
How Credit Cards Tax America - nols
http://priceonomics.com/how-credit-cards-tax-america/
======
blcknight
Eh, the bitching over credit cards is tiresome. Cash is expensive for
businesses too - they have to pay to transport it securely, keep it safe, deal
with cashiers' errors, etc. And at the end of the day, cash consumers spend
less than payments by electronic means.

Now, what _should_ a very efficient electronic system _cost_? Very little, a
few tenths of a percent. But it doesn't, merchants charge the fees that
businesses will pay for that convenience, even begrudgingly, because access to
the millions of consumers with credit cards is worth it.

If Silicon Valley wants to disrupt the business, do it. It is possible to come
in and take on an established industry. But so far I'm less than impressed
with the payment start-ups that are out there, and imho all they're doing is
introducing yet more fragmentation. Sorry, I have no interest in paying with
my phone - especially not with Snapchat. My Chase Sapphire card doesn't run
out of batteries, and I get lots of cool perks with it.

~~~
RivieraKid
It's a natural monopoly market, making a better product is not enough.

~~~
dpweb
3% is not price gouging. First, they spent decades building up their networks.

You are paying for indemnity. People forget about the power of purchase
protection. I can pay with a card and feel safe I will not get screwed by a
merchant. Merchants are scared of chargebacks, so they rarely screw the
customer.

Card payment is vastly superior to cash payment the fees are not out of line.

~~~
needusername
> 3% is not price gouging. First, they spent decades building up their
> networks.

Except the fee goes to the issuer and not the network.

> You are paying for indemnity. People forget about the power of purchase
> protection. I can pay with a card and feel safe I will not get screwed by a
> merchant. Merchants are scared of chargebacks, so they rarely screw the
> customer.

Then the cardholder should pay for this, certainly not the merchant.

> Card payment is vastly superior to cash payment the fees are not out of
> line.

3% is out of line for incrementing an integer in one mainframe and
decrementing it in an other mainframe with virtually not risk.

------
johnchristopher
I don't understand. Isn't there something in the US like `Bancontact' ? In
Belgium (and, I believe, Germany, The Netherlands, France, etc.) your bank
issues you a `debit' card that could act as a credit card but it's not its
first use or purpose. When you pay with it you slide it into a terminal, enter
your pin and validates the transaction. The money is then transferred from
your bank account to the merchant's one. There's only one intermediate between
banks and it's the service provider (whose name escapes me at the moment) and
there are 0 fees applied. It's on the merchant and it's not percentage based
but transaction based (much less than 5ç I believe but the merchant has to
rent the terminal).

There are basic insurance for card stealing that covers `some' things and you
can buy larger ones if needed.

Why is the credit card the default in the US ?

~~~
mseebach
Pretty much every European country has their own incompatible, cheap debit
card system. The problem is that they are incompatible, and often difficult to
access for outsiders (non-permanent residents). As a contractor, I've be in
large company cafeterias where the only payment option was such a card
(getting by by handing cash to one of the employees I'm working with, high
friction and not very professional).

In the US, when I was an exchange student in the late 90s, I could pay with my
local banks ATM card (so, a debit card) in the local supermarket. I can't
remember how far that network extended, but it certainly existed.

The reason credit cards are a thing is because processing payments between a
global set of debitors and a global set of creditors, instantly and securely
(and yes, despite various problems and shortcomings, on the margin, it's very
safe), is a pretty hard problem, much more so 20-30 years ago when the current
systems came of age. The credit part is necessary because until recently, the
technology simply didn't allow for online processing of payments, all the way
from the debitors bank account. The payment would clear against your credit,
the expectation that you're good for it, not actual cash in your account.

Running such a network is complicated, thus the fees.

In the past 5 or so years, both Visa and MasterCard have introduced proper
debit cards, that is, card where payments are instantly processed against your
bank account balance. This is still complicated, but essentially a new, much
simpler and more modern network, and thus fees are much lower. Despite the
security of the legacy network, this is safer yet, which is good for both
merchants and bank (and, indirectly, consumers, though arguments can be made
over whether the lower fees outweigh the cost of taking on a higher
liability).

I expect expensive credit cards to largely go away, if not by regulation, then
competition, and be replaced by debit cards and decoupled credit products and
travel-benefits/insurance products. On the margin, the vast majority of users
will (and economically should) prefer to save ~2% on their spending to earning
airline miles.

~~~
needusername
> The credit part is necessary because until recently, the technology simply
> didn't allow for online processing of payments, all the way from the
> debitors bank account. The payment would clear against your credit, the
> expectation that you're good for it, not actual cash in your account.

Nope, that's not at all how MasterCard/VISA debit cards work. They are not
processed online, you just have an online authorisation.

> Running such a network is complicated, thus the fees.

Except the fees go to the issuers and not the network.

> In the past 5 or so years, both Visa and MasterCard have introduced proper
> debit cards, that is, card where payments are instantly processed against
> your bank account balance. This is still complicated, but essentially a new,
> much simpler and more modern network, and thus fees are much lower.

Nope, MasterCard/VISA debit cards work just the same way and are processed the
same way as credit cards. The only difference is that the issuers charges the
card holder later and allows him to overdraw.

------
ersii
Recent jurisdiction that came into effect in Europe limits transaction fees in
Europe to 0.3% of the transaction.

The flip side of this for the customers is that the card rewards/kickbacks are
decreased as well.

~~~
blcknight
That's not the only downside, this basically kills the possibility of
innovation. They're basically solidifying the position of MC and Visa in the
market forever, and make it hard for someone else to come in.

So far the U.S. hasn't been so successful in taking the power away from these
payment networks, but at least there's a chance. I could see someone like
Square coming in and dominating the market with a consumer product in 5-10
years.

~~~
vilmosi
Square is using Visa/Mastercard too. They mentioned this in the article.

------
ismail
"The founder of Coinbase actually left his job at Airbnb to start a Bitcoin
company once he realized that credit card fees ate up nearly half of Airbnb’s
profit margins."

This is so true, and a weakness in cc wth the rise of marketplaces.

I started a side project, a marketplace due to very low margins of suppliers
the max we could get in transaction fee including cc processing was 10%.

We did not want to add markups on in store price so had to absorb the costs.

Take a transaction of $100 , e.g you pay 3% fee/$3. For the merchant it is 3%
but for you its actually 30%

------
pps43
The author mixes in interest, interchange, and fees. What he calls "fees" are
actually interchange, and it's a relatively small line item in bank's P&L.

The main source of business income is interest. And interest is so high
because it has to offset losses from card members that stopped paying.
Remember that credit cards are unsecured products. Banks typically recover
only about 20% of the default amount, the rest is gone.

------
dclowd9901
The thing I hate most about this whole thing is it's reached a critical mass
such that if you don't play the game you're just paying the cost.

I wish stores would simply charge the credit card fee outright as a line item
to dis incentivize usage of the credit card (many gas stations do something
similar in charging a cash vs credit price).

~~~
hannibalhorn
Charging a different price for credit cards is generally against the terms of
the contract a merchant has with their card processor.

~~~
germanier
In Europe usually it is allowed (as long as the surcharge reflects the real
costs) but it doesn't happen. Notable exceptions are only online travel agents
and shops in Denmark.

------
caf
A few years ago the regulations in Australia were changed so that the CC
companies can't force merchants to cross-subsidise the fees - merchants are
allowed to directly pass on the transaction fees as a surcharge if they want.

I've certainly chosen to use alternate payment methods to avoid the surcharge
when convenient, so this must be putting some competitive pressure on the CC
transaction fees.

~~~
Maxious
The next wave of that regulation should come into effect soon - the banks
tried some loopholes and merchants like Jetstar claimed they needed to levy
huge surcharges so another reform is required:

"the Board is proposing to change the Bank's surcharging standard with the aim
of ensuring that customers cannot be surcharged any more than the cost of
accepting cards."

"It is proposed that no credit card interchange fee will be able to exceed
0.80 per cent and no debit interchange fee will be able to exceed 15 cents if
levied as a fixed amount or 0.20 per cent if levied as a percentage amount."

[http://www.rba.gov.au/media-
releases/2015/mr-15-24.html](http://www.rba.gov.au/media-
releases/2015/mr-15-24.html)

------
sschueller
All these fees yet the merchant gets almost no protection from the Credit Card
companies when their product is forged and used.

Charge backs can happen up to 6 months later and the last time I had a
merchant account the permitted response time for a merchant was just 1 day or
the full amount plus penalty was taken.

~~~
kintamanimatt
IIRC that's not true for in-person transactions in locations where EMV chips
have been rolled out and merchants actually use the chip.

------
tracker1
I'm genuinely curious why the likes of Walmart and/or Amazon, given their
sheer size haven't started their own credit card networks, or even charge
accounts for their own stores over using the CC networks...

