Wednesday, July 28, 2010

Stacked Deck On Credit Card Fees

Didn't catch this K-Drum piece until this morning, but it's a vital read.
Adam Ozimek is obviously trying to make my head explode this morning. Today he points to a new paper from the Boston Fed that investigates the consequences of credit card interchange fees. The basic background is this: (1) card companies charge merchants a 1-2% interchange fee on all credit card purchases, (2) merchants raise the prices of all their products slightly in order to cover this cost, and (3) because most merchants charge everyone the same price, regardless of whether they use cash or credit, cash users end up paying a little more than they should while card users pay a bit less than the actual cost of the interchange fee they incur. So what does it all mean?
On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.
Isn't that peachy? This is the result of allowing an effective monopoly in the card business, thus giving network providers the power to force merchants to keep interchange fees hidden instead of charging them directly to card users. Vast masses of poor and middle income families end up paying a few dollars into the system every year while a small number of upper income families reap the benefits.
In other words, the more you use cash in America, the more you're paying into the credit card interchange fee pot.  Credit card users actually cost merchants more, but they make it back up by charging cash users too with a higher price.  The bottom line is if you use only credit/debit cards, you're not paying as much as you should at the store...and the cash users are picking up your tab.

They've been doing this for years.  Nice, eh?  There's a even a chart.

Your average middle class American is dumping in, and the wealthy are avoiding paying all the interchange fees they rack up when using cards, even though A) they're using the cards and B) they can afford to pay the fee.

After all, who would use credit cards at all if it was more expensive to do so at the store?  (Sure, it's more expensive in the long run with interest and fees, but if it cost 2% more to the store price on top of that to use the card rather than cash, especially on a big purchase, you'd not do it.)

And the rich have been dodging that 2% fee or so for years.

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