

Credit Cards: Who Wins, Who Loses? - cmurphycode
http://www.bos.frb.org/economic/ppdp/2010/ppdp1003.pdf

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cmurphycode
I don't understand this paper. How does the merchant credit card fee change
the price that users pay? I understand that they implicitly markup to make up
for their loss, but everyone pays that markup, whether they pay with cash or
card. This paper makes it seem like those who purchase with credit cards are
paying slightly less than those who purchase with cash, and that's how it's
being interpreted in the blogosphere: (links listed by closest-to-the-real-
paper)

[http://modeledbehavior.com/2010/07/27/are-credit-cards-
regre...](http://modeledbehavior.com/2010/07/27/are-credit-cards-regressive/)

[http://motherjones.com/transition/inter.php?dest=http://moth...](http://motherjones.com/transition/inter.php?dest=http://motherjones.com/kevin-
drum/2010/07/great-interchange-fee-scam)

<http://kottke.org/10/08/cash-is-expensive>

I understand how credit card users make some money due to the rewards
programs, and that those reward programs are funded by the merchant fee and
thus the markup that everyone (including those who pay with cash) pay. But the
paper explicitly mentions the rewards programs, and seems to point to the
merchant fee as an additional, separate factor. Anyone understand this?

~~~
tedshroyer
I guess the paper is using merchant fees to just refer to the transaction fee
and base transaction %. Rewards is an additional % on top of the base
transaction % and differs for each reward program. I would price my
merchandise to cover all costs so I don't understand why this paper is making
a claim about subsidy. It should just make a claim about cash customers being
penalized (and maybe even some credit card customers who don't have rewards
being penalized).

"... cash buyers must pay higher retail prices to cover merchants' costs
associated with the credit cards' merchant fees. Because these fees are used
to pay for rewards given to credit card users, and since cash users do not
receive rewards, cash users also finance part of the rewards given to credit
card users."

This doesn't make sense to me at all. What merchant would gamble on having
enough cash customers to subsidize his credit card customers? Merchants make
the money. They just make more money on cash.

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teilo
If anyone were to do a cost/benefit analysis for the credit card companies, I
dare say they should be _paying_ merchants to accept their card, because I
strongly suspect that the companies make _far_ more off of interest than they
lose on defaulted accounts, and the profits, on interest alone, absolutely
dwarf whatever income they receive from merchant fees.

~~~
brazzy
Credit card debt is a very US-specific phenomenon, and one that could
disappear very quicky. Relying exclusively on interest collected from it would
be like time-delayed suicide for the companies.

~~~
teilo
Credit Card debt is in no way different than the supposedly secured debt which
precipitated the housing crisis (tell the banks that are sitting on foreclosed
properties that they cannot liquidate how "secured" that debt really is).

Both are built upon cash generated out of thin air by banks that, in truth,
put up NO assets of their own when they lend money. It is this criminal
behavior that is the money-making engine of not only the credit card companies
but of all lenders whatsoever.

The entire debt-based banking system is built on time-delayed suicide, and the
paltry (in comparison) fees collected from merchants in no way, shape, or form
stems the inevitable collapse.

~~~
brazzy
I think you missed my point, which was that getting massively indebted to
credit card companies at ruinous interest is something that 1) nobody outside
the USA does (instead, people get massively indebted to normal banks, usually
for somewhat lower interest) and 2) could quickly disappear inside the USA due
to competition from banks or changing regulations.

Thus, it would be a very stupid move for credit card companies to rely on debt
interest completely and forego merchant fees, even if doing so would raise
their income short-term (which I am not at all convinced it would).

------
drx
A scribd link would be nice for the RSS (it's de facto a PDF warning)

