Visa and Mastercard have entered into a $30 billion anti-trust settlement with retailers over card interchange fees. Readers are asking, as one put it, “Is this the end of credit card rewards?”
Here’s the theory of why this would be concerning.
- Merchants pay for credit card acceptance
- Much of that cost is rebated to the customer in the form of rewards, to induce the customer to use the card
- Lower interchange fees mean less money available for rewards, and less of a reason to spend money to incentivize those transactions.
However, the details of the settlement wouldn’t appear to raise much concern. Reportedly the settlement does two basic things:
- “Visa and Mastercard will reduce interchange rates by four basis points (0.04 percentage points) in the United States for three years, and cap rates for five years.”
- “Both card networks also agreed to remove anti-steering provisions.” Merchants will be allowed to push customers to use payment methods which cost them less to process, like debit.
These will not have a material impact to credit card rewards.
- It limits price increases for five years, but current pricing supports rewards
- A 4 basis point reduction in processing cost will eat into profits but amounts to less than 2% of revenue and shouldn’t ultimately undermine the value proposition of card rewards – this is also only a three year price cut, which is another reason it makes sense not to change the rewards model.
- Anti-steering provisions actually make the rewards value proposition stronger. When merchants can encourage use of other payment methods, there needs to be even more marketing to consumers to establish their preference for card.
Merchants are hailing the settlement,
Joseph Stiglitz, a Nobel Prize-winning economist hired by the merchants as an expert, in an affidavit said the settlement “greatly enhances merchants’ freedom to steer customers using the linchpin of competition–prices,” and could lead to “very substantial” savings for merchants.
“Competition among merchants results in these cost savings being passed on to customers in the form of lower prices,” Stiglitz added.
It does undermine the case for Durbin-Marshall legislation to limit card interchange although retailers will argue that it does not – when I debated the law’s main lobbyist/proponent in November, he conceded that the legislation was just a start and they would keep pushing for more.
The settlement also doesn’t directly affect the cost of processing American Express cards. Amex would actually be a primary beneficiary of Durbin-Marshall’s proposal that cards couldn’t be exclusive to Visa and Mastercard and would have to process across another payment network as well.
I bet any limit or reduction on interchange fees will not result in a reduction of increasingly more common credit card surcharges (or as they put it, reduction for cash payments).
@andrew, ugg even some medical/doctor offices are starting to add such a surcharge which complicates reimbursements from HSA account as the surcharge doesn’t quality as a valid HSA “expense”
Then theres a local restaurant that adds 4% for cc transactions which I get around because they are on Uber Eats and with pickup orders the menu prices are exact same as ordering directly with restaurant but WITHOUT this surcharge. So its cheaper to order through Uber than through restaurant directly, and very DUMB on the restaurant as their fees to use uber platform costs lot more than the 4% they are being greedy for
What more likely portends the value of reward credit cards is the increasing demand from vendors (3 in the last month alone) I do business with to switch to ACH payments for all those recurring charges we have like shipping, internet services, utilities, etc… that generate a large steady flow of points. Of course, they say you have the option to keep your CC billing if you want, but a new 5% fee will be added. Needless to say, we’ve switched to ACH. I only see this picking up speed as small and large businesses facing squeezed margins due to higher labor & other costs look to claw back the 2-3% they pay to the CC companies.
When you use a rewards card, you are complicit to extortion.
The fees charged to small merchants (don’t know about huge ones, like Amazon or Walmart) are considerably higher and more than enough to cover the reward. Credit card companies force merchants to take all reward cards if they take any MasterCard or Visa or Amex.
For the good of society, it’s better if rewards and the extra costs are banned. For the good of those who know how to exploit rewards, such as manufactured spending and sign up bonus, rewards are great. Why not r ap e a merchant in order to get benefits?
The settlement also allows merchants to charge different fees based on type of card (so rewards cards may be charged more) and to determine which cards they will accept. I see this becoming a headache for rewards card users.
What does steering mean in this case? Simply a prompt recommending a debit card or actually allowing for a CC surcharge?
@ derek – Don’t be so naive. There is a cost to accept cash as well.
And the cost of rewards incentivize spend at stores and are not the only part of the swipe fee.
@derek I can see he is bitter since he doesnt generate much in the way of miles and points and wants to remove the programs. @Daniel Great points. Cash is a risk for robbery, theft from employees, there is a labor cost to manage it. There is no question that some people will spend more using the card vs handing over cash or equivilent.
@Daniel There is an added cost to accepting rewards cards versus non-rewards cards
@robertw I am not bitter. In fact, I benefit from lots of rewards, miles and points but I know that I am abusing the merchants when I do this. It’s easy for the credit card companies who offer these rewards but require the merchants to pay for it. Trump picked up on that with the “build the wall, Mexico will pay for it”.
@Daniel There is an added cost to accepting rewards cards versus non-rewards cards @robertw I am not bitter. In fact, I benefit from lots of rewards, miles and points but I know that I am abusing the merchants when I do this. It’s easy for the credit card companies who offer these rewards but require the merchants to pay for it. The Donald picked up on that with the “build the wall, Mexico will pay for it”
Everybody should just pay cash all the time. When you use a credit card the merchant has to issue a receipt for the transaction and that means they have to report the gross receipt to the IRS, thus making it taxable. When things are paid in cash, merchants can pretend like it never happened and then they don’t have to pay tax on it. You need your precious reward points, but at what cost?! Small businesses can’t afford to pay tax on all of their transactions. That’s just not fair. If you expect businesses to have to pay tax, then you should pay a surcharge to cover that. Tax just can’t be considered part of the cost of doing business.
Every time a headline ends in a question, you can safely presume that the answer is No. Otherwise the headline would declare the bad news as fact.
solely because of the size of the Visa/MC network, any settlement would have been large.
This has to be seen as a means by which the status quo can be maintained w/ minor tweaks to hold off more severe legislation.
As Gary has noted, there are lawmakers that are trying to fix a problem that doesn’t exist – or at least that plenty of people benefit from the status quo.
@robertw and @daniel- a few semi- coherent ramblings to add to the mix…(emphasis on semi)
1. One can certainly speculate a cost of handling cash- frequently discussed in travel blogs but I haven’t seen it quantitated- Is it 0.5%? 2%? Need that number for a direct comparison to swipe fee cost to truly draw a conclusion and thus relevance
2. I believe (without being able to cite immediately at this time) there have been studies demonstrating electronic payment users spend more than when the same users use cash (although less clear about if the electronic payment is actually driving behavior)
Although 1& 2 above may be true, that doesn’t necessarily then lead to the conclusion that swipe fees should be high. Like the “Ticketmaster problem”. In no way does the cost to provide the service of processing a transaction actually reflect the swipe fees in the same way that ticketmaster certainly does not require their outrageous fees to manage a ticket for you. The rest of these fees are essentially just to add to card companies (or in the case of concerts ticketmaster/ etc) profitability and to fund the less efficient portions of their companies.
i.e. the argument that cash has a cost does not immediately lead to the conclusion that credit card processing costs should also be high!
Functionally, the portion of these swipe fees that is returned as rewards is used to pay for the card company marketing and significant profits in this oligopoly where true competition does not/ cannot exist (except perhaps for retailers so large, such as Costco that they can push back). So essentially, marketing cost for rewards cards get pushed onto the retailors, then to the consumer.
Much of the time, the cost is just increasingly added to the “price of business” and passed onto the consumer one way or another. In fields where adding it to purchase price is possible, the item price is raised. In fields where it is not allowed (i.e. medical offices where price cannot be unilaterally raise), expect more card surcharges.
I do have one beef with one of Gary’s oft- cited maxims, that in areas where swipe fees are capped/ minimized, that retail prices have not decreased in tandem to this. This is a specious argument, as inflation would cause all prices will increase over time regardless- so the issue is as to whether prices increase more slowly or to a lesser degree over time.
To truly settle this question, we would need the impossible experiment where in the same country, one region had capped swipe fees compared to another and the outcomes could be compared.
“If you expect businesses to have to pay tax, then you should pay a surcharge to cover that.”
Is this satire?
Have you ever gone shopping?
When we do this the receipt says:
Item cost: $X
Sales tax: Y%
that would be “a surcharge to cover that”
Or do you mean we should pay an extra surcharge to cover the taxes they need to pay due to their profits?
regardless:
is it your assertion that we should pay in cash so that businesses can avoid paying their legally obligated taxes?
head scratcher.
@Jerry
GTFO. I do not understand why, in the Year of Our Lord Two-Thousand-and-Twenty-Four, that we should have to carry around bundles of paper and bits of metal to exchange for goods and services. There is only a few things cash is good for: illicit purchases, money laundering, and tax fraud.
@Jerry, Taiwan has an answer for that. When you buy something, whether by cash or credit card, you get a receipt. Every quarter, there’s a lottery where you win money if your receipt number is drawn. As a result, everyone wants a receipt with a lottery number printed on it.
Nobody requires any business to accept cards, but if you don’t accept cards, you won’t make any significant sales to me, because I usually have about $30 along. I do not want to carry cash. It isn’t as convenient or safe as carrying a credit card; it’s more trouble to keep track of purchases; and it doesn’t have the protections credit cards provide in certain situations. You can argue the pros and cons as you wish, but if you don’t want my credit card I can almost always buy elsewhere. If you charge me extra for using my card, I may or not go through with the purchase, but I’ll seek out your competitor next time.
@ Gary — ‘should ultimately undermine the value proposition of card rewards” Huh?
@ Jerry — Um, tax avoidance is NOT OK.
I was obviously kidding, but thanks for the laughs!
@Luke, your point about Uber Eats is spot on, but it gets even worse for the restaurant: Drinks (both alcoholic and non-alcoholic) are typically their highest margin items, and when most order for pick-up, they don’t include drinks. As you say, it’s hard to imagine restaurants being that clueless.
the difference between tax avoidance and tax evasion…
https://youtu.be/AzlBuVngO1U?feature=shared
“four basis points (0.04 percentage points)” is not true. 4 basis is .4% or .004
@LEE ARMER
There are 100 basis points in 1%. So 4 basis points is 0.04%. Gary is correct. Your math ain’t mathing. When the fed raised rates 0.5% it was 50 basis points.
Rewards are funded by fees charged by issuers, not by fees charged by the schemes.
Unless issuers are reducing their total portion collected via the MSF (as was mandated by those criminals running the Australian RBA Payments Systems Board), there’s nothing to see here.
The “steering” to use other payment methods is my big issue on this. We’ll return to the old days when you swipe a card where the default will be “debit” and you’ll have to ask to use credit or enter cancel, etc. at many retailers. It’s just a PIA. We’ll also see more bait and switch like we currently do at gas stations where the price posted is for debit and credit is a higher amount. I can’t blame the retailers for this because they are just trying to make a profit during the hard economic times we are experiencing but it’s just a pain.
With regard to cash:
Another cost to the merchant is the armored car fees many pay in order to have the cash picked up and deposited. With a credit card their accounts just get the money, minus the swipe fee.
I use cash for three things:
The hunger box at church
Lottery tickets
Tips in hotel rooms
And that’s about it.