Who's Paying for Your Credit Card Rewards?

"In effect, [the cards] are subsidized by those who pay those higher retail prices with cash, debit cards or standard-issue credit cards," writes the Washington Post.

February 08, 2011

WASHINGTON - Over the weekend the Washington Post highlighted the practices of credit companies who entice consumers with low annual fees and rebates.

"Credit card companies are amazing," the Post writes, tongue-in-cheek. "Not only do they now offer cards with no annual fees and low teaser rates, they even give you a rebate for one percent of everything you buy??Can seven percent be far behind?"

While swipe fees are suggested as one source for subsidizing the card perks, ultimately, the Post concludes, the consumer covers the additional costs.

"When all is said and done, all that's really happening is that the credit card companies are taking money out of your left pocket, setting aside a hefty fee for themselves and putting what's left back in your right pocket??In effect, [the cards] are subsidized by those who pay those higher retail prices with cash, debit cards or standard-issue credit cards."

The anomaly occurs because Visa and MasterCard dominate the credit card business in the U.S., with about 80 percent of the plastic market, and thus are able to charge higher prices than would be possible in a more competitive environment.

Additionally, because merchants must accept those cards to appease their customers, the credit card companies have begun charging higher fees (swipe fees), without risk of losing merchant participation.

Today, as card companies face a competitive landscape characterized by a low price sensitivity of their merchant customers, and high price sensitivity of their cardholders, they have raised their merchant fees and used that money to offer more enticing rewards and cash rebates to cardholders.

The strategy is paying off (for the card companies), as those costs are difficult to dissect: The higher merchant fees result in higher retail prices, but consumers aren't able to discern the difference. Instead, they're distracted by the five percent rebate they receive every time they use their card at the supermarket.

As a result, the Justice Department sued the card companies last October, an effort to reverse this anti-competitive dynamic. Visa and MasterCard settled with the DOJ, agreeing to change their contracts so that retailers could notify customers of their transaction fees, persuading them to use cash or cards with lower fees. However, for most retailers, the rules won't take effect until a similar settlement is finalized with American Express or imposed by a federal court.

"It would have been better if Justice had also insisted that merchants be given the option of adding surcharges for credit card purchases or the right to refuse to accept higher-fee cards altogether," argued the Post. "Both are prohibited under credit card contracts."

The Post concluded that with the near monopoly Visa, Mastercard, and American Express hold over the marketplace, that regulation would be the surest way to eliminate the excessive fees. Congress mandated that for debit card fees, though the Fed has proposed to reduce that by more than 80 percent.

Finally, the Post highlighted two additional reasons for consumers to fear premium awards cards:

First, the cards are highly regressive, with lower income households fronting more money each year in the way of higher retail prices, a result of merchants' credit card fees. Why? "Poorer people tend to do more of their business in cash and don't qualify for many high-reward cards."

Second, the cards induce consumers to assume greater debit, much as what happened during the recent credit bubble.

"That hardly seems like the kind of social and economic benefit that the credit card industry wants to brag about," wrote the Post in its sendoff.

What You Can Do: Three Steps To Preserve Swipe Fee Reform

Action is needed now on swipe fees!

  • Send a comment to the Federal Reserve Board in favor of their proposed debit fee setting regulations. In December, after extensive analysis, the Federal Reserve released their first draft of these regulations, which include limiting the per transaction fee for debit purchases to between 7 and 12 cents. This represents a reduction in fees of approximately 80%. There is a comment period currently underway, in which the public is invited to weigh in on the proposed regulations. The comments are almost entirely from bankers (what else do bankers have to do all day but write comments to the Fed?) who are trying to water down, delay or repeal the regulations. In order to balance out the public comments, PLEASE click here to send your own letter, which you can edit or write in your own comments. This is extremely important!
  • Register for NACS Day on the Hill March 9-10. Join your industry colleagues in Washington, D.C., to lobby your members of Congress. NACS will set up appointments for you and conduct a group briefing prior to your meetings. Additionally, there will be NACS staff attending most meetings to help you find your way. The credit card lobby is planning on bringing hundreds, if not thousands of bankers to town in February to lobby against the swipe fee regulations. Do not let them distort this issue! Stand up for yourself and your business! Click here to register.

  • Respond to NACS Calls to Action. As this battle develops over the next several months, NACS will be sending calls to action requesting you to write letters, make phone calls or arrange appointments with your members of Congress back home. When you get these emails please open them and respond to the request. It is because of the tremendous grassroots pressure the convenience store industry placed on Congress that these much-needed reforms are close to becoming a reality. It is essential that we keep up the pressure these last few months! Click here to send the most recent letter.

Contact Lyle Beckwith at lbeckwith@nacsonline.com with any questions on how you can help preserve swipe fee reform.

Advertisement
Advertisement
Advertisement