Floyd Norris raises a very good point in his column today on merchant credit-card fees: Why do we have a system that has cash buyers, who tend to be poorer, subsidizing credit and debit-card purchasers, who tend to be richer?
It’s a very good way to think about the interchange fees Visa, Mastercard, and the like charge retailers every time you swipe your card. That comes to about 2 percent of every plastic transaction.
You think retailers just eat that 2 percent? I don’t think so. These fees end up boosting the price of goods for everybody. That’s fine if you’re a card user. But what about the people paying with cash or even food stamps, as one Norris source points out:
“Food stamp recipients pay the higher credit prices for things they buy with food stamps,” said Mallory Duncan, the general counsel of the National Retail Federation. “They are subsidizing the people who get miles.”
Norris has a terrific paragraph here with a bunch of stuff that’s new to me:
How much less depends on what kind of business the store has. (Food stores pay smaller fees than clothing stores.) It depends on what kind of market power the store has. (Home Depot gets a bigger share than Fred’s Hardware.) It depends on whether the card is a credit or debit card. (Debit cards have lower fees.) It even depends on whether a credit card offers rewards. So when I use the Visa card that gives me airline miles, the merchant gets less than if I use a basic Visa card.
And he asks the right question:
All of this invites the basic question: If the store gets less when I use my credit card than it does when you pay cash, why should we pay the same price?
I’m wondering if it would be better to just charge the plastic-using consumer the fees.
This has absolutely nothing to do with the fact that credit card companies make massive donations to political campaigns while no one lobbies on behalf of cash and few lobby for the poor. It was unpatriotic of you to even suggest it.
#1 Posted by Josh Narins, CJR on Sat 3 Oct 2009 at 11:48 AM
Merchant fees are a marginal cost. They are passed entirely to consumers in higher prices for stores than have no market power, and paid entirely by stores when the stores have perfect market power (because such stores already charge the highest price they can).
Since neither situation ever occurs in the real world, interchange fees result in a mixture of higher prices for consumers and lower profits for businesses.
The same analysis applies to sales and excise taxes.
Unlike sales and excise taxes, interchange fees do not support public goods, but instead increase the profits of banks.
- Greg Weston
http://www.westonfirm.com
#2 Posted by Greg Weston, CJR on Sat 3 Oct 2009 at 08:58 PM