Making Sense Of Credit Cards And Merchant Fees

Ron Lieber  at the New York Times is getting to be one of my favorite columnists on the subject of credit cards and personal finance.   His most recent article sheds some light on the costs to merchants that credit cards impose.    It is a must read.

Are Reward Card Users Selfish?

To me, the question is absurd.   Are people who use coupons selfish?  Am I selfish by taking tax deductions?   Capitalism is inherently selfish, as we each try to maximize our earnings while minimizing our expenditures.   Lieber brings up the old canard that reward card holders are subsidized by people who don’t use them.   This idea even has a cool name, the “Reverse-Robin-Hood-Cross-Subsidy Hypothesis!”  Coming soon to theater near you!

I am convinced that cannot possibly be the case, as there is no reason credit card companies would offer reward cards if they only exist because they are subsidized by other products.    If I am a bank and I am offering two cards, with one subsidizing the other, why not just eliminate the unprofitable card?

What About Merchant Fees?

I have every sympathy for merchants who pay these fees.   I am sure it is just the mirror image of the fees we consumers pay for using the credit cards, and the merchants are treated no better by the card processors than consumers are treated by their banks.    I would even be in favor of some sort of regulation that makes card processors more competitive.    That said, credit cards are optional for merchants in the same way that they are optional for consumers.     My favorite bagel store in Denver does not take credit cards.    Their bagels are good enough that I will pay cash or use a check.    I guess that they decided that that the costs of handling cash and checks was less than accepting credit cards.

To Lieber’s credit, he does a good job of explaining the benefits to merchants of accepting credit cards:

People can use credit to spend more than they have in the bank at the moment, and some may spend more on a card than they would if they had to lay out a pile of money. Merchants who handle less cash, meanwhile, bear fewer costs for counting it, calling the armored car, and theft by employees or armed bandits.

It is refreshing to see that someone “gets it” when it comes to merchant fees.   I have heard one too many business owners whine about merchant fees as if they are forced to pay them and accepting credit cards provides them with no value whatsoever.

Benefits To Consumers

Lieber also catalogs some, but not all of the non-reward benefits credit cards have to consumers:

…like ease of budgeting and record keeping, allowing you to avoid checks by paying monthly bills with a card, the ability to dispute charges and the time savings in not having to refill your wallet at an A.T.M. as often (and cost savings in not paying A.T.M. fees).

Oddly, he omits chargebacks, rental car insurance, and theft and loss protection.   If I lose my wallet today, which holds no cash at the moment, my losses will  be limited to the cost of a replacement wallet.   That would not be the case if I carried enough cash around to make regular purchases, although you could argue a debit card is a good compromise.

Boycott?

Lieber suggests a consumer boycott of credit cards only to illustrate how it would never work.   He then concludes, “There is no way for consumers to win.”    Here is where I take objection.    Clearly, as someone who, by his own admission, aggressively pursues credit card rewards, Lieber understands that it is very easy to win the reward card game.    Simply find a card with the best rewards, and pay it off in full every month.    If that’s not winning, I don’t know what is.

Surcharges?   Oh No!

Lieber discusses all of the various proposals to allow retailers to offer discounts for cash or surcharges for credit card use.    He rightly concludes that the difference between the two is merely semantics.    Personally, I hate surcharges of all kinds.    Post your best price, but don’t play games with surcharges.   Once you start down that road, you end up like car rental companies or the telecommunications business where the surcharges can be as much or more than the “price”.   Often cell phone companies can’t even give you the final price of their plan until  the very end of the transaction.   What a nightmare!  Count me in as someone who prefers the status quo, where retailers can’t offer different prices depending on the method of payment.