The New York Times runs an opinion video arguing that rewards credit cards drive inequality. But the Times doesn’t understand the issue beyond retail lobbyist talking points.
- Retailers pay swipe fees. Credit card issuers rebate part of their revenue to customers to attract business.
- Because of swipe fees, “store owners..raised their prices. That means that all of us are paying more. But only those who have special cards are getting rewards.”
- Furthermore, wealthier Americans have better rewards cards. And poorer people are more likely to use cash, or debit cards.
- The simplistic argument is that the poor are paying higher prices so that the wealthy can have rewards.
That is not how this works. It isn’t how any of this works. Leaving aside that ‘the poor’ here do in fact use credit cards, and rewards cards, and aren’t getting rewards for their debit card payments because of Dick Durbin’s limit on debit interchange that he now seeks to extend to credit cards, not because of the market, it is simply not true that non-credit card customers are paying higher prices than those using credit cards. The argument rests on two premises:
- That credit cards are more expensive for merchants to accept than cash
- That if merchants weren’t paying higher prices for credit cards, prices to the consumer would fall
Cash is actually more expensive for merchants to accept than credit cards. That means, if anything, cash customers are driving higher costs for retailers without paying a surcharge. The subsidy goes in the opposite direction!
- Retail clerks make incorrect change, losing money for their employers
- Retail clerks pocket some of the cash, losing money for their employers
- Heavy cash businesses often pay higher insurance rates because of risk of outside theft and loss
- Retailers that prefer or discount cash payments often do so because it makes tax fraud easier, or as a deceptive surcharge on credit card customers like when the Westin Fort Lauderdale Beach Resort was hitting everyone with a surprise fee at check out for paying by card, sure they wouldn’t charge it for cash but no one is carrying enough cash and they have to hurry to the airport.
Not only is cash more expensive to accept (often estimated at 4% – 9% or more), but where interchange limits have been imposed prices have not fallen (Europe, Australia). That means that prices aren’t higher than they otherwise would be (for the poor, or everyone) because of card interchange!
The best the retail lobby, who wants government to require card processing at lower prices, has been able to muster is that retail grocers pass on around 70% of the savings to customers when the price of grocery items (not card processing charges) fall. That is just a single vertical, and perhaps the single most competitive vertical.
Moreover, 60% of interchange on average goes back to the customer. If you eliminated interchange, you’d have to believe that retailers would pass through 60% of the savings just for consumers to break even.
According to the New York Times, “this rewards card, it’s really a screw-over-poor-people card. Every time you’re using it, you’re contributing to inequality.” But that is not true.
Now, there is a less-talked about cross-subsidy in credit cards. Products like Citi Costco and Sapphire Reserve may rebate 100% or more of swipe fees to the consumer. They’re doing this in search of cardmembers who revolve (pay interest). The subsidy is from those rewards customers who do not pay their bill off each month, to those who do. Of course, those who borrow on their cards are often getting better terms than their next-best alternative which might be payday lending. People still have to borrow, though I counsel against doing so if it’s at all for discretionary purchases.
Incidentally, they also mischaracterize a 2020 people as a “Federal Reserve Study” claiming consumers lose more to price hikes than they receive in rewards. It isn’t “by” the federal reserve, it’s by a professor at the National University of Singapore (with assistance from a Fed researcher, so the Fed released it as a working paper, but it was not a Federal Reserve study). And it actually makes the cross-subsidy point from borrowers to non-borrowers I make here as well.
In Australia credit card fees rose after interchange was limited, reducing access to cards precisely for those least able to afford them.
When debit card interchange was limited, prices didn’t fall, rewards were taken away including from poorer Americans, and those same worse-off customers saw banking fees rise. More people became unbanked, pushed to check cashing stores and elsewhere because banks no longer earned profit from debit which subsidized free checking.
That – as this – was a redistribution from consumers, including less well of consumers, to retailers. It’s couched as taking from banks because banks are supposed to be unpopular, but that isn’t what’s happening at all. The New York Times was just too naive and fell for it.
(HT: Jon D)
1) Biden’s inflation has caused more damage to poor people than any credit card.
2) New York Times is consistently wrong about everything they write.
While Gary usual has great columns, this one is wrong.
Cash is not always more expensive to handle. Maybe if the store is giant and they deal with hundreds of thousands of dollars each day, but small businesses often don’t find cash as more expensive.
A bigger misconception are the fees. Rewards cards really in a higher fee than non-reward credit cards. They charge much more in fees that exceed the rewards given. That’s almost like extortion to the small business. They must take all credit cards, including rewards cards, and pay higher fees that exceed the rewards given if a customer uses a rewards card.
When we use rewards cards, we should be aware that we are participating in bullying.
@Gary: “Cash is actually more expensive for merchants to accept than credit cards. That means, if anything, cash customers are driving higher costs for retailers without paying a surcharge. The subsidy goes in the opposite direction!”
No. For the umpteenth time you wouldn’t see ‘discount for cash’ if that were true. This is <> evidence.
“Cash is actually more expensive for merchants to accept than credit cards.” This may be true, but some actual evidence would have been nice to see.
I don’t care about the poor.
It is very true that limiting swipe fees on credit cards will not result in lower merchandise pricing.
I am 100% with Gary on this.
The New York Times does not understand how the world operates.
@ L3, looks like you missed the part about tax fraud. Your point also ignores the broader point Gary correctly makes that interchange fee reductions or removals have not led to price decreases. The argument should end there.
When did the liberals (and NYT by proxy) stop being cool, educated, and thoughtful and begin being a bunch of whiny and jealous losers?
Oh yeah, when formerly trustworthy media became captured appendages of special interest groups who began pushing bunk like the idea rewards cards cause inequality, and liberals by and large took the bait. Sad!
The above comments about very small businesses in practice preferring cash is 100% solely around tax fraud. If it’s the owner always handling the money, and not some minimum wage employee, then yes, you prefer cash. Is that really the outcome we want to craft public policy around? As usual, almost all leftist demands for government intervention achieve the opposite of what they claim.
The most liked comments in the NYT piece indicate readers there aren’t warm to the proposal or the basis of the class warfare argument
@Mantis: No. It is because it’s cheaper.
No wonder you have no evidence, your argument is so stupid.
Dear NYT
Hint for you. The wealthy are always going to get a better deal whether paying by card or cash.
Deal with it.
Signed
Reality
Pretty weak gravy here.
@InterchangeInterloper: I didn’t miss anything Read the text before you make an ignorant comment.
Also, try thinking.
Every time Gary comments on this he embarasses himself. Merchants give a discount for cash because cash is cheaper for them to process. FULL STOP. I realize readers here want their miles, but everyday people (especially less well off) get entrapped by the ridiculously high interest rates promulgated by predatory credit card companies. I am NO FAN of the NYT but they are 100% right here.
You were expecting proper research and competent reporting from the New York Times?
Arco offers a lower price for debit versus credit. That shows that credit cards costs even big merchants higher costs.
The credit card system works to the benefit of those who manage credit use better than those who don’t manage credit use as well. And there the correlation is probably indeed one where the wealthier tend to do better than the poorer. But capping the amount that merchants are charged for card processing won’t really change that dynamic of who benefits more from the credit card system at others’ expense; nor will it lower the merchants’ prices for goods we buy. What we need more of is financial literacy being taught by families and schools so as to better level the playing field for consumers across the economic spectrum. Increased financial literacy — with better credit use skills — and a move away from hyper-consumerism and into preference for used goods and generics will do more for less-advantaged consumers that capping credit card fees will do for the less-advantaged.
Discounts for cash = we cheat taxes.
Failing NYT isn’t wrong all on the points, but it’s too generalized.
Leaving aside the biases of the NYT, here’s a few more observations about cash vs. credit. One – at the register I have waited much longer when someone pays cash versus a credit card transaction. Not only are they fumbling for the right amount of cash, but then the clerk has to process the cash and return the proper change (which many clerks don’t know how to do much less do it efficiently). Second, most people don’t carry that much cash around. A merchant might say that there is a high cost to accepting credit cards, but I can assure you that certain merchants would find their sales volume plummet if they ONLY accepted cash as discretionary purchases would fall because people wouldn’t have sufficient cash. Third, I don’t carry much cash because if I lose cash, it is permanently lost and irreplaceable, whereas, if I lose a credit card, I can quickly cancel the card without any losses.
Personally I refuse to patronize any merchant that passes along the cost of the credit card fee to me. It’s their prerogative to do so, but it’s also my right to take my business elsewhere.
@Ken: “Personally I refuse to patronize any merchant that passes along the cost of the credit card fee to me. “.
I have sad news for you. Every merchant passes along the cost of credit card fees to you. There is no fee fairy.
The person who has a right to feel agrieved is the poor cash customer, who is subsidizing your use of credit cards. They are totally screwed.
Cash has to be picked up or deposited at the bank. There is risk of the employee involved. Cash can be stolen from a vehicle. Cash absolutely has a cost to the merchants. Weather causes merchants to not be able to make a deposit. Having an in store lockbox/smart safe costs money. All forms of payment cost money. The higher the rewards cards, the more it costs to process.
Every company passes all costs along to the consumer so they can stay in business.
@hal Discounts for cash = we cheat taxes…. you realize the sales tape still says cash was received. Not sure how that means a store is cheating on taxes. I don’t think you have ever worked retail.
NY Times used to be a more reliable source of information. Now it seems to slant with the money and power behind it.
@derek: Good catch!
A lot of people doesn’t realize there are quite a few banks out there do charge cash handling fees for their commercial clients. Electronic transactions are just so much cheaper for them to process.
Great points on both sides of this issue. I honestly don’t know who to believe. The New York Times is a terrific newspaper, but nobody is right 100% of the time. They do their best. Gary and the commenters also
make some powerful points.
Hey “Alan” :
1) “Biden’s inflation” was caused by the lax monetary policies and outrageous tax breaks for the 1% by Donald “Traitor” Trump and George W.. Bush
2) As a long-time business owner (who profitably offered a 3% rebate for cash/debit card payments) I can guarantee that credit cards create a “regressive” pricing environment for the less fortunate in our society.
3) Fake Fox News (a wholly owned subsidiary of the GOP) is consistently wrong about *everything single thing* they write, say or broadcast, full stop.
Happy Thanksgiving !
The New York Times used to be a fine newspaper. It’s no longer that. It’s a hit-or-miss publication, and IMO when discussing cash vs credit cards it errs because it’s not part of much of the life in the US. The Times reminds me of the girl who had a curl in the middle of her forehead. When she was good, she was very good, and when she was bad she was horrid. Just like the NYTimes.
Small businesses aren’t charged fees by their banks for handling cash. They are. however, charged by VISA, MasterCard, etc, for processing sales made to those cards. Some large businesses may well be charged by their banks for processing large amounts of cash, but we’re not told whether those charges are more, less, or the same as the charges for processing credit card sales.
Hey @Alan :
1) “Biden’s inflation” was caused by the extremely lax financial policies and outrageously HUGE tax breaks given to only the richest 1% by President Donald “Traitor” Trump and George “W is for Warmongerer” Bush.
2) Credit cards are absolutely a regressive tax on the poor. The fact my business advertise a 3% rebate for cash payments and *make money doing this* versus credit card payments says it all…
And btw, “cash payments” are almost never in physical cash, but payments via check, debit card and/or wire transfers, all which are recorded and reported by our bank, so no tax cheating here – If you wanna catch tax cheats, FUND THE IRS and let them focus of the richest 10% of American Taxpayers for tax compliance, which would give us back TRILLIONS in rev use by stopping the mostly illegal tax avoidance methods of the rich,
3) Fake Fox News (the wholly-owned propaganda subsidiary of the @GOP) is consistently wrong about *everything single thing* they write or say on air.
Finally Gary, something we can agree on! Been a while since I read an article of yours that properly inform consumers about some of the lies that these people (WaPo, NY times, Vox) spread often. I make 50K/year (790 fico), good at setting my budget, pay my bills on time (in full), very good at using and accumulating points. Some of my friends at work who makes well above 150K/year wonder how I could afford business class seats whenever I go to vacation. I actually consider Credit cards as one of the greatest EQUALIZER tool for a poor, low income fella like me who could not afford to pay cash for a biz class seat
Hey @Alan :
1) “Biden’s inflation” was caused by the extremely lax financial policies and outrageously HUGE tax breaks given to only the richest 5% by President Donald “Traitor” Trump and George “W is for Warmongerer” Bush.
2) Credit cards are absolutely a regressive tax on the poor. The fact my business advertises a 3% rebate for cash payments and *makes money doing this* versus credit card payments says it all…
And btw, “cash payments” are almost never in “physical” cash, but cash payments via check, debit card and/or wire transfers, all which are recorded by our bank, so no tax cheating here – If you wanna catch tax cheats, FUND THE IRS and let them focus of the richest 5% for tax compliance, which would give back America TRILLIONS in revenues by stopping the mostly illegal tax avoidance methods and schemes of the ultra-wealthy cheaters,
3) Fake Fox News (the wholly-owned propaganda subsidiary of the GOP) is consistently wrong about *everything single thing* they write or say on air.
4) Gary : Please stop blocking comments you personally disagree with !
Do credit cards exacerbate inequality? The answer is certainly, yes. The question is whether inequality is preferable. US = capitalist, not communist, which means by definition we chose inequality over equality.
The New York Times video admits that credit cards offer a service and banks deserve to make money from it. The video does not mention the most important part of the service.
Even if I earned 0 points, 0% cash back, 0 rewards whatsoever on my cards, I would still use my cards whenever they are accepted at parity with cash. Why?
CONSUMER PROTECTION
In rare cases–but I am a voracious enough consumer that this happens to me 2-3x a year–I receive goods or services not as described, and the merchant is unwilling or unable to provide a satisfactory resolution. In all such cases I have filed a dispute with my card issuer. I have never lost a dispute. Last year, I earned back $25,000 in disputes that would have been lost if I paid with cash.
Major banks charge $0.30 per $100 cash, with some amount 5-20k exempt per cycle.
Not a crushing cost, certainly not as compared to cc fees.
Hey @USVET1 :
You make over $150,000.00 a year by yourself, swear by #FakeFOXNews outright lies and radical far-right wing propaganda, and then actually have the balls to claim you are a “low income” ? What a tool..
Try telling that to the average American who makes 3X LESS than you do, at just a median salary of less than $45K/Year. At worst, you are middle-class – and mostly likely upper class, if you live in a flyover state.. Stop whining.
Durbin’s bill is a good, though small, step in the right direction. What’s needed — in addition — is a requirement that all fees for using a credit card be charged to the card holder on the monthly bill. Call that charge “the cost of convenience.”
Another thing is that non-cash rewards (e.g. “miles”, etc.) is that they are economically inefficient, and therefore a drag on the economy as a whole. Airlines, for example, get far more revenue for seats paid with credit card miles than for seats paid for online or through travel agents.
Gary Leff often has good info in his articles, but this one is wrong, wrong, wrong all the way through. It is long past time to end the travesty of credit card rewards — unless those getting them pay for them themselves by paying for the card fees. That way anyone needing a card can still have one, and shop among card offerors for the best deal on swipe fees.
Merchants would still need agreements with card companies for the hardware or software they need, and for the banking services involved: here, too, merchants can shop around for the best deal.
Hey Olaf U :
You conveniently forget to mention that you can also dispute charges on DEBIT CARDS, which many merchants (including my business) treat as cash.
And if you spend so much money that you got back $25K in disputes alone (which equals more than 50% of the yearly median wage for the average American), stop publicly flexing your great wealth – Its disgusting.
Gary, Gary, Gary, we’ve gone through this. My real life business pays over $30,000 a year in credit card fees. In no reality is cash costing me less. If one of my people comes up short the onus is on them to cover the shortage. Basically, cash costs me almost nothing, and certainly nowhere near the price of credit cards. Can you show me some real life small to medium sized normal businesses that pay more for cash than plastic? I have my business as an example; opposing opinions are more nebulous.
That said, this legislation is bad for various reasons, not least of which is that consumer prices will not come down if it passes.
@Mantis said :
“…The above comments about very small businesses in practice preferring cash is 100% solely around tax fraud…”
**Seriously** ??
The amount of “tax fraud” by small businesses in America would amount to a tiny **rounding error** compared to the **institutionalized tax fraud** committed by major multinationals like Google, Amazon and Microsoft, and the ultra-wealthy 1% (like **Traitor Trump**) who control radical far-right wing politics – Time we beef up the auditing staff at the IRS and gear up to go after these major tax cheating traitors, once and for all
@Alan,
I’m on both sides, and the current inflation was caused by the bi-partisan response to Covid-19, and the Trillions in ‘free money’ that was released. Increase the money supply = inflation, and BOTH parties are too blame.
As for the NYTIMES article, the report was inaccurate in many areas.
1) There is no such thing as SWIPE fees. The cost of a transaction is broken up by the Interchange fee (which VISA/MC/AMEX charge), and the issuing bank fee. Interchange is the MINIMUM % cost of the transaction. And it’s entirely based on what Merchant Type/Code you have operating as a business, and there’s thousands of them! Are you a nonprofit or education institute? You have have one of the lowest interchange fees possible. Are you a weight loss supplement company that charges monthly recurring fees? Good luck getting less than 3%, let alone any processing at all!
2) Bank fees are next, and yes, they depend on the rewards level (actually called Qual/no Qual). Higher rewards cards (think 2% back! 5% at gas stations!), do cost the merchant more, BUT… many merchants have what’s called a blended rate that takes a statistical sample and simplifies the overall rate. I.E., while nearly every reader of my post has a rewards card, the average merchant’s customers use a variety of cards, and not all of them are rewards….. There really is a subset of customers who *prefer* to pay with a debit card, because of there opposition to taking on any debt at all.
3) Like many folks, the NYTimes reporter confuses correlation with causality. The reason why rich people do better with rewards cards vs. poor people is because rich people are more profitable because their average ticket amount is much higher, which covers the fixed costs (and more) that banks have for EVERY. SINGLE. TRANSACTION.
I actually like the NYTimes, and I also think they went wayyyyyy too left on this opinion article, and they are realizing it (it was just posted and the comments section are already shut down).
-Jon
ps – I post on here all the time, I like to think objectively and fairly and always using my real name. I’ve been in the credit card processing business for 25+ years, nearly entirely with nonprofits. it’s what I do. http://www.biedermanngroup.com.
The real inequity is Delta raising its Medallion thresholds to ridiculous spend levels and limiting lounge entries for the AX cards. Delta is just trying to keep black and brown people out of the lounges!
Another point lost on both articles. If you pay with a credit card you’re getting a month of float. It meant nothing when things were at 0%. Now it’s ~5%p.a. you gain by charging vs cash/debit, in addition to rewards.
Hi “Hey @USVET1 :
You make over $150,000.00 a year by yourself, swear by #FakeFOXNews outright lies and radical far-right wing propaganda, and then actually have the balls to claim you are a “low income” ? What a tool..” I gather you did not read the post. This is what he wrote “Finally Gary, something we can agree on! Been a while since I read an article of yours that properly inform consumers about some of the lies that these people (WaPo, NY times, Vox) spread often. I make 50K/year (790 fico), good at setting my budget, pay my bills on time (in full), very good at using and accumulating points.” You certainly made a tremendous amount of assumptions….time to slow down. As for myself I am grateful there are Vets who took the time to serve our country…to all Have a Happy Thanksgiving ..and slow down when reading fellow travelers posts… 🙂
I thought we were all supposed to use contact less payment and credit cards? You know……..for “covid”.
I guess they just don’t care about grandma after all.
Delta is able to charge a premium to both cash and credit card customers, because they offer a premium product. Full stop.
This is a very bad article. Basically fact-free and opinion-full. Let’s peel the onion.
I am a merchant and I am selling hand bags for 10,000 USD a piece.
The typical cost for allowing costumers to use a credit card is about 3.5% in the US and that cost is largely driven by the interchange fee (2%) that goes to the issuing bank. Whoever processes the payment for me deducts 350 USD from every transaction. What I receive as a merchant is 9,650 USD
Alternatively, I can ask my clients to transfer the sales price to me. In this case, I as the merchant receive the full 10,000 USD.
As a merchant I don’t care whether my customer gets any credit card points and what these points are worth to them. I need to cover my cost and make a profit.
If you are a merchant, would you prefer your customer to pay by credit card or bank transfer and why? I think we all prefer the bank transfer.
The fact that customers get credit card points drives them to use a mean of payment that is more expensive for me as a merchant. To recover the fees I have only one option: increase the price. The price increase is the cost of the credit card times the percentage of credit card use:
If all my customers pay by transfer, I don’t have to increase my price.
If all my customers pay by credit card, I have to make back the 3.5%, so my price has to increase to 10,327 USD (3.5% fee is 327 USD) to make the same amount of money to cover cost and profit.
That’s a very obvious conclusion and the NYT gets this part very right.
As a government I might not like this and I might be of the opinion that market forces are not working properly because bank transfers are obviously never the preferred choice to achieve the best economic outcome.
Some governments are now limiting interchange fees and the best example is Europe. This will bring prices down in the long run and is one option.
The other option is to allow the merchant to charge the true cost to the consumer. This is what we can see in Australia. The merchant can offer the bank transfer for free but charge 3.5% for the use of the credit card.
As someone who is in favour of leaving decision making to the market, the latter option is the better one: merchants can offer the lowest price and consumers have a choice.
That this is not in the interest of credit cards and people benefiting from them is clear. So read Gary’s article with a pinch of salt and get the facts right.
@SMK77: Thanks for the detail!
I hope people notice in your text that credit cards increase prices.
Some commenters above (not those who are actually merchants) claimed, without support, that they don’t!
I have a small business and yes, I increased my prices because of credit card processing fees. I much prefer a check or cash as it costs me nothing.
I do think he has the percentage of cost to the merchant wrong. It is more than the exchange fee and swipe fees. The processing companies will sell a low percentage, but the add in 10-15 extra charges. I take payments on square. The last payment percentage deducted for American Express was 9.355 percent.. On Shopify my percentage is 8.73 percent. When I had Clover it was over 10 percent. I have been in business for over 25 years and had one charge back.