5 Tons of Flax

What the deuce!

A piece of the action

Posted by Jon on 29 May, 2007

I’ve heard, in a few different places, that credit card companies charge fees to merchants for processing a sale. I was never clear on exactly how much these charges amount to, however. This post over at TPM Cafe suggests the merchant processing fees range from 2% up to as much as 15% based on whether you use a plain vanilla card or a “rewards” card of some type. Moreover, merchants are apparently forbidden (by their contracts with the credit card companies) to charge differently for credit card vs. cash purchases.

The effect, of course, is to hide the cost of credit card processing charges, by raising the overall price on all goods, regardless of the method of payment. If you pay cash you are subsidizing people who pay be credit card. Or to be more precise, almost everyone is paying more than they would if prices were set without including any credit card fees. Of course, if the linked article is correct, people with the most extravagant credit cards – milage cards, rewards cards, etc. – are getting the best deal because they cost the merchant more than regular credit cards do.

Beyond simply raising prices for the customer, this seems to indicate an immense transfer of wealth from consumers to credit card companies, that occurs almost invisibly. The difference in price paid by the customer goes directly to the card company, even if the customer pays by cash! In other words, credit card companies get you going and coming – choosing not to use, or even have, a credit card, does not mean that you are not paying money to them.

There’s no way credit card companies would ever choose to end this practice. It would mean reduced credit card use by visibly increasing the price of charged goods relative to cash-bought goods, as many merchants would add the credit charge fee directly and visibly to bills, as they do tax in sales tax states. More significantly, it would end the effective theft of money from people who pay cash.

Just to put it in more concrete terms: The store you shop at takes credit cards, and the credit card fees average about 1% (spread over all purchases, including cash ones). You spend $100 in case. $1 is going directly to Visa/MC. Essentially, CC companies are taking “a piece of the action” of all consumer economic activity regardless of actual CC use. The Mafia never had it so good.

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