> Two years ago, the European Union capped the fees retailers pay at 0.2 percent for debit cards and 0.3 percent for credit cards.
How is it possible that retailers in the U.S. and Canada pay 2-3% for credit card usage, or ten times greater than legally permitted in Europe? I have to assume that 0.3% is profitable, otherwise the credit card companies would simply stop operating in Europe. Could this be a misprint in the original article or are Americans and Canadians being horribly ripped off?
American merchants are paying 0.05%+$0.22 for debit and check cards, and the only credit cards where interchange is 2-3% are those that pay 1-2% in cash back or reward points/miles. Non-reward credit cards and gift cards start at 0.65% in interchange fees otherwise.
> the only credit cards where interchange is 2-3% are those that pay 1-2% in cash back or reward points/miles
What percentage of credit cards in the U.S. and Canada pay 1-2% in cash back or have reward points/miles? If the answer is most credit cards, then it seems to follow that merchants are being charged 2-3% for most transactions. Or am I missing something here?
Furthermore, I don't believe that merchants are allowed to pick and choose which credit cards they'll accept based on the fees. That is, if a merchant says that they take Mastercard, they have to take any brand of Mastercard. They can't refuse a Mastercard that gives cash back (and how could they even tell at the time of the transaction anyway?).
There were class action lawsuits in both Canada and the US over the anti-competitive nature of the agreements merchants had to enter into. I can't remember all the details, but in the US merchants rights to charge consumers higher prices or fees for using rewards cards was confirmed. But I've never seen a merchant actually doing this online.
Before there was the class action, the US Justice Department sued. Visa and MasterCard settled.[1] The settlement required those companies to allow merchants to "steer" customers to less expensive cards with with discounts and incentives. Not that this agreement didn't override state laws which prohibit that practice. AMEX choose to go to trial, lost, and the case is currently on appeal at the Second Circuit (the judgment stayed).[2]
The class action lawsuit was settled in principle back in 2012 and approved by the district court in 2013, but was thrown out recently by the Second Circuit.[3] It would have been the largest class action settlement in history, but many large merchants objected to being bound by a settlement that they had no part in negotiating.
I believe either VISA or MasterCard - likely both - have rules against charging any additional fees when paying with their cards as a merchant, with the implicit threat of them pulling their services and leaving you unable to process cards if you don't follow said rules.
The typical workaround, which isn't against their rules, is to offer a discount for paying in cash - I can't recall the last gas station I saw that didn't do this (for gas at least), and a number of restaurants also offer cash discounts.
The reason for offering a discount for paying in cash is probably that most clients would get angry if merchants tried to charge them more for using a credit card while they are always happy when they get a discount for paying in cash. I think the credit card processors are smart enough to realise that this is happening, so if they wanted & could do anything about it, they would probably write their terms differently (cca. "prices for payments in cash and with cards must be equal").
There are different types of card that have different fees, like Visa Signature or MasterCard World. These usually have rewards. However, it seems like most credit cards I've seen (at least in the tier I've considered) have 1% CB or equivalent at the least, even without being Signature or World.
Not a lot, just a little. Pages 1-2 are just title pages. Page 3-6 every row shows 0.05%+$0.22, because those are all types of debit cards. Page 7-8 are the ones that apply to swiping a credit card, and only 3 of those rows account for what we're talking about here: retail/supermarket/restaurant. In those rows, we have 4 columns that correspond to how many rewards the cards pay back to the consumer. They max out at 2.4% for any brand's variety of Visa Signature Preferred card, which pay up to 2% cash back.
Yep. This low debit fee is due to the durbin amendment (https://en.wikipedia.org/wiki/Durbin_amendment), which is generally how Stripe makes most of its money AFAIK. Stripe still charges the % and takes the remainder.
> the only credit cards where interchange is 2-3% are those that pay 1-2% in cash back or reward points/miles. Non-reward credit cards and gift cards start at 0.65% in interchange fees otherwise.
Those differences in credit card fees between rewards and non-rewards often aren't being passed on to the merchant, though, especially small businesses who have little room to negotiate.
I'm a small business merchant, and they're passed on to me. I pay interchange plus 0.04%. If interchange on a specific transaction is 0.05% then I pay 0.09%. If it's 2.9% then I pay 2.94%.
Merchant service providers have been pushing this "interchange-plus" pricing model to win over businesses from other providers with the old "tiered rates" pricing for many years now. Even "tiered rates" did pass on some of the price differences, just not as directly.
PayPal/Stripe's model of a single flat fee for all card types is pretty much exclusively an internet (card-not-present) thing, except for the rare coffee shop with one of those Square smartphone dongles. None of the B&M stores you shop in are likely paying flat rates. Different cards cost them different amounts of money.
Small correction: visa/mc interchange is 1.2-2.4% + 5-10 cents.[1] And that's what banks get to work with in terms of paying out rewards. It's processors that mark up the rates higher... And that can increase what merchants pay for debit as well.
The biggest merchant ripoff going on right now are processors that charge the same rate for debit and credit. If more merchants knew how cheap debit can be there might be more steering.
Much of the 2-3% US companies charge is spent in the form of rewards in the US. The fact that US companies offer 1-1.5% back to customers as rewards implies they can support lower fees to merchants if they get rid of rewards. Do EU cards have cash back programs?
So, the card gives rewards and charges higher merchant fees. The merchant raises prices to offset the fees, which offset the customers' rewards. Friction.
This is exactly like subsidizing farm, ranch, and oil but then raising taxes to pay for the subsidies indirectly.
The rewards establish a system where everyone would be better off if no one uses reward cards, but the best strategy for each individual is to use them.
A clever application of game theory to leach wealth from the populous.
>One of the most often cited studies is one conducted by Dun & Bradstreet, where the company found that people spend 12-18% more when using credit cards instead of cash. McDonald’s reports its average ticket is $7 when people use credit cards versus $4.50 for cash.
>Those who were told they would have to pay by credit card were willing to pay more than twice as much on average as those who were told that they would have to pay by cash.
Reward cards and other benefits (such as extended warranties) encourage people to put spending on credit cards. Putting spending on credit cards causes you to spend more. Ergo "those rewards programs get people to spend more money because they get more points."
It's well established that paying with plastic over paper makes you spend more.
>But the most surprising thing about these studies? When I tracked down many of their authors this week, I found that they, too, can’t quite kick the credit card habit. Why doesn’t Joydeep Srivastava, co-author of the Monopoly money study, use a debit card or cash?
>“Mostly because my credit card is giving me lots of miles,” he said
>Once upon a time Mr. Prelec, a professor of economics at the Sloan School of Management at the Massachusetts Institute of Technology, refused to collect frequent-flier miles (or even coffeehouse stamp cards) because he thought they cluttered his decision making... Now, he doesn’t leave home without American Express card. Why not go debit-only? “The rational answer is, it’s the points,” he said, given that few debit cards offer reward points.
They don't, really, as long as they're not disadvantaged compared to the competition. The people who are getting screwed are people who pay cash or use cards without rewards programs.
Merchants will charge more when profits drop. None of this is coming out of profits. They only time it comes out of profits is when competitors have some advantage that prevents the merchant from passing increases on to the customer.
Or like throwing your change in a bucket every day for a year, and then pretending like the money came out of nowhere when you cash it in once a year and blow it on something you wouldn't normally buy.
Well you can always try the India model which is Chip and Pin for cardholder present transactions and mandatory two factor authentication for online. One result of this strict policy though is automatic subscription card billing is essentially illegal.
You can only pay online with debit cards if you use two factor authentication in Europe (eurozone). It's basically free though (cash is more expensive to handle), unlike credit cards.
No, the processor will redirect you to the page of your bank where you need to enter a code sent by sms by your bank. This is true 2fa, it works at least with all Russian banks I've used and I'm sure it works in EU the same way (I thought it was like that everywhere in the world?)
What's sad is that the rewards cards are generally only available to people with good credit which correlates strongly with the middle class and up. That makes rewards cards a transfer of wealth from lower classes up. Making us all complicit in the ursury evilness of credit cards.
Good credit isn't so hard to establish, and not so tightly based on income... My ex wife has incredible credit and she doesn't make that much more than minimum wage. It comes down to money management, and paying your bills on time, over time. Too many people will let frivolous expenses take priority over paying the bills.
I've been down and out... unemployed most of 2002, and saddled with a six figure hospital bill (after insurance max) about 7 years ago... I still have two rewards cards... I put everything day to day on them, and generally pay them off at payday. I try not to carry much of a balance, except for larger outlays that I'll do over time.
The bigger problem is that parents should talk to their kids about bills, the importance of paying them, and actually show them a spreadsheet with how much is coming in, and how much is going out just for bills, and then working with what's left. Parents don't do this, schools should as well, and even then, the stigma prevents parents from showing this to their kids, so they get to be adults with no understanding, prioritization or coping skills.
Oh please. Here's a better reward: don't buy anything you don't need. Since credit cards are commonly used to purchase luxury goods -- generally associated with middle class and up -- I could make a similarly inane argument that it's a transfer of wealth from spendthrifts to those that are disciplined and save their money.
If you do business travel, or other per-deim expenses, it's a huge boost to have a rewards card... the original bill is reimbursed and you get the points/miles.
Oh great, an incentive mechanism that rewards going for the most expensive acceptable option even if there is not only no business value in it, but also no direct personal value.
But that won't lower prices... as it stands, even if rewards programs were eliminated today, and fees were capped as in europe, the prices of goods would not go down.
Online retailers (esp small ones) are paying ~2.5-3% in credit card fees, and compete heavily on price. I run a small online store - if my credit card fees suddenly dropped by 2% the first thing I would do is drop all my prices accordingly.
Rounding to stupid numbers (.99) works just like rounding to reasonable numbers: there are some inputs where a sub-granularity change would push the result over the threshold and others where it would not.
But your observation gave me an entirely unrelated idea: could a merchant, online or not, use deliberately random "##.74 instead of ##.99" prices to give the impression of really tight margins, even when they are actually wide?
Yes, there were plenty of reward schemes - Airline, store points, hotels, cashback etc. in the UK (at least) but the number of them and the rewards are getting smaller since this ruling
Debit cards, which are huge outside the US, never have reward programs (that I've seen anyway.) Visa does not charge different fees for different product types for them.
That's cool but that's a fixed 10 cents, so basically Discover is forwarding to you some of the money they receive for handling the debit in the first place.
I have yet to see a debit card do a 1% cash back, which is really common in credit. Here in Canada, the debit charge (handled via the interbank Interac "sort of coop") are really low, 6 cents per transactions is about par. There's nowhere to tack on even a 10 cents cash back.
They used to but they are being phased out - the EU piously thinks that the merchants will pass on lower costs to the consumer - which is to borrow a line from Sir Humphrey "A brave choice commissioner"
Let's say that retailers' financial services costs drop by 1% of revenue, and they choose to raise their prices by 5%, because they're really greedy or mean. Their competitor across the street is also really mean, but only raises their prices by 4%. As a thought experiment, play that scenario through a few more turns.
The effect of lowering their costs for financial transactions is to lower retailers' minimum price for selling their products. They're "allowed" to charge as much as they like, though there are legal restrictions that make it illegal to collude with their competitors. And, even if they do collude there are motivations to defect from those illegal agreements that tend to undermine them.
A higher level view will appreciate that the higher sticker prices from higher transaction costs largely ended up being refunded to consumers through credit card reward programs, but probably distorted the prices for buyers paying with cash.
The regulation had a noticeable effect in Germany: As soon as it was in effect every chain started to accept MasterCard and Visa cards. That includes the most frugal stores that have razor thin margins. The food market is extremely competitive and if a store can afford to undercut their competition they will the first second they can.
Europeans also use credit cards way differently. Pretty much all cards now have EMV crypto chip which makes traditional credit card fraud impractical. The merchants pay for the EMV terminals themselves, and the risk of offline, non-EMV transactions is born by the merchant alone. This greatly diminishes the risk of the payment processor.
AFAIK EMV terminals are not required in the US, and the payment processor bears all the risk. This could explain why they must charge higher fees, too.
Pretty much all new US cards now have chips in them. Nearly the entire market has shifted over to that in the last year. The only cards remaining without chips are those that are running out their expiration date.
Merchants are now liable for fraudulent charges if they haven't switched to EMV terminals. The payment processor hasn't born that risk for nearly a year.
It's fun to watch Europeans (like myself) use ATMs in the US.
They insert the card. Nothing happens. After a while they get confused and pull out the card. By then some infomercial is playing.
Eventually they figure out you're supposed to swipe your card in the ATM. There is nothing on the machine that tells them to do so. European ATMs tend to be wonders of usability in comparison.
>Pretty much all new US cards now have chips in them
Yeah, but pretty much all chip readers in the field are disabled. It seems most merchants would rather eat the fraud then issue a configuration change (!!).
That's good to hear. My information is based off a friend who worked in credit card defaults, but it's some couple of years ago when he elaborated on the differences between US/EU on this regard.
One reason might be the US' extremely strong consumer protection law. It's also the place it was originally rolled out, so it could be a historical artifact.
That's one reason some stores(like Winco) only accept debit cards: The processing fees are much cheaper. And it might be because they don't have to enforce chargebacks, by law.
Certainly it's possible to accept payments with low costs: Bank transfers are pretty cheap.
It's easy to say "this charge is fraudulent, I didn't make it" and your credit card company will make it go away and mail you a new card.
Neither Citi nor Capital One entertain "I made this charge but I don't want to pay it because I'm angry at the merchant for bad service" (or whatever) easily. At minimum you have to prove that you tried to remedy the problem with the merchant and they're refusing.
In some instances it is better. In other circumstances it is not.
One silly example that happened to me. I bought a dishwasher and it had a problem. Under EU law, the retailer covers the warranty the first year and then the manufacturer warranty kicks in for years 2 and 3. Under the manufacturer's warranty they would dispatch a technician to my home. But the for the first year I would have to carry this big bulky appliance back to the store for them to look at and repair it.
In the end I sat on the problem for a few months until the "real" warranty kicked in and had a technician come out.
I don't think this was intentional but an oversight in the original consumer protection law.
Actually, that's not the EU law. EU law states that the retailer is responsible for a 2-year guarantee, full stop. Member countries may then legislate stronger protection if they like.
Thus, local legislation in an EU country may give better protection; for instance, here (Finland) there is an additional defect liability which says that if an item is supposed to last longer than 2 years (e.g. a dishwasher), then the liability "wears out" over the reasonably expectable lifetime of product. You won't get a refund if a 6 year old washing machine breaks (yes, I won't buy another LG), but you can get a partial refund if a 3 year old machine breaks down.
This liability falls on the retailer; importer/manufacturer has only secondary liability.
The US has larger rewards programs (one of my cards gives me 2% cashback) and the US has a far higher fraud rate due to their archaic processing systems. Europe has been using EMV with PIN for about a decade so has lower fraud and doesn't have the same rewards programs, meaning costs are lower.
In Argentina it is worst. If you have a plan to buy something in 12 month, the retailer receives a 30% discount up front. This is connected to high inflation BUT the retailers don't give you a 30% of discount if you pay with cash.
The differential isn't actually 10 times. The part Visa/MC keeps in the US is more like 0.05% to 0.65%, not 2-3%.
In the US, debit card interchange fees are capped at 0.05% + $0.22, since 2010. That was in the Durbin amendment to the Dodd-Frank Wall Street Reform Act.
Credit card interchange runs up to about 2.9%, but that's only on the cards with the most benefits: those that pay the largest percentage back to the cardholder. That's up to 2% back in cash, reward points or miles... plus 90 day accidental damage protection on all purchases, 1 year extension on all product warranties, travel insurance, concierge service, etc.
Interchange fees for the credit cards without rewards programs start at 0.65%.
> Credit card interchange runs up to about 2.9%, but that's only on the cards with the most benefits
Repeating what I asked in another comment, it's important to know what percentage of cards have those benefits. If most credit cards in the U.S. and Canada have cash back, miles, or rewards, then it follows that merchants pay 2-3% on most transactions. In my experience in the U.S. and Canada, almost everyone seems to use a cash-back or reward-type credit card.
Actually, we arguably do. Go try to price a US health insurance policy with the same level of coverage and cost insulation [1] you could get in Europe: get ER or primary care, at any time, with the promptness they would get for appointments, while never paying anything other than the premiums.
I'd be surprised if you could even find such a policy.
[1] And, of course, the same "we won't pay for this" cutoffs impose by e.g. UK's NICE board.
The law covers what amount can be tacked on to the consumers bill that depends on how they are paying. Not how much the provider can charge the merchant. In the US very few places charge different amounts depending on payment type.
We pay more than 10 times as much as many countries for healthcare if you're counting only individual expenses. If you're counting both individual and public expense, we still spend almost 10x more than Turkey.
It's really not. Some country has to provide financial incentives for companies to develop new drugs - a multi million dollar task - and the USA is the country that subsidiaries the rest of the world
I've seen this said a bunch of times but never anything to actually back it up.
The fact that big pharma companies tend to have fantastic margins and spend similar amounts on R&D as they do on marketing makes me think that it's probably bollocks.
The idea that big pharma companies are happily scalping Americans just so they can provide drugs to countries that can't actually afford them is just... absurd.
Here is a recent blog post that has some references to economics research papers around this general topic, but likely not directly addressing your exact claim. Nonetheless, you may find it interesting: http://slatestarcodex.com/2016/09/07/reverse-voxsplaining-br...
That's a nice (and popular) story but it really isn't as simple as that. Not only does the accounting get a bit creative, but also the research is more expensive to do in the US for partially for precisely the same reasons that the health care is (a lot of the cost of R&D goes directly into the health care system). Chicken, meet egg.
Even without this, drug development cost doesn't get anywhere close to accounting for the whole cost difference.
How is it possible that retailers in the U.S. and Canada pay 2-3% for credit card usage, or ten times greater than legally permitted in Europe? I have to assume that 0.3% is profitable, otherwise the credit card companies would simply stop operating in Europe. Could this be a misprint in the original article or are Americans and Canadians being horribly ripped off?