Monday, July 27, 2009

Credit where credit is due

by Cylinser

There's something you're going to figure out about me eventually, so best to get it out of the way now. I'm an information junkie. Some people sky dive and hang glide. Others have unprotected sex with multiple dubious partners while their wife thinks they are closing a business deal. Some people cash their paycheck and spend it on black jack. Some push dirty hypodermic needles into their veins and inject dangerous and highly addictive narcotics into their bloodstreams. And every now and then, one takes over a country and starts and international crisis. Me? I get high on information. Not a day goes by that I haven't been on, C-SPAN and wikipedia multiple times. Also, I listen to NPR a lot. Its the latter that I'll be talking about today.

Over the weekend while taking a long out of town trip, I'm naturally listening to NPR news when they get to a story on credit card fees, specifically the fees that merchants pay to accept credit card purchases. Now I don't carry cash on me. I prefer to pay for everything with plastic because its more convenient for me, credit card theft is easier to protect against than a cash grab, and in general I tend to think of money as dirty because it has absorbed the blood and sweat of thousands of unidentified and likely highly infectious people you've never seen before. But this story made a compelling enough argument that I'm thinking of trying to transition back to cash, at least for a while.

You see, merchants are forced to pay a fee to all the major credit card companies to be able to accept payments from their card carriers. Apparently, debit cards also carry a fee, somewhat smaller but still present, which I didn't know. It seems twice a year these companies get together and arbitrarily determine what fee they will all agree to use until the next time they meet, with maybe some slight variation from company to company. But basically, they stay on the same page with each other to ensure that no one is offering a significantly better deal. These fees typically fall somewhere between one and two percent, but can be as a high as four.

So? Well, its more serious than you think. According to the story, based on the current economy, the cost of restocking, paying employee salaries and benefits, bills, etc., your typical franchise or local mom and pop corner store is going to take home about $2 on ever $100 taken in. That's right, $2. For the no-math club out there, that's two percent. Now back to that fee, which tends to be at our above one percent. Suddenly, your penny-on-the-dollar credit fee becomes fifty percent of your take home...or more...maybe even enough to put you in the red. Not so small anymore, is it?

The point of the NPR story was that a lot of businesses in a certain area (sorry, can't remember specifically where) were considering asking consumers to boycott using credit cards for a certain amount of time to get the credit card companies' attention. When I first heard that, I was taken aback. You mean I have to use cash?! GASP! But I thought about it...and that's not really so bad. I could easily pay cash for a lot of things I used plastic on if I just make a point to remember to have some on me. But how many other people are going to have the same reaction I initially had and never get beyond that? Probably a lot. But I thought of a more effective idea.

Why don't these companies find a way to pass that charge on to the consumer? I don't know if there are any laws in place that prevent marking up credit card purchases...probably are, but what about a sale? Pay with cash and save X amount of dollars on all goods! Think about it. I walk up to you and say, "hey, merchant fees for credit cards are bullshit, pay with cash!" You push me into the gutter and mutter something about alcoholics in public. But what if you walk into the store and they say, "hey, buy that carton of milk with cash and we'll cut the price by 10 cents!" Hmm, now its interesting.

Look, these credit card companies don't need the income from this fee. Credit card companies make major bank off of their card holders' unpaid bills. In fact, that's probably where the majority if their cash comes from. People who use their card sparingly and pay their bill in full every month are of no use to them, but the big group of people that have big bills every month that are never paid in full and are constantly accruing interest are their bread and butter. Some companies also make money through monthly fees associated with simply having a card, but most of those disappeared when people decided they didn't want to pay that anymore, and indication that enough people can force the credit card companies to alter their business methods if they want to.

There's probably at least a few of you out there who notice the potentially fatal flaw in this effort, and that is a large number of people in this country rely heavily on their credit cards to make ends meet. Some of them are poor financial planners but just as many are probably barely making enough to feed their family and are only keeping up by falling back onto a credit card. I don't have numbers, but clearly the effectiveness of this plan would depend on the number of people that fall into this group. And its a tough think to accept, but really the bigger that group is, the better for the rest of us. Credit card companies are companies after all and they do need to make money to stay afloat. In that sense, we need a steady supply of people who can't polish off their bill every month but who are paying at least some of it every month at the same time, or we all lose our credit cards.

But I've gotten off the point. The point is that, however you slice it, the current situation of credit fees on merchants is going to cause some serious problems in the near future if it isn't dealt with. Credit card fees for merchants are threatening to put a lot of people out of business, but the alternative is to stop accepting credit cards...and see your clientele drop to zero. Some of these small businesses are really between a rock and a hard place. The solution for them is to see more cash purchases and less plastic without refusing credit-only customers.

As I said above, I would be in favor of them finding creative ways to pass that credit fee on to the consumer because I can afford it, but I don't know how much of their other clientele can't and how many of them would be drive to competitors as a result. Still, in the mean time, there's no question that every cash purchase is more favorable to the merchant than a credit purchase, so I'll be making an effort to have some green on me when I shop local or locally owned from now on. If you can manage that, I would strongly encourage you to do it to...unless you like seeing a Starbucks on every corner instead of your local coffee shop. And who knows, if enough of us do it, maybe the credit card companies will decide they don't need that fee after all? Sphere: Related Content


Dick Mace said...

Thats an interesting idea to discount products for cash customers. At the store I manage, we have some old stock of retaining wall block that we're trying to get rid of to make room for the new stuff. I can discount these block as low as $4.50 for cash or check customers. CC users will pay $7 per block.

Another observation is that Citizens Bank has a deal w/ Giant Eagle's fuel perks program. If you run your Citizens debit card as a credit, they give you an extra 2% off your grocery bill in addition to your fuel perks.

They're always scheming.

Cylinsier said...

Hey, it could work. I was thinking a ten or twenty cent difference, but $2.50? That's potentially a huge savings in a relatively short amount of time for return customers.

Ellipses said...

I know in other states, they do this at gas stations...

Cylinsier said...

Yeah, I'd heard that too, but they don't tell you they are doing it. You just get a slightly higher bill. They should advertise that like crazy: "Hey, pay cash and your gas is cheaper!" The CC companies' CEO's heads will spin.

Lori said...

My favorite coffee shop is next to the bank and they only accept cash. I'm a believer Mace.

Anonymous said...

Merchant agreement states that you cannot do anything to discourage someone from using credit card or you risk losing your merchant account. The fees are in most cases over 2% for any card that offers a reward or points and each transaction also carries a 20 -25 cent fee. Collecting $10,000 on cards always costs me over $225 per month.

Ellipses said...

Anon has a good point... if you take American Express, you can't stipulate a minimum purchase amount... I could call AMEX and they will coax the merchant into taking my preferred form of payment... I wonder, though, if rather than giving an incentive by way of a price reduction on goods paid for in cash, that you couldn't simply pass the 1-2 (or 4) % onto the customer? Rather than milk being 2% cheaper with cash, simply make it 2% more expensive with card... you see this online a lot... a 1 dollar convenience fee added to your "purchase"--- even if it's paying a bill (which pisses me off to no end).

Cylinsier said...

Yeah, there are always loopholes.