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Re: Merchant costs on 2% cash back cards

Postby Cash » Sun Jun 30, 2013 4:00 pm

lhl12 wrote:That must not be correct, since Fidelity would then be losing money on every Visa charge I make.


I think that actually is correct. Fidelity just hopes to make up for it elsewhere, such as through commissions and interest. Note that Schwab discontinued its nearly identical card a while ago presumably because they decided the economics no longer made sense for them.
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Re: Merchant costs on 2% cash back cards

Postby arkerr123 » Sun Jun 30, 2013 4:04 pm

Visa, AMEX, Mastercard... all charge approximately 3% to the store you bought something from.

The stores accept the additional fee because of the convenience it provides customers. Stores that dont allow cards typically have fewer customers.

.. ever heard of a cash discount, Lots of places will give you a few percent off if you pay cash.
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Re: Merchant costs on 2% cash back cards

Postby lhl12 » Sun Jun 30, 2013 4:14 pm

arkerr123 wrote:Visa, AMEX, Mastercard... all charge approximately 3% to the store you bought something from.

The stores accept the additional fee because of the convenience it provides customers. Stores that dont allow cards typically have fewer customers.

.. ever heard of a cash discount, Lots of places will give you a few percent off if you pay cash.


If 3% is correct, then how much goes to Fidelity and how much does Visa keep?
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Re: Merchant costs on 2% cash back cards

Postby frugaltype » Sun Jun 30, 2013 4:17 pm

Cash wrote:
lhl12 wrote:That must not be correct, since Fidelity would then be losing money on every Visa charge I make.


I think that actually is correct. Fidelity just hopes to make up for it elsewhere, such as through commissions and interest. Note that Schwab discontinued its nearly identical card a while ago presumably because they decided the economics no longer made sense for them.


Probably all the Schwab customers paid in full each month.
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Re: Merchant costs on 2% cash back cards

Postby tj » Sun Jun 30, 2013 6:13 pm

lhl12 wrote:
arkerr123 wrote:Visa, AMEX, Mastercard... all charge approximately 3% to the store you bought something from.

The stores accept the additional fee because of the convenience it provides customers. Stores that dont allow cards typically have fewer customers.

.. ever heard of a cash discount, Lots of places will give you a few percent off if you pay cash.


If 3% is correct, then how much goes to Fidelity and how much does Visa keep?



no idea but FIA Card Services is taking a cut too.
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Re: Merchant costs on 2% cash back cards

Postby JamesSFO » Sun Jun 30, 2013 6:46 pm

Square is charging merchants a flat 2.75%/swipe so that gives a sense of the headroom. Other vendors like gas stations pay more.

Square takes some
Visa/mc takes some
FIA card services takes some

And finally fidelity gets some. So fidelity must think that what they get makes it worth it to them for now.
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Re: Merchant costs on 2% cash back cards

Postby stan1 » Sun Jun 30, 2013 6:58 pm

FIA is certainly hoping some people carry a balance at 13.99%.
Possible the deal with FIA also gives some interest payment $ back to Fidelity. Would be very hard to know how that works.

There are many people who only have retirement accounts at Fidelity. Quite possible for people to have money in retirement accounts and still carry a balance on a credit card.
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Re: Merchant costs on 2% cash back cards

Postby Jack » Sun Jun 30, 2013 8:13 pm

Credit card transaction fees consist of three parts:

1. The interchange fee is the only one paid to the card issuer, Fidelity in this case. The interchange fee depends on the type of card and the type of merchant. For example supermarkets pay 1.65% plus 10 cents. Hotel, car rental and airlines pay 2.3% plus 10 cents. The interchange fee is the largest because the card issuer assumes all risk for non-payment of debt and in most cases, card fraud and also must handle billing and rewards programs.

2. The second fee is the assessment, which is 0.11% and the only fee paid to Visa.

3. The third fee, the markup is variable and goes to the merchant's credit card processor. The markup depends on the type of merchant and their volume but is typically 0.20% plus 10 cents.

The interesting thing is that the interchange fee is higher for rewards cards than non-rewards cards, yet than difference is passed on to the merchant who has no control over what type a card a customer presents to them. So the merchant takes a bigger hit on a reward card than a non-reward card.
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Re: Merchant costs on 2% cash back cards

Postby tj » Sun Jun 30, 2013 9:28 pm

Jack wrote:Credit card transaction fees consist of three parts:

1. The interchange fee is the only one paid to the card issuer, Fidelity in this case. The interchange fee depends on the type of card and the type of merchant. For example supermarkets pay 1.65% plus 10 cents. Hotel, car rental and airlines pay 2.3% plus 10 cents. The interchange fee is the largest because the card issuer assumes all risk for non-payment of debt and in most cases, card fraud and also must handle billing and rewards programs.

2. The second fee is the assessment, which is 0.11% and the only fee paid to Visa.

3. The third fee, the markup is variable and goes to the merchant's credit card processor. The markup depends on the type of merchant and their volume but is typically 0.20% plus 10 cents.

The interesting thing is that the interchange fee is higher for rewards cards than non-rewards cards, yet than difference is passed on to the merchant who has no control over what type a card a customer presents to them. So the merchant takes a bigger hit on a reward card than a non-reward card.


FIA Card Services is the card issuer for the Fidelity cards.
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Re: Merchant costs on 2% cash back cards

Postby Jack » Sun Jun 30, 2013 9:49 pm

tj wrote:FIA Card Services is the card issuer for the Fidelity cards.

In that case, the interchange fee goes to FIA and I suppose they pay a small fee to Fidelity for marketing their card.

Incidentally, FIA is the new name for MBNA, which has a history as one of the slimier credit card issuers that paid multiple fines and penalties for cheating customers.
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Re: Merchant costs on 2% cash back cards

Postby mediahound » Sun Jun 30, 2013 10:08 pm

Not all Visa cards carry the same fee with the merchant. There are like 100 different fee structures under Visa.

Rewards cards charge the merchant a higher fee with most traditional card processors. In fact, I've even seen (rarely) some merchants state 'no rewards cards'.
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Re: Merchant costs on 2% cash back cards

Postby JamesSFO » Sun Jun 30, 2013 10:57 pm

Jack wrote:The interesting thing is that the interchange fee is higher for rewards cards than non-rewards cards, yet than difference is passed on to the merchant who has no control over what type a card a customer presents to them. So the merchant takes a bigger hit on a reward card than a non-reward card.


Without having data on the types of purchases by reward card vs. non-reward card users it is hard to say whether there is a bigger hit vs. not. For example, do the type of people who get rewards cards make bigger average purchases? For example, if most reward card purchasers spend more because behaviorally they are lulled into bigger purchases then the merchant should probably be indifferent. Similarly, given that there are processors like Square that simply pass along a single flat fee like 2.75%, the merchants can potentially be indifferent to the type of card used.
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Re: Merchant costs on 2% cash back cards

Postby RenoJay » Sun Jun 30, 2013 11:15 pm

I look at the P&L's of lots of Internet companies, and they typically pay 3%+ in merchant fees. I'm not sure what traditional brick and mortar business pay, but my guess is probably 2%+ since they swipe a physical card. (i.e. they're less risky than websites.) My guess is that this is either break-even or maybe even a slight loss leader for Fidelity in order to rope in clients and I presume they've run the overall value equation for a customer and realized it's worth the price.
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Re: Merchant costs on 2% cash back cards

Postby madbrain » Mon Jul 01, 2013 7:51 pm

Jack wrote:Incidentally, FIA is the new name for MBNA, which has a history as one of the slimier credit card issuers that paid multiple fines and penalties for cheating customers.


MBNA was bought by Bank of America. This acquisition must have been a very good corporate fit, as BofA is also not known for being particularly good to its customers.
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Re: Merchant costs on 2% cash back cards

Postby frugaltype » Tue Jul 02, 2013 5:54 am

madbrain wrote:
Jack wrote:Incidentally, FIA is the new name for MBNA, which has a history as one of the slimier credit card issuers that paid multiple fines and penalties for cheating customers.


MBNA was bought by Bank of America. This acquisition must have been a very good corporate fit, as BofA is also not known for being particularly good to its customers.


lol! My thought exactly.
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Re: Merchant costs on 2% cash back cards

Postby lhl12 » Tue Jul 02, 2013 11:16 am

Jack wrote:Credit card transaction fees consist of three parts:

1. The interchange fee is the only one paid to the card issuer, Fidelity in this case. The interchange fee depends on the type of card and the type of merchant. For example supermarkets pay 1.65% plus 10 cents. Hotel, car rental and airlines pay 2.3% plus 10 cents. The interchange fee is the largest because the card issuer assumes all risk for non-payment of debt and in most cases, card fraud and also must handle billing and rewards programs.

2. The second fee is the assessment, which is 0.11% and the only fee paid to Visa.

3. The third fee, the markup is variable and goes to the merchant's credit card processor. The markup depends on the type of merchant and their volume but is typically 0.20% plus 10 cents.

The interesting thing is that the interchange fee is higher for rewards cards than non-rewards cards, yet than difference is passed on to the merchant who has no control over what type a card a customer presents to them. So the merchant takes a bigger hit on a reward card than a non-reward card.


I have also heard that American Express charges more than MasterCard and Visa, which is why some merchants won't accept American Express. Is this correct, and if so, how much more does Amex charge than MC or Visa?
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Re: Merchant costs on 2% cash back cards

Postby momar » Tue Jul 02, 2013 11:22 am

Fidelity also recoups some money since the vast majority of people using this card have the money deposited into a Fidelity account. If I give you 2% cash back, but then you take that cash back and buy and hold a mutual fund that I charge you 1% per year for 30-50 years, who wins?

OK, so that is a huge stretch. But it's something!

Especially if this makes you choose Fidelity over another company, I suppose.
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Re: Merchant costs on 2% cash back cards

Postby Jack » Tue Jul 02, 2013 11:56 am

lhl12 wrote:I have also heard that American Express charges more than MasterCard and Visa, which is why some merchants won't accept American Express. Is this correct, and if so, how much more does Amex charge than MC or Visa?

Depending on the type of merchant, Visa and MC fees are typically 1.5% to 3.0%. Amex fees are typically 0.5% to 1.0% higher, for a total of 2.5% to 3.5%.

Worse, Amex takes as long as a week to credit a merchant's account for a sale while Visa and MC pay in one or two days.
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Re: Merchant costs on 2% cash back cards

Postby Quickfoot » Tue Jul 02, 2013 12:11 pm

Visa, AMEX, Mastercard... all charge approximately 3% to the store you bought something from.


3% is very high, my merchant accounts have all had a discount rate around 1.5%. Yes there are plenty of companies that charge 3% discount rates for merchant accounts but there is absolutely no reason to use them. Large merchants like Walmart, Target, etc are very likely to pay significantly less than 1.5% per transaction. I never accepted Amex because of the higher transaction costs.

To put it in perspective Costco's profit margin is about 1.94%.
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Re: Merchant costs on 2% cash back cards

Postby Jack » Tue Jul 02, 2013 12:48 pm

Its worth noting that those of you who proudly pull out your Platinum Whatever card and present it to the merchant thinking it signals that you are an elite customer, that to the contrary, the merchant hates you. Those cards cost them an extra half to one percent for the transaction. They feel like they are being gouged to support your perks.
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Re: Merchant costs on 2% cash back cards

Postby Mister Whale » Tue Jul 02, 2013 12:50 pm

I own several very busy restaurants. Low cost and high volume = lots and lots of charges every day. I'm quite aggressive about getting the best rates for my business. Last year we averaged between 2.5% and 3.0% in fees on all credit transactions (we don't do debit transactions, primarily because the use of a PIN pad would hold up the line) and paid an amount approaching $250,000 in fees. The number of chargebacks we had can be counted on one hand. Oh, and recently we've had several CC businesses approach us, interested in having our business; one of them flat-out said, "you have great rates, we can't match that!" and the other never got back to us. (We don't accept AmEx.)

We were a cash- (and check-) only business for decades, but public expectations and a move into a part of town with a younger demographic pushed us into accepting credit cards. (No, we were never robbed, and our bank would charge us about a twentieth of what we pay for the privilege of accepting plastic.)

I personally hope that more large businesses will charge for the privilege of accepting cards and it will eventually become accepted as a mainstream practice. As a merchant I'm happy to pay for services that I use, but this isn't that. I'd say that the majority of folks have no idea that their "bonus" miles, perks and trinkets are paid for by the merchants who accept their cards.

Jack, it's good to see you posting in this thread. I know where you stand. :beer
Last edited by Mister Whale on Tue Jul 02, 2013 12:53 pm, edited 1 time in total.
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Re: Merchant costs on 2% cash back cards

Postby mediahound » Tue Jul 02, 2013 12:52 pm

Jack wrote:Its worth noting that those of you who proudly pull out your Platinum Whatever card and present it to the merchant thinking it signals that you are an elite customer, that to the contrary, the merchant hates you. Those cards cost them an extra half to one percent for the transaction. They feel like they are being gouged to support your perks.


Not really. AMEX card holders on average spend more so many merchants like them.
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Re: Merchant costs on 2% cash back cards

Postby Mister Whale » Tue Jul 02, 2013 12:54 pm

mediahound wrote:Not really. AMEX card holders on average spend more so many merchants like them.


I would love to see a source to back up this claim, and for what types of purchases this may or may not be true.
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Re: Merchant costs on 2% cash back cards

Postby mediahound » Tue Jul 02, 2013 1:00 pm

Mister Whale wrote:
mediahound wrote:Not really. AMEX card holders on average spend more so many merchants like them.


I would love to see a source to back up this claim, and for what types of purchases this may or may not be true.


AMEX-
The credit card giant is a great company in a fine industry. Credit card companies have strong competitive advantages (it’s not easy for newcomers to set up a network). And Amex’s cardholders tend to be affluent, to spend a lot and to pay their bills on time.

from -
http://www.kiplinger.com/article/invest ... tml?page=2
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Re: Merchant costs on 2% cash back cards

Postby Mister Whale » Tue Jul 02, 2013 1:02 pm

mediahound wrote:
Mister Whale wrote:
mediahound wrote:Not really. AMEX card holders on average spend more so many merchants like them.


I would love to see a source to back up this claim, and for what types of purchases this may or may not be true.


AMEX-
The credit card giant is a great company in a fine industry. Credit card companies have strong competitive advantages (it’s not easy for newcomers to set up a network). And Amex’s cardholders tend to be affluent, to spend a lot and to pay their bills on time.

from -
http://www.kiplinger.com/article/invest ... tml?page=2


I'm sorry, and I say this respectfully, but you'll have to do better than posting a link to a fluff piece blurb on which companies to invest in.
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Re: Merchant costs on 2% cash back cards

Postby Quickfoot » Tue Jul 02, 2013 1:12 pm

I personally hope that more large businesses will charge for the privilege of accepting cards and it will eventually become accepted as a mainstream practice. As a merchant I'm happy to pay for services that I use, but this isn't that. I'd say that the majority of folks have no idea that their "bonus" miles, perks and trinkets are paid for by the merchants who accept their cards.


And your employee's salaries are paid by people who use credit cards / debit cards to pay their bills. The merchant pays the fee knowing they will receive much more business than if they did not accept cards (make up the 3% in volume). I and many others will not pay cash / check and will not frequent places that charge me to use a debit / credit card.
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Re: Merchant costs on 2% cash back cards

Postby mediahound » Tue Jul 02, 2013 1:13 pm

Mister Whale wrote:
mediahound wrote:
Mister Whale wrote:
mediahound wrote:Not really. AMEX card holders on average spend more so many merchants like them.


I would love to see a source to back up this claim, and for what types of purchases this may or may not be true.


AMEX-
The credit card giant is a great company in a fine industry. Credit card companies have strong competitive advantages (it’s not easy for newcomers to set up a network). And Amex’s cardholders tend to be affluent, to spend a lot and to pay their bills on time.

from -
http://www.kiplinger.com/article/invest ... tml?page=2


I'm sorry, and I say this respectfully, but you'll have to do better than posting a link to a fluff piece blurb on which companies to invest in.


If you think the Kipliner's article is a 'fluff' piece, you may take it up with them. If you read the article, they are not saying to buy AMEX, they are saying they believe it's a 'hold'.
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Re: Merchant costs on 2% cash back cards

Postby mediahound » Tue Jul 02, 2013 1:15 pm

For merchants who don't accept AMEX because of higher fees, I don't understand why they don't just get Square for those (or all) transactions and pay a flat 2.75%. Or get PayPal Here and pay a flat 2.7%

It makes zero sense to not accept AMEX, along with the other popular cards.
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Re: Merchant costs on 2% cash back cards

Postby Alex Frakt » Tue Jul 02, 2013 1:16 pm

I manage a small law firm. We run a small number of credit card transaction each month, but the average amount per transaction is close to 1k. We pay a flat 2.75% for all VISA/MC/Discover cards and 3% for AMEX. There were other plans available that had variable rates, from something like 1.75% for standard cards to 3.75% for double rewards and cash back cards.

I'm not sure why some companies don't accept AMEX. It doesn't seem like enough of a price differential to justify alienating some of your customers and we get paid the same day or at most one day later than the other cards. Maybe they have higher charges for small retailers and restaurants?
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Re: Merchant costs on 2% cash back cards

Postby lhl12 » Tue Jul 02, 2013 1:41 pm

Mister Whale wrote:I personally hope that more large businesses will charge for the privilege of accepting cards and it will eventually become accepted as a mainstream practice. As a merchant I'm happy to pay for services that I use, but this isn't that. I'd say that the majority of folks have no idea that their "bonus" miles, perks and trinkets are paid for by the merchants who accept their cards.


I don't know if it is still the case, but I know it used to be prohibited by Federal Law for merchants to charge a premium to clients who use a credit card. It was (and I believe still is) acceptable for merchants to give a discount for people who pay cash, however. Assuming this is all still true, then your solution is to advertise "2% discount for cash" or something similar. Following this approach, your published price would be the credit card price and the advertised discount would be the cash price.

From my perspective as a 2% cash rewards card user, I will continue to use my credit card every place I possibly can so as to capture the 2% discount myself. I wasn't aware that that cost was being passed on to you, and I'm sorry for that, but I don't intend to change my behavior now that I know it. I am simply optimizing my own personal utility within the set of rules presented to me. If Congress changes the rules, then I will reconfigure my own behavior, but until they do I think I am doing what I should be doing as a pure economic actor (and Boglehead) and you are unfortunately the victim of a Federal regulatory architecture that may appear flawed from your perspective but that presumably provides other benefits to the users of the system (merchants and consumers) in aggregate.

I'm sorry if this sounds harsh - I'm not intending to be. I think this is all an unfortunate byproduct of a huge, complex system that imposes unintended consequences on certain participants in order to achieve a greater aggregate good.
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Re: Merchant costs on 2% cash back cards

Postby mediahound » Tue Jul 02, 2013 1:43 pm

Alex Frakt wrote:I manage a small law firm. We run a small number of credit card transaction each month, but the average amount per transaction is close to 1k. We pay a flat 2.75% for all VISA/MC/Discover cards and 3% for AMEX. There were other plans available that had variable rates, from something like 1.75% for standard cards to 3.75% for double rewards and cash back cards.

I'm not sure why some companies don't accept AMEX. It doesn't seem like enough of a price differential to justify alienating some of your customers and we get paid the same day or at most one day later than the other cards. Maybe they have higher charges for small retailers and restaurants?


If any merchant refuses to accept AMEX, they should also refuse to accept any Visa/MC rewards cards, since those also have higher than normal fees, even higher than AMEX.
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Re: Merchant costs on 2% cash back cards

Postby lhl12 » Tue Jul 02, 2013 1:45 pm

mediahound wrote:
Alex Frakt wrote:I manage a small law firm. We run a small number of credit card transaction each month, but the average amount per transaction is close to 1k. We pay a flat 2.75% for all VISA/MC/Discover cards and 3% for AMEX. There were other plans available that had variable rates, from something like 1.75% for standard cards to 3.75% for double rewards and cash back cards.

I'm not sure why some companies don't accept AMEX. It doesn't seem like enough of a price differential to justify alienating some of your customers and we get paid the same day or at most one day later than the other cards. Maybe they have higher charges for small retailers and restaurants?


If any merchant refuses to accept AMEX, they should also refuse to accept any Visa/MC rewards cards, since those also have higher than normal fees, even higher than AMEX.


I think that Visa and MC impose a rule on their merchants that require them to accept all cards of that type. In other words, you can selectively deny an entire class of cards (e.g. Amex) but if you accept one Visa then you must accept all of them.
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Re: Merchant costs on 2% cash back cards

Postby Mister Whale » Tue Jul 02, 2013 2:01 pm

lhl12 wrote:From my perspective as a 2% cash rewards card user, I will continue to use my credit card every place I possibly can so as to capture the 2% discount myself. I wasn't aware that that cost was being passed on to you, and I'm sorry for that, but I don't intend to change my behavior now that I know it. I am simply optimizing my own personal utility within the set of rules presented to me. If Congress changes the rules, then I will reconfigure my own behavior, but until they do I think I am doing what I should be doing as a pure economic actor (and Boglehead) and you are unfortunately the victim of a Federal regulatory architecture that may appear flawed from your perspective but that presumably provides other benefits to the users of the system (merchants and consumers) in aggregate.

I'm sorry if this sounds harsh - I'm not intending to be. I think this is all an unfortunate byproduct of a huge, complex system that imposes unintended consequences on certain participants in order to achieve a greater aggregate good.


It doesn't sound harsh, and I don't blame the consumer beyond his or her choosing to remain uninformed. Thank you for your perspective, and for your willingness to be open-minded enough to listen.

The game is rigged because of how the laws favor the credit card companies, how they are permitted to construct their contracts, and how they are permitted to have a monopoly on the market. It's a giant shell game (complete with a massive advertising budget) designed to make more people use credit cards at the expense of merchants, and in the aggregate it's a giant drain on the economy with the primary beneficiary being the credit card companies as they rake in their take as middlemen. Most interestingly, you will see how many consumers (in this thread and elsewhere) will defend the architecture of these arrangements with everything they have in the name of frugality, convenience and choice; nobody wants to see anything change.

Apologies if I'm not allowed to talk about this stuff here. I just wanted to present my perspective as a business owner in accordance with the intentions of the original poster.
Last edited by Mister Whale on Tue Jul 02, 2013 2:08 pm, edited 3 times in total.
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Re: Merchant costs on 2% cash back cards

Postby Jack » Tue Jul 02, 2013 2:05 pm

Alex Frakt wrote:I manage a small law firm. We run a small number of credit card transaction each month, but the average amount per transaction is close to 1k. We pay a flat 2.75% for all VISA/MC/Discover cards and 3% for AMEX. There were other plans available that had variable rates, from something like 1.75% for standard cards to 3.75% for double rewards and cash back cards.

I'm not sure why some companies don't accept AMEX. It doesn't seem like enough of a price differential to justify alienating some of your customers and we get paid the same day or at most one day later than the other cards. Maybe they have higher charges for small retailers and restaurants?

Since you are a high margin business, you shouldn't care. But many retail and service businesses like restaurants are very low margin, one or two percent. So the premium for an Amex card literally can represent 50% of profit. This is similar to paying a 1% expense ratio for a Treasury bond fund. It makes a very big difference and can be the difference between profit and no profit. That is why it is perfectly rational for some businesses to refuse Amex cards.
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Re: Merchant costs on 2% cash back cards

Postby lhl12 » Tue Jul 02, 2013 2:11 pm

Mister Whale wrote:
lhl12 wrote:From my perspective as a 2% cash rewards card user, I will continue to use my credit card every place I possibly can so as to capture the 2% discount myself. I wasn't aware that that cost was being passed on to you, and I'm sorry for that, but I don't intend to change my behavior now that I know it. I am simply optimizing my own personal utility within the set of rules presented to me. If Congress changes the rules, then I will reconfigure my own behavior, but until they do I think I am doing what I should be doing as a pure economic actor (and Boglehead) and you are unfortunately the victim of a Federal regulatory architecture that may appear flawed from your perspective but that presumably provides other benefits to the users of the system (merchants and consumers) in aggregate.

I'm sorry if this sounds harsh - I'm not intending to be. I think this is all an unfortunate byproduct of a huge, complex system that imposes unintended consequences on certain participants in order to achieve a greater aggregate good.


It doesn't sound harsh, and I don't blame the consumer beyond his or her choosing to remain uninformed. Thank you for your perspective, and for your willingness to learn.

The game is rigged because of how the laws favor the credit card companies, how they are permitted to construct their contracts, and how they are permitted to have a monopoly on the market. It's a giant shell game (complete with a massive advertising budget) designed to make more people use credit cards at the expense of merchants, and in the aggregate it's a giant drain on the economy with the primary beneficiary being the credit card companies as they rake in their take as middlemen. Most interestingly, you will see how many consumers (in this thread and elsewhere) will defend the architecture of these arrangements with everything they have in the name of frugality, convenience and choice; nobody wants to see anything change.

Apologies if I'm not allowed to talk about this stuff here. I just wanted to present my perspective as a business owner in accordance with the intentions of the original poster.


I think it's great that you are presenting your perspective as a business owner! I am the OP, and I was genuinely trying to understand how the system works. So, I think you are very much on-topic.

Separately, I know there is no such thing as a free lunch, and I would I would be perfectly happy to see all rewards cards outlawed and instead be offered a 2% discount debit card that debited my account immediately (to pay the merchant) but gave me a discount because of immediate payment in cash. Even if my rebate were only 1%, I expect I'd capture the other 1% in reduced prices by the merchant.
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Re: Merchant costs on 2% cash back cards

Postby Jack » Tue Jul 02, 2013 2:16 pm

mediahound wrote:If any merchant refuses to accept AMEX, they should also refuse to accept any Visa/MC rewards cards, since those also have higher than normal fees, even higher than AMEX.

The Visa and Mastercard contracts do not allow you to pick and chose which types of cards you will accept, rewards or not. But even if they did, the merchant has no idea what the transaction will cost until they have rung it up and get their processor statement a month later. Other than the obvious platinum card which you know will be high, there is no indication to the merchant what the transaction fee will be because there are hundreds of cards out there with different merchant fees. It is sort of like going to the hospital and having no idea what the charges will be until you get the bill.
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Re: Merchant costs on 2% cash back cards

Postby prudent » Tue Jul 02, 2013 2:19 pm

Jack wrote:
Alex Frakt wrote:I manage a small law firm. We run a small number of credit card transaction each month, but the average amount per transaction is close to 1k. We pay a flat 2.75% for all VISA/MC/Discover cards and 3% for AMEX. There were other plans available that had variable rates, from something like 1.75% for standard cards to 3.75% for double rewards and cash back cards.

I'm not sure why some companies don't accept AMEX. It doesn't seem like enough of a price differential to justify alienating some of your customers and we get paid the same day or at most one day later than the other cards. Maybe they have higher charges for small retailers and restaurants?

Since you are a high margin business, you shouldn't care. But many retail and service businesses like restaurants are very low margin, one or two percent. So the premium for an Amex card literally can represent 50% of profit. This is similar to paying a 1% expense ratio for a Treasury bond fund. It makes a very big difference and can be the difference between profit and no profit. That is why it is perfectly rational for some businesses to refuse Amex cards.


I remember reading an article some months ago that explained how gas stations actually make less money when gas prices rise due to the credit card cost and the way they mark up gas. For reasons I don't think were explained, gas stations tend to apply a fixed cents-per-gallon markup on gas (not a percentage!) of 11 or 12 cents/gallon. If the station pays 3% for accepting credit cards, that essentially makes the sale of gas a break-even at $3.75/gallon.
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Re: Merchant costs on 2% cash back cards

Postby ogd » Tue Jul 02, 2013 2:23 pm

I think that initially the expenses for an electronic transaction were high enough to justify those merchant fees. Like every thing else IT, they've probably come down immensely since then. I view the rewards system as the first avenue for the rest of us to start getting those fees back, which are still being kept high by inertia and monopolistic power. Eventually they should come down for everybody, either through competition from other methods of payment or intervention from the government or the courts (like it happened with debit card fees). Meanwhile, I see no reason to not reduce the bank's average take through my activities :)

In regards to the fee amounts, a good data point is the fees required for credit card payments on expenses typically paid with cash, such as rent and taxes, where many of the merchant constraints don't apply. In my experience those are in a fairly tight range between 2 and 2.5%.
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Re: Merchant costs on 2% cash back cards

Postby bungalow10 » Tue Jul 02, 2013 3:00 pm

Mister Whale wrote:I own several very busy restaurants. Low cost and high volume = lots and lots of charges every day. I'm quite aggressive about getting the best rates for my business. Last year we averaged between 2.5% and 3.0% in fees on all credit transactions (we don't do debit transactions, primarily because the use of a PIN pad would hold up the line) and paid an amount approaching $250,000 in fees. The number of chargebacks we had can be counted on one hand. Oh, and recently we've had several CC businesses approach us, interested in having our business; one of them flat-out said, "you have great rates, we can't match that!" and the other never got back to us. (We don't accept AmEx.)

We were a cash- (and check-) only business for decades, but public expectations and a move into a part of town with a younger demographic pushed us into accepting credit cards. (No, we were never robbed, and our bank would charge us about a twentieth of what we pay for the privilege of accepting plastic.)

I personally hope that more large businesses will charge for the privilege of accepting cards and it will eventually become accepted as a mainstream practice. As a merchant I'm happy to pay for services that I use, but this isn't that. I'd say that the majority of folks have no idea that their "bonus" miles, perks and trinkets are paid for by the merchants who accept their cards.

Jack, it's good to see you posting in this thread. I know where you stand. :beer


You claim to do over $10,000,000 in business annually. Don't you think that if you handled that much cash or checks each year you would have $250,000 (or more!) in employee theft or bad checks?
An elephant for a dime is only a good deal if you need an elephant and have a dime.
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Re: Merchant costs on 2% cash back cards

Postby gnphiker » Tue Jul 02, 2013 7:39 pm

Thought I would weigh-in on this topic to give you all some hard figures of what exactly a merchant pays as a percent. Everyone is correct in the percentages quoted of what a merchant is charged. The fact is that depending on the type of business you have (in my case medical (veterinary)) and what type of credit card is swiped will depend upon the rate that you pay. The past several years I have used Costco as the credit card processor (which is actually processed through Elavon) as they seemed to have had the best "prices" compared to many of the banks. It is true that AMEX charges a higher fee, but actually through Costco it is a pretty decent fee compared to other processors. Having said all of this, when you get your monthly statement it can be totally confusing of what exactly you paid as a percent as well as how much money you had to pay for each swipe. So, here are some hard figures for a merchant in the medical field (my company)(note that these are only for credit cards, as debit cards are a whole other beast):
Qualified (this is your basic non-rewards credit card): 1.48% + 20 cents per swipe (Visa, M/C, Discover)
Rewards Qualified (rewards card): 2.2% + 20 cents per swipe (Visa, M/C, Discover)
Mid-qualified (believe this is a business card with no rewards but could be wrong): 2.91% + 33 cents per swipe
Non-qualified (believe this is a rewards business card, but again could be wrong): 3.75% + 33 cents per swipe

AMEX: 2.89% with no swipe fee.

Note that I can also accept Diners Club, but have never even seen or processed one before. Hope this helps give some of ya'll some hard figures to digest.
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Re: Merchant costs on 2% cash back cards

Postby ryuns » Tue Jul 02, 2013 7:56 pm

This turned out to be quite the interesting thread. With that expectation that electronic transaction will come to dominate even more, does anyone have a guess at whether/what/when a legitimate competitor to the credit card model will take off in the US? Many smart phones have capabilities for electronic transactions, but many of those just store CC information and the fees are unchanged. Your mobile carrier can support some transactions (text redcross to 85478 to give a $10 donation, etc) but I have no idea if that model is cheaper or could be used for daily transactions. Anyway, I'm curious. Seems like there's a huge potential for someone to disrupt the current model, but huge barriers to entry.
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Re: Merchant costs on 2% cash back cards

Postby ogd » Tue Jul 02, 2013 8:20 pm

My biggest hope is Square + prepaid debit cards. Both are looking quite disruptive.
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Re: Merchant costs on 2% cash back cards

Postby Cash » Thu Jul 04, 2013 5:01 pm

Credit card fees are built into the prices merchants charge, so I don't really have much sympathy there. People who use cash and other cheap forms of payment subsidize rewards card usage, not the merchants.
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Re: Merchant costs on 2% cash back cards

Postby allenneal99 » Thu Jul 04, 2013 7:19 pm

Cash wrote:Credit card fees are built into the prices merchants charge, so I don't really have much sympathy there. People who use cash and other cheap forms of payment subsidize rewards card usage, not the merchants.


I don't know how merchants can make enough money to stay in business let alone make any profit from sales. The credit card charges are a percentage of each sale, so the higher the merchant increases the price of goods/services, the more c/c fee taken out. Also, take into consideration that for most locales the c/c fee is against the sales tax too, not just the item(s) sold.

Think of the c/c fees as a loaded mutual fund with a 5.75% front-load + 2.5% annual fee + .25% 12-b1 fee and a 30 day 2% redemption fee. Does that fund sound like a good deal to you? Especially if you're trying to save for your retirement and you don't know any better.

The major difference however, is the c/c fees charged to merchants are erratic. The merchant will really never know what they will have to pay up front. Some card charges will be 1.18% + 25cents/swipe, others 2.5% + 30cents/swipe, and others as high as 3% + 25cents/swipe. Even the shrewdest merchant couldn't factor in the markup needed for each item/service. They would have to mark-up anywhere from 5-10%+ to maybe break even. Then there are separate fees for charge-backs, refunds, and credits (think of them as early redemption fees).

Let's not forget that for a brick-n-mortar merchant (like a restaurant or grocery store), they also have to lease/rent the POS (point of sale) equipment and swipe machines -- which can be as high as $20/month per swipe machine. And then there are costs for fraud protection (for the merchant) and address verification and whatever else processing companies can dream up.

Accepting credit cards does not eliminate employee theft. An unscrupulous employee can cause considerable financial harm to both the merchant and consumer directly with very little technical savvy. And they can be long gone before they are caught since it could be some time before the infractions are realized, unlike counting down a cash register and reconciling at the end of the day.

Factoring all of these costs and that $5 latte could have been $2 once upon a time.

Consumers should be informed about the c/c fees charged to merchants, because no one consumer is subsidizing these costs. We are all over paying.

The SquareUp idea sounds great, but I am absolutely floored that any merchant would think 2.5% is a great deal.

That 2.5% used to be the introductory penalty rate for high risk, "card not present", internet based, brand-new to the world merchants 8 years ago. Established brick-n-mortar merchants used to get around 1% - 2% max and no per swipe fee then. Now most merchants seem to be glad to pay 2.5% per swipe for charges. That's highway robbery if you ask me. The SquareUp fixed fee will only last until they build up more momentum and they'll start charging high fees like the rest of them.

There's going to have to be a tipping point for high c/c fees. I'm sad to say, but I think reward cards may be the beginning of that point.
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Re: Merchant costs on 2% cash back cards

Postby Default User BR » Thu Jul 04, 2013 10:47 pm

allenneal99 wrote:I don't know how merchants can make enough money to stay in business let alone make any profit from sales.

No one forces them to accept cards. In the past the could have given a discount for cash had they wanted. Now they can charge a fee for CC use.

If credit cards are so ruinous, why take them? Because they would miss out on a lot of business. And if all similar merchants are using them, then it's a level playing field for them. As noted, the ones who get the raw deal are the cash payers. Thanks!


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Re: Merchant costs on 2% cash back cards

Postby AndroAsc » Fri Jul 05, 2013 12:05 am

allenneal99 wrote:
Cash wrote:Credit card fees are built into the prices merchants charge, so I don't really have much sympathy there. People who use cash and other cheap forms of payment subsidize rewards card usage, not the merchants.


I don't know how merchants can make enough money to stay in business let alone make any profit from sales. The credit card charges are a percentage of each sale, so the higher the merchant increases the price of goods/services, the more c/c fee taken out. Also, take into consideration that for most locales the c/c fee is against the sales tax too, not just the item(s) sold.

Think of the c/c fees as a loaded mutual fund with a 5.75% front-load + 2.5% annual fee + .25% 12-b1 fee and a 30 day 2% redemption fee. Does that fund sound like a good deal to you? Especially if you're trying to save for your retirement and you don't know any better.

The major difference however, is the c/c fees charged to merchants are erratic. The merchant will really never know what they will have to pay up front. Some card charges will be 1.18% + 25cents/swipe, others 2.5% + 30cents/swipe, and others as high as 3% + 25cents/swipe. Even the shrewdest merchant couldn't factor in the markup needed for each item/service. They would have to mark-up anywhere from 5-10%+ to maybe break even. Then there are separate fees for charge-backs, refunds, and credits (think of them as early redemption fees).

Let's not forget that for a brick-n-mortar merchant (like a restaurant or grocery store), they also have to lease/rent the POS (point of sale) equipment and swipe machines -- which can be as high as $20/month per swipe machine. And then there are costs for fraud protection (for the merchant) and address verification and whatever else processing companies can dream up.

Accepting credit cards does not eliminate employee theft. An unscrupulous employee can cause considerable financial harm to both the merchant and consumer directly with very little technical savvy. And they can be long gone before they are caught since it could be some time before the infractions are realized, unlike counting down a cash register and reconciling at the end of the day.

Factoring all of these costs and that $5 latte could have been $2 once upon a time.

Consumers should be informed about the c/c fees charged to merchants, because no one consumer is subsidizing these costs. We are all over paying.

The SquareUp idea sounds great, but I am absolutely floored that any merchant would think 2.5% is a great deal.

That 2.5% used to be the introductory penalty rate for high risk, "card not present", internet based, brand-new to the world merchants 8 years ago. Established brick-n-mortar merchants used to get around 1% - 2% max and no per swipe fee then. Now most merchants seem to be glad to pay 2.5% per swipe for charges. That's highway robbery if you ask me. The SquareUp fixed fee will only last until they build up more momentum and they'll start charging high fees like the rest of them.

There's going to have to be a tipping point for high c/c fees. I'm sad to say, but I think reward cards may be the beginning of that point.


With all this rant, what do you want? Go back to cash...?! Please the swipe fees are built into the business model. These are just costs of doing business for crying out loud...
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Re: Merchant costs on 2% cash back cards

Postby Oilburner » Fri Jul 05, 2013 9:02 am

I always thought the merchant fees (interchange fees) were in the 2-2.5% range. To back that up I just got a quote that included a cash discount for carpet and was told the discount of 2.5% equals their interchange fee.

Well, how do credit card companies make money on "cash back" cards? My assumption is that they don't, if the amount of cash back is above 1.5% of purchases and the persons getting the cash back pays their card balances in full each month. But what percentage of credit card holders is that? Probably very small. And those who do carry balances, that balance earns the credit companies a lot of money because credit card account interest rates are in the 15-30 percent range.

I bet there are people out there who use cash back cards and keep running up balances, but keep using the cards in order to get all the cash back on the card they can, thinking they are coming out ahead, or to justify living beyond their means :shock:

I've seen the opposite too. I have a friend who refuses to use credit cards due to the temptation to over spend and run up balances. I think not using cash back cards is leaving money on the table.

My wife and I use cash back CCs for just about everything we buy and pay the bills off in full each month. We do not buy extra stuff either. I estimate we get about an extra $1000 a year this way. We have three with differing percentages for cash back and we use the most advantageous one for certain purchases (travel, food/gas, eating out, etc). None have annual fees. The best one we have is a grandfathered HSBC Master card that gives 5% cash back on groceries, heath care, and automotive (replacement parts included), up to $500 back each year. My wife and I each have one, so that's up to $1000 back on those heavily purchased items. I get about $30 a month back on that one.
Last edited by Oilburner on Fri Jul 05, 2013 1:44 pm, edited 1 time in total.
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Re: Merchant costs on 2% cash back cards

Postby englishgirl » Fri Jul 05, 2013 10:17 am

Since I've opened a business and have been getting merchant accounts to accept CC's, I am definitely more aware of what I'm swiping with. If it's a small local business, I now will always use my debit card, unless they are using Square. Debit cards seem to have the lowest fees charged to merchants. If it's a national business, or the merchant is using Square, then I'll happily use my Amex. We have been using Square, which I think is a fair rate (and gives you the option to go to a flat $275 monthly fee) but we're moving away from them to an integrated POS/inventory system. Which actually has higher fees. :oops: As far as I can tell, most rewards cards will be 3.29%, plus some nickel and dime monthly fees. But apparently we can negotiate the fees when our transaction volume gets bigger. I'd rather stay with Square but my business partner is certain that the benefits from inventory tracking will offset any other issues. We'll see. :greedy
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Re: Merchant costs on 2% cash back cards

Postby allenneal99 » Fri Jul 05, 2013 11:12 am

AndroAsc wrote:With all this rant, what do you want? Go back to cash...?! Please the swipe fees are built into the business model. These are just costs of doing business for crying out loud...


I don't think we can go back to cash. You practically need a credit card to buy most goods these days.

It was not my intention to rant. I really wanted to state the facts that many merchants face. I'm all for cost of doing business and understand this completely. Once upon a time when I was "consumer-minded" I would have been just as dismissive. Just like once upon a time I was "employee-minded" and I thought all businesses were flush with piles and piles of money and they never ran out.

It wasn't until I started setting up merchants & non-profits for accepting credit cards that I realized the huge disparity in the c/c fees charged to them (and between them). Large merchants, like Walmart and Supermarkets pay insane discounts compared to smaller merchants. Small to mid-sized merchants are getting eatin' alive by these fees. It's a mathematical challenge to price them into their business model if they are not consistent.

My response to the OP's question is to simply state that no, cash back is not economical to "certain" merchants. It's great for Fidelity and Visa as it is pure profit for them.

I'm not advocating to stop using cash back cards or credit cards at all. Just don't complain while prices inch higher and higher and your reward incentives start inching lower and lower.
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