Credit Card fees cost you $400 a year even if you use cash
Filed under: Cards
While you may not know it; merchants have to pay a fee to use the credit card machines which typically is 2% of the actual purchase price. To defray this cost of doing business many retailers factor the 2% fee into the shelf price for items which leaves cash-paying customers shelling out the same 2% overhead on their purchases too. During this year your family will spend on average $427 to cover these fees while the credit card companies net a cool $48 million from the interchange fees.You can't make that kind of money in the U.S. without attracting attention from Congress and lobbying groups especially when your industry is already under fire for high interest rates and complicated anti-consumer fees and fine print. Congress is looking to regulate the interchange fee with the Credit Card Fair Fee Act of 2008. This fee is a cost of doing business; get rid of it and you risk a less reliable system or having the cost will moved to a different area under a new name. Even if the retailers can negotiate a lower fee, how likely is it that they will drop prices to reflect it? Consumers are already adjusted to the current price so the profit will stay with the retailer, not be passed to the consumer.
The article points out that any changes on the credit card end would just be passed on again in the form of higher interest rates. If this is really for the betterment of society as a whole, isn't a 2% transaction fee better than a 2% higher interest rate that compounds itself? Don't think I've forgotten about those individuals who pay off their balance every month; they'll also risk a negative result because the income from the interchange fee is part of what funds the rewards programs they enjoy cashing in on.
This is definitely the wrong area for the government to step in and start dictating fee structure and business practices. If they want to help out consumers they should refocus on the consumer side and continue to work on making billing practices better. Under the new legislation the government would try to create a rate that represents a system in which neither the buyer nor the seller has any power, an unrealistic scenario. If price gouging were going on I'd support the government breaking up the racket but in this case I believe that more government involvement would only add another barrier to entry to any startup that wants to create a better and cheaper system.
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Reader Comments (Page 1 of 1)
8-14-2008 @ 8:44PM
ray b said...
would someone explain how the governament can let a credit card company advanta bank in this case charge there good customers who have never been late 35% , thats right 35% i thought the sopranos went off the air. the government stands by along with the 2 presidental canidates and allows banks to take advantage of the hard working american who has always paid the debts ontime and now gets 35% for a ineterest rate?evryon please e-mail advata and complain and write your congressman and senator things like this have to be stopped
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8-15-2008 @ 4:43PM
Rachel said...
I don't understand why there is a need for the credit card fees. The credit card usage makes it easier on the vendor because the system is computerized. The need for accounting is done. They should be paying for us to use credit cards. I get so flustered when there is a minimum amount to pay to use a credit card or an overhead tagged on to the total. I usually refuse business, however, it is difficult to when they build it into the costs.
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8-15-2008 @ 4:59PM
Josh Smith said...
The fees cover running the computerized system and leasing equipment. While some argue that the 2% is too high if the fee is removed then CC companies will likely make it up by charging retailers for support or machines. That is my understanding of what the transaction fee is for.
As for minimum purchases, most cards prohibit them, as well as an add on for using a credit card. You can report the retailer to the CC company but if they are a small store they have likely added the minimum to make sure they aren't losing money on CC sales.
8-16-2008 @ 9:47PM
Rich said...
Josh, right now the banks compete with each other with miles and points offers that they don't pay for rather the consumer pays for it through higher fees and prices when they purchase goods and services. When Australia regulated the card industry and made the interchange fees more aligned with the actual cost of processing and still provided a profit to the banks, the market responded with lower retail prices and the banks had to compete for customers in other ways. The primary area the banks competed was through lower interest rate cards, so the opposite of what you suggested. The US is paying the highest interchange rates in the world and we have the most transactions.
As to where the money goes, see this chart:
http://www.unfaircreditcardfees.com/uploads/Diamond_Chart.pdf
Only 13% of the fee the banks charge are going to actual processing.
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8-16-2008 @ 9:48PM
Josh Smith said...
Rich, thanks for the PDF, I'll have to dig in further on this topic.
Thanks for sharing.
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