Merchant Fees Reconsidered

Last spring, when the CARD act was being debated, I discussed a horrible amendment that would have allowed merchants to add surcharges to all transactions made with a credit card.    Currently, they are forbidden from doing so by their merchant agreement with the processors, Visa, Mastercard, Amex, etc.   Had it passed, I would have radically changed my credit card usage as merchant fees are almost by necessity going to be greater than any reward.   Thankfully, that amendment went down in flames as the CARD act was signed into law without it.

Taking Another Look At Merchant Fees

What did happen as a result of the CARD act was that the Government Accountability Office, (GAO) has been studying these fees.    According to this article in the Washington Post, there has also been a trio of bills that would change the way credit cards are processed.    Two of the bills would allow merchants to band together to collectively bargain with the processors to reduce merchant fees.    A third bill would allow merchants to charge different amounts for goods and services, depending on the method of payment.

Where Do I Stand

I am largely with the merchants here, but only up to the point where they want to be allowed to start passing on “transaction fees” that vary depending on the method of payment.   I think they should have the right to collectively bargain with processors over interchange fees, which are a cash cow.     The fact that so called “interchange fees” eat 1-2% of each transaction and make up 48 Billion dollars a year tells you that it is not a competitive market.    For $48 billion dollars you rebuild every baseball stadium in the country, construct a high speed rail line from New York to Miami, or set up a colony on Mars!    It is obvious to me that merchants are getting ripped off in the same way that consumers get ripped off by “foreign transaction fees”.

On the other hand, I shudder to think of a world where every single purchase has some sort of “transaction fee” associated with it.    A fee for paying someone is probably the most obnoxious and insidious fee there is.    It is the way TicketMaster works, and they might be one of the most hated companies in the world.     If Representative Peter Welch’s bill were to become law, every merchant would feel free to become TicketMaster.

A quick look at Welch’s  web site shows me that the Vermont Democrat has taken some very pro-consumer stands.    The web site claims that this legislation as “allow merchants to give consumers who pay in cash a discount and bans penalties for small businesses that process only a small number of transactions.”

You can call it a cash discount or a credit card transaction fee,  but it is the same thing.    I think that his heart is in the right place, but it is too easy to see the ramifications here.

What Would This Do For Reward Cards?

Ironically, we could get more credit card rewards, as they would need even more incentive to get us to use our cards when we have to pay more each time.   Of course it still will not be worth it to pay 3% more to get a couple frequent flier miles or 2% cash back.   We know that because a select fee “merchants” such as the IRS accept credit cards, but only through a third party that charges a transaction fee.    The reward is never really worth the fee.

The effect on reward cards is not the reason I oppose it though.    I just like price transparency and hate fees.   I like the convenience of the credit card, but I still don’t think I should have to pay a fee to pay someone.   I don’t want to be waiting in line for a million years behind people writing checks and fishing for spare change.    I don’t want to have to be one of those people in order to avoid a transaction fee or get the “cash discount”, which is really the same thing.

Ultimately, if merchants can negotiate lower interchange fees, than we will probably see fewer rewards.    If that happens, then I am ok with that.     Merchants should get to negotiate and they should not be taken advantage of.     More likely, there will be less of that $48 billion dollars for profit for the banks and the credit card processors.    I for one, will not stay up at night worrying about them.