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.)