I’ve never had a credit card; although many people I know do have one, I never really grasped the entire system of those flexible plastic companions.
AFAIK the credit card company (hereafter referred to as the CCC) has two sources of income: The annual fee paid by the customer and a commission on every purchase made thorugh that card paid by the merchant to the CCC. Right?
Now, OK, I understand that annual fee stuff: It’s comfortable to pay using a card instead of having to carry tons of cash around. But what about the commission the merchant has to pay? I think he’d love to dump the CCC because he doesn’t like to pay tributes to them. Of course, he’d loose the customers that insist on credit card payment, but couldn’t he win those customers who are also willing to pay cash? His general costs would be lower since he saves the payments to CCC, and he could make his products cheaper. This would be of benefit to everybody, except for CCC which everybody hates. So why do stores accept credit cards? IMHO it doesn’t bring any benefit to them.
Related question: How do the CCCs prevent fraudulent stores from charging my card with more than the stuff I’ve bought costs? If I signed a written payment paper, it can be checked, but if I told him my number on the phone or online, how can I prove the bill is false?
As pointed out, the big source of income for the Credit Card company is interest. The annual fee is just to make sure they get something from users that don’t carry a balance or whatever.
As far as the benefit for the vendor, there are plenty of benefits. Cash is a pain in the ass. It can be stolen by thieves and ugly employees; it has to be carried to the bank every day, it has to be counted (sometimes incorrectly), it has to be entered into accounting records. Credit cards do away with all that. The customer uses his card and the deal is done.
Also, there is a big benefit for the customer, because again cash is a pain in the ass. So, some customers won’t deal with a vendor who doesn’t accept CC’s. I’m strongly in that boat. If it were possible, I wouldn’t even carry cash.
Because it increases sales. Sure, you lost 3% or so to the CCC, but if you sell one or two items a month to customers who don’t have the cash with them, then you’re ahead. The last thing a merchant wants is a customer leaving, especially when the customer was all ready to buy.
The amount in fees is trivial compare to the money the merchant does get for credit card sales.
Kneadtoknow has the main reason why CCCs stay in business. I don’t even pay an annual fee on mine. In addition, I get a percentage of my total annual amount paid back to me at the end of the year. There are several CCCs that do that. I guess it’s all right to name mine: Chase.
You asked a lot of questions. Note that many stores will not accept American Express. They soak them more than the other CCCs. Some stores won’t accept any for a charge less than $5 (usually restaurants). I never carry over a balance, so I’ve never paid interest. CCCs hate me. I still get offers to accept various CCCs altho they don’t make any money off me. Explain that. I guess they will make the money from the places I shop.
CCCs are so ingrained in our life now that I don’t think most merchants can not accept them. People don’t carry checks around and don’t carry a lot of money around. CCCs are such a convenience that people who are used to them are not going to patronize a place that doesn’t accept them if the place next door does. There is a bagle place I frequent that only accepts cash, but there’s an ATM 20 feet away. Most of their orders are under $5, so I guess it’s good policy for them not to accept CCCs.
At the moment (for one more week only, hooray) I am working at Customer Services of a big Credit Card Company. And to answer your question. Yes, in principle they can charge your card with any amount whatsoever. Hotels often do this, if a person left the hotel and wrecked the room/drained the mimibar etc. Car Rental companies also have a habit of raising delayed charges.
Basically, from my job’s point of view, what happens is that the cardholder usually is on the line pretty quickly when he is overcharged.
The company then has to provide itemisation for the goods or services purchased. If they cannot do this, our department will simply not pay out the money to this company or take it off their next payment and the cardholder is refunded.
Of course, a company could come up with a fake itemisation. Because they want to keep accepting credit cards (for reasons mentioned above) I find this is really rare. If a cardholder does contact us and says an itemised bill is fabrication, it would then go to the fraud department. I do not know exactly what happens next (although I am sure that I remember there was a Fraud Analyst on the board), but I suppose that in the worst case scenario it would involve court cases and the like.
So, to sum up, being fraudulent is easy in principle. But because of the way the system works, getting away with it for a long time is not.
(sorry, I have been in this utterly dreary job too long, so I seized this once in a lifetime opportunity to show off my “expertise”.
So basically a store accepts CCs because its competitors do, and it would lose customers to them if it didn’t follow? But then again, how could CCs get established? The first one was AFAIK Diner’s Club in the 1950s. A potential customer doesn’t want the card if there are too few stores accepting it, and the stores won’t accept it if there are too few customers having one. So it could never get established?
(I know this story is pretty much made up, but I cannot imagine reality was too different.)
If I had a store, I would hang big posters at the walls saying <b>We are cheaper! We don’t pay a single penny to Visa, Amex, Mastercard,…</b>
Diners Club started with exactly 14 resurants in New York accepting it, and the dude who started the company issued about 200 cards to his friends. It cought on, and many resturants joined and many people wanted cards. There’s a good history here:
You basically got it. CCCs issue no-fee cards to people with excellent credit. People with excellent credit who never pay interest are generally more wealthy, so they buy more expensive stuff. Thus the CCC makes a decent amount from the store commission.
It is more than their competitors take plastic. If someone leaves your store they probably are not coming back to buy. Some will go get the checkbook or cash but most will not. You need to do everything possible to not let them leave without buying. Paying a 3% discount is probably OK. Especially since as people have pointed out taking cash or checks are not without their own cost so accepting credit cards really costs less than 3%.
Another thing that I have seen low margin stores do (mostly computer parts) is to either offer a 3-5% discount for using cash, or less often charge a 3-5% credit card charge to make up the amount that they pay the CCC.
I don’t know about other cards, as far as the one I work for is concerned that is illegal. It is called suppression, and if the Card Company finds out , the establishment is in trouble.
Apparently, this is a problem with certain online “service” providers.
As indicated by other posters, credit card companies investigate complaints of fraudulent billing practices. Ultimately, the threat of having the ability to accept charge cards revoked and/or the threat of being prosecuted keeps this problem in check. Nevertheless, from what I hear, the costs of fraud are substantial. I suppose that this is greatly outweighed by other sources of profit - interest, merchant fees, and cardholder fees.
The situation you describe, Clint Pheonix, is what prompted me to learn how CCs work. I was traveling in Asia and many merchants discouraged the use of credit cards and would tack on an extra 2-5% to the bill if you insisted.
It was always a battle because they could never understand why I was willing to pay the extra fee in exchange for the convenience. I would explain that I’d rather throw in the extra couple of rupees than spend 1-2 hours at the bank cashing travellers checks (you think I’m kidding?). They invariably said, “Yes, but it’s only a couple of hours at the bank. What else are you going to do? You could save 300 Rupees”.
For me, the thought processes of both sides mirrored our life situations. The American has the money, but won’t waste the time. The Nepali has the time and wouldn’t think of wasting the money.
One other note…studies have shown (no, I don’t have a cite), that people tend to spend more when they have a credit card. I know I do.
The other night, the Mrs. and I went out with some friends. There had been a mix up at the bank, and I knew in advance that my Debit card would not work, so I had to use cash. I kept track in my head how much we had spent, and made sure that we stopped well before the cash ran out, so we could leave a good tip. If my Debit card had been functioning properly, I would have spent more.
Just a lagniappe, which has nothing to do with the OP, the big discount stores, at least Costco and Sam’s, accept only cash, but: Costco will accept American Express when you fill out their application for the card, and they also accept debit cards. Sam’s has its own credit card and will also accept Discover. Only Discover.
My take on this is that there is a kick-back between those stores and the respective CCC that they accept. Discover is owned by Sears, but that doesn’t preclude a kick-back. I wonder if that’s illegal.
I will not dispute that this may be true where you are, but it is simply false as a generalization. Sam’s Club and Costco here in Charlotte both accept Visa, and I have the receipts to prove it.
I won’t comment on Cecil’s report since it was in 1996, but I’ll do it here. The Costco here in Charleston, SC, accepts everyone (who is willing to pay the annual fee). Sam’s does have restrictions, but as Cecil pointed out, they’re pretty well meaningless.
I wish they accepted Visa here, but they don’t. It surprised me to read that Sam’s accepts Visa elsewhere. I wonder why they do it in some locations but not here. The only reason I’ve kept my Discover is for Sam’s. Costco just moved here in the spring and I had to get one of their American Express to buy on credit. I don’t use debit cards. They also waived the annual fee for the first year if you hopped on the bandwagon by May 31.
