I came across this article last week, indicating that the cost of processing credit card transactions, which are normally passed on to the business selling the product, increases the cost of the product. This is, understandably, a RPITA for small businesses.
When able, I use my card as a debit card. Do transactions as a debit card incur the same processing fees?
RPITA = Royal Pain in the Arse.
Tripler
Looking to keep things cheap for my Mom ‘n’ Pop Coffee Shop.
The fees merchants pay for accepting credit cards are much higher in the U.S.
But I think this may be a bit misleading. In the U.S. credit card market, there might not be much competition at the business (seller) end. But there is aggressive competition to get consumer business by offering rebates on purchases. I get 2% back on every transaction on my Fidelity card.
So if they charge the business selling me the product 3%, the true charge is really 1%.
In Canada, credit card merchant fees are similar to the US. Debit is much cheaper and top out at around 60 basis points (0.6%) with a cap of $1.80 per transaction.
For what it’s worth, here in Europe, regulators view the processors as an effective monopoly and heavily restrict fees.
Retailers are happy with this action, unsurprisingly, and want the regulators to go further. Time will tell if they do, and if other jurisdictions follow the example.
Not from the merchant’s point of view. Which is the point of the story.
But now I am wondering who pays the 2% cash back when I use my US credit card in the EU?
Of course it is. If merchant raises prices by 2%, pays 3% to the CC company, and the CC company gives me 2% back, that’s economically exactly the same as the merchant paying 1%. That’s conceptually no different than merchants collecting a 7% sales tax, and adding it to the cost of goods to cover it.
When you compare how much the CC companies are taking out of the system in the U.S. vs Europe because of purported lack of competition, that’s the way you have to look at it. There is competition, but its operating at the consumer end in competitive rebate rates.
The problem with this, however, is that merchants raise prices slightly to cover CC costs but generally charge everyone the same for any method of payment. So economically disadvantaged people who don’t qualify for the best credit card rebate deals (or any CC at all) get screwed. Poor people subsidizing rich people, the American way.
The chain I work for is not a small business - 140 locations and counting across 11 states - but we don’t take credit cards for exactly this reason.
Debit card fees are considerably lower and we do take debit.
Many high-rebate cards charge a foreign transaction fee that claws back all or part of the rebate. Coincidentally Fidelity just abolished theirs last month. I think it is a promotional feature, that overall they have worked out that they can lose a bit of money of overseas transactions but that will only ever be a small proportion of purchases.
Now that I think about it, my credit card is the Bank of America travel card, which doesn’t charge a foreign transaction fee (which is why I have it), but also doesn’t pay back 2% either. I get travel credits, but I am sure it’s less than 2% when the dust settles. But still, there is some reward there that comes from somewhere.
They also take 1-2 percentage points out of the foreign exchange rate, so in fact they aren’t losing money. Very few people pay attention to that, it’s a baked in foreign transaction fee. But CCs are still by far the best way to make overseas purchases, any other method uses a less competitive exchange rate.
This seems to answer the OP’s question.
But, if a business accepts credit cards, and raises prices accordingly to cover these fees, as a customer, you still end up paying the same as everyone else no matter what card you use, right? Unless the business provides a discount for cash or debit, you are just helping out the business a tiny bit by not using a credit card (your one transaction in a day compared to hundreds of others).
ISTM this situation is ripe for disruption, or more regulation, as in the EU.
I’m pretty sure that the credit card companies require that in order for their card to be accepted at your business, you (the retailer) agree that you will not offer different prices for different payment methods. Making that contractual stipulation illegal would disrupt the market. Consumers would then be exposed to the true ~3% cost of using a credit card, and question whether that is value for money for the convenience and protection (and rebate) that a credit card offers.
As I understand it, it is legal in all fifty states to offer cash discounts for transactions. This is quite popular where I live (Louisiana). I believe there is a federal law from 2010 (the Durbin bill) that explicitly allows this.
So I’m not sure. I wonder if the stumbling block is debit cards? Most people don’t want to carry a lot of physical cash, so perhaps the CC companies control discounted pricing for debit cards?
In the UK and, I suspect, in the EU, there is a major difference for the buyer between CCs and DCs.
Credit cards offer two advantages: First, the payment is deferred at no cost if paid off when due, and second, they have better protection than Debit cards. You can get your money back from a problem transaction using Section 75 of the Consumer Credit Act – as long as you paid more than £100 and no more than £30,000.
The article is quite wrong. Okay, sure- CC fees run 2-3%. But they increase business by 20%.
Credit cards can increase your revenue… This is a big reason. Businesses, in general, tend to see around a 20% increase in sales when they offer their customers the ability to pay with credit cards. Some customers will not even shop at stores that don’t accept credit cards.
Top reasons businesses should accept credit cards - Credit Card Processing and Merchant Account.
But then there is the alternative- cash. Cash has costs also. Banks will charge you about 1% for large cash deposits. Then there is the cost of armored car pickups.
Not to mention- the increase in hold up insurance premiums, the risk of armed robberies, “shrinkage” by employee theft, and the labor cost of paying two employees to count and recount the cash at the end of the nite. More or less, cash costs you 1%. But it is indirect, so you dont see it. You get angry when you see the 2% cut Visa takes, but you dont think about the cost of cash.
Now let’s do the math. Let us say in NPRs example, Mr Garcia paid $25000 in CC fees. If he paid the higher amount of 3%, what were his sales in CC alone? Wow, that is a lot of ice cream! But then, if his sales were 20% higher due to accepting CC, how much extra did he make?
Do you have a cite for this? The link you provided does not explain how they came up with this estimate. It’s not exactly an unbiased viewpoint given their business is payment processing.
Next you’ll be telling me that the average person who switched to [insert any insurance company here] didn’t save 40% on their premiums.
“Total credit card processing fees for merchants range from 1.15% + $0.05 to 3.15% + $0.10 in interchange fees plus an additional 0.13% to 0.17% in assessment fees.” So credit card fees for merchants vary from 1.28% to 3.32%, ignoring the nickel or dime fixed charge. Yes, your rewards card charges the merchant more than my ordinary credit card, and the merchant can’t vary the charge with the fee. Rewards cards are exercises in redistribution among consumers.
Above quotes from Average Credit Card Processing Fees and Costs in 2023 | The Motley Fool
The Durbin Amendment caps debit card interchange fees at 21 cents plus 0.05% for banks with assets above $10 billion. Smaller banks are not regulated, though some debit networks cap their fees. Interchange fees aren’t everything though: average debit fees are 34 cents or 0.74% - much lower than credit card fees. Debit Card Processing Fees: Complete 2023 Guide for Merchants
So should the consumer use their debit card in solidarity with merchants? That can’t be answered in FQ, but I’ll note that debit cards have less federal protections than credit cards. Most banks have fraud protection programs for debit cards, but they invariably are not as extensive as protections for credit cards. Oddly, there is no debit card that I’m aware of that simply says they will provide the same fraud guarentees that credit cards do. Corrections welcome.
Mastercard and Visa are highly profitable companies.
“Could save up to…” and yeah if you switch, you often do so to save.