The Hidden Costs of MasterCard & Visa Debit Cards
The ATM card is not the only one with sneaky fees. Those Visa and MasterCard symbols on your bank debit card signify high hidden fees as well. Commentary is swirling around this NYTimes piece:
Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.
Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.
As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.
In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.
There is no good reason whatsoever for the debit-card interchange fees to be rising like this, especially when they were often negative a few years ago. It’s almost funny, watching Visa executives tying themselves up in knots trying to justify the indefensible …
[NYTimes reporter Andrew] Martin doesn’t seem to have talked to any regulators for his story, but I hope they’re watching this fiasco closely, and are minded to crack down on it. There’s no reason at all that Visa and Mastercard should be soaring in value in a world where payments should be completely commoditized: it’s a monopoly rent, and I look forward to this particular trust being busted sooner rather than later.
Someday I’ll finally be able to say that there’s nothing left that credit/debit card companies can do that would surprise me. But today is not that day. As I read through…I found myself so gobsmacked that I wasn’t even outraged. Instead, I kept laughing at the sheer audacity of the whole thing. It is truly unbelievable.
Tyler Cowen at Marginal Revolution tries to suggest how “higher fees” can be good rather than bad:
My practice does not match the setting of the article exactly, but here’s how it goes. As Natasha forced me to internalize years ago, when I use my Visa credit card, and sign for payment, I receive frequent flyer miles. When I use my Visa BB&T debit card (yes, my two main payment cards are both Visa), I don’t get anything back. By using the credit card, resources are redistributed away from the store and to both Visa and me. On net that’s a better deal for me and that’s why I end up signing so often. This could be efficient too, in a constrained second best sense. For one thing, it indicates the supermarket was earning ex ante monopoly profit; is it so tragic for some of that profit to be split by Visa and me? One way to understand Visa is that it is supplying countervailing power by “organizing” consumers against the retail monopoly and distributing the gains from the new bilateral monopoly arrangement.
There’s nothing to stop the store from offering me frequent flyer miles, or other forms of discount, if I use a means of payment which they prefer. I’ve yet to see a deal good enough to make me switch. (When Sears pushes this on me, I just say no because Visa offers me a better deal.) And I find it easy enough to believe that the petty monopoly of the local grocer is more significant than the market power in the potentially more contestable cards and payment market.
Got that? If not, Xeni Jardin in Boing Boing boils it all down, “Short version: two ways to screw you!”
At The Big Picture, Barry Ritholtz says, “if I like the retailer and feel they treat me fairly, I use the PIN.”
Nudge looks at the incentives and psychology of it to conclude:
it’s unfortunate that customers themselves aren’t easily able to exert their power in the marketplace and take action themselves. Most don’t know which card can help save them money on their purchases (one story in the Times, even a heavily emailed one, won’t overcome this level of ignorance [ouch! Choose your words better, please]), and organizing to push for a different fee system is very difficult.
For now, if you use a debit card, opt for the one that requires your PIN. And if you are designing an incentive structure somewhere, ask yourself if everyone involved understands it.
I’ll be using the 2 credit cards I have that offer incentives, and calling for tighter bank regulations. After all we’ve been through I don’t understand why more and better bank regulation isn’t a no-brainer! (Or, rather, I do understand it. The bankers have bought and paid for our politicians. And we plebs call it the American way of capitalism and go along with it.)
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17 Responses to “The Hidden Costs of MasterCard & Visa Debit Cards”
The problem actually stems from the original agreements made long ago that prevents stores from charging more for people who use those cards. If the buyers, rather than the stores, paid the fees, then people would have reason to go back to cash or look for lower-fee cards.
Are you saying that there's an endless agreement that someone somewhere signed saying that stores can't charge more? I am surprised to hear that a merchant cannot charge more for those who pay with cards and/or offer discounts to those who pay with cash.
I think the Prof is right. The contract stores have with the card companies is that they will not pass on to consumers the 3-5% fee stores are charged. Every store that does (many do overseas) does so in violation of their agreement.
I hate the banks and the credit card companies. My solution? Move to a local credit union. It keeps your money local, as most lend to locals, and the fee paid by the stores on your debit card go into your local economy, not Delaware's.
Interesting argument, indeed. Some restaurants charge a dining in fee or automatically charge a tip, so why not include a % fee for use of plastic (or a % discount for using cash)? That seems like a pretty common sense capitalist solution that allows the consumer to decide his/her fate and that of these banks.
Not to mention, with the way today's cash registers are so easily programmable, it would be VERY easy to implement and would even help merchants.
My understanding is that they have done this from the beginning, or they would never have become so popular, although some gas stations do discount for cash. I would think that this could be called collusion nowadays, but I'm a little naive that way.
Your first sentence earns an “A”, but your second gets a “D”.
The term of art in the vendor agreements is that transactions using the card shall not be “surcharged”….therefore, your clever LLD colleagues have made discounting for cash verboten without even mentioning the idea in their printed agreements……amazing what higher education can accomplish.
You can't sustain the collusion argument, however, because the method of payment by credit is wholly optional on the part of the consumer.
Nonetheless, banks and merchants will not be weeping for the lack of Windish's future business because, at the level above mom and pop, merchants PREFER the credit card used because it keeps currency out of the hands of the employees and piling up in the till. Secondly, the vast majority of customers simply do not carry enough cash to afford a large majority of impulse and discretionary purchase decisions. More sales revenue and lack of embezzlement risk more than offset the transaction fees.
However, extra credit was earned for the gas station example. The gas cards do not contain the same language as the majors, so the proprietor is free to offer the cash discount. In this instance, the majors do not raise a ruckus because they are not typically otherwise the card being used at gas stations.
[...] The Hidden Costs of MasterCard & Visa Debit Card – The Moderate VoiceCompetition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard [...]
There was a section on this at the close of the NYTimes article, but even going back and rereading it's not clear to me what the status is and what the obligations are.
I'm having a hard time understanding how anybody is getting 'screwed' by a system that is wholly voluntary by all parties. The customer decides whether to use a card instead of cash. The merchant decides whether to accept a card instead of cash. If VISA were not offering something of value to both, nobody would use it.
Enter the government telling people it is going to get them a free lunch by pushing on the market in this and that way and you can be sure costs will go up for everyone. You don't want to get screwed, don't use 'em. I consider a few percent worth the convenience of an instant guaranteed loan.
Next week: Drivers screwed by auto companies selling cars that require “gasoline” to run!
In our society, it's hard to do without credit cards, but here's another incentive to check the terms carefully*, use them as little as you can and pay them off completely before the debt comes due.
*Slightly OT, but if you have kids of an age to get their first credit card, it wouldn't hurt to have a financial advisor or lawyer go over the terms with them and explain the implications before they (and you) sign on with it.
“If the buyers, rather than the stores, paid the fees, then people would have reason to go back to cash or look for lower-fee cards.”
Some of us have done this anyway, all along. (Not paid the fees, but preferred cash and been wary about credit.)
Also,
“Move to a local credit union.”
I've not done this in a long time, but I did long ago — the one car I bought with a down payment and the rest on credit, was financed through my credit union where I worked when I was still in California. (That was also the one car I bought new. Since then I've paid cash for used cars, a much better deal by far.)
the majors do not raise a ruckus because they are not typically otherwise the card being used at gas stations
They seem to be okay with the “convenience fees” charged by branches of government like the DMV for transactions done over the web. And for surcharges on major purchases, where Visa's 3% would be a big chunk of change.
I'm with DaMav, the system may be complicated and arbitrary, but it is conducted by consenting adults. And like Tyler Cowan, I'm enjoying my 1% rebate. Hard to see how letting Uncle Sam into my wallet would leave me better off.
>>I'm with DaMav, the system may be complicated and arbitrary, but it is conducted by consenting adults. And like Tyler Cowan, I'm enjoying my 1% rebate. Hard to see how letting Uncle Sam into my wallet would leave me better off.
As much as I disagree with DaMav on nearly every other issue on this site, I am on his side on this one. As far as consumers go, the system of using debit cards, credit cards, cash or other forms of payment is essentially voluntary. While I understand there is always a need for various government laws and regulations over transactions (such as Reg. E, which governs electronic transactions and disputes for consumers), it seems to me that the best solution to the “credit/debit problem” can be addressed by gold ole-fashioned free market forces.
As just a single example which happened *today*, Best Buy announces that they will no longer accept contactless Visa payments due to a long-running dispute with Visa over fees. (Link here: http://www.storefrontbacktalk.com/securityfraud…)
Let's remember that merchants basically are freeing themselves from risk by taking cards – if you don't pay your Visa bill, the grocer still gets paid. Years back if you bounced that check, the merchant ate it. This may be why my seven year old can sign my card slip with a smiley face, but retailers require two ids and a DNA sample if I write a check.
It's shocking to think retailers would like all the benefits of the system without bearing any of the cost, isn't it?
Disclosure: I work for a credit union trade group.
The only problem is that the free market seems to be more of an oligopoly at this point. The only time that a merchant has had the guts to rebel against a card company, that I know of, is when Wal-mart said that they wouldn't take Visa, until Visa backed down. The free market works properly only when there are large numbers of both buyers (in this case, merchants) and sellers (processing companies). I don't want the government to control, or restrict, the market, but we've got to get some real competition in there somehow.
I agree with your concern about the small number of processors available. Visa, MC, Diners Club (still around?), Discover, American Express. I'd like to see some more from a market standpoint as well. Those are off the top of my head, so maybe I've missed a couple but that's not very many to make a vigorous market.
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