Lots of news on the multi-billion dollar settlement today, but tough to get good details on what exactly has been agreed to and tougher still to predict how it will all play out.
But a case I wrote about earlier in the week, where merchants were suing over claims of price fixing in the fees charged to process credit cards, has been settled.
Visa, Mastercard, and several banks will pay out over $6 billion dollars. They will temporarily reduce interchange fees while they write new credit card processing agreements. And, as explained by Visa’s press release, we’ll see:
Modifications to Visa’s rules to permit retailers to impose a surcharge on credit transactions subject to a cap and a level playing field with other general purpose card competitors. The rule changes on surcharging likely would be implemented in early 2013.
(Mastercard, a party to the settlement, will be similarly affected.)
So beginning in 2013 we can expect to see at least some retailers charge more for credit card transactions (as opposed to discounting for payment by cash).
Raising the price on credit will make credit less used, and I don’t cheer this. And as I argued earlier in the week, consumers and merchants benefit greatly from electronic payment by credit card.
[C]ompanies get money right away, deposited straight into their account when processing credit cards, and without the risk that a check bounces. Consumers paying by credit card tend to spend more money per transaction. Credit card transactions also reduce the likelihood of employee theft significantly compared to cash transactions. And they allow consumers to better manage cashflow (one bill at a specified time each month rather than money coming out of an account right away). It’s easier to track balances in checking accounts in real-time when paying a single bill (most people don’t fill out their check register after each debit card transaction), and this helps consumers avoid overdraft fees.
Of course, it’s almost not necessary to point out that credit cards are big business. They fuel the mileage programs that drive the profitability of the airline industry. They’re hugely significant for the still fragile banking sector. And gosh darnit, they are my great source of frequent flyer miles that provide me access to premium cabin international travel. Is this disquieting for me personally? You’re darned right it is.
That said, if I had to guess in a vacuum I’d have guessed that little had changed. Companies could already discount for non-credit card payment, which is effectively the same as charging more for credit cards, and yet this isn’t widespread. Why should it become widespread now that surcharges are permissable?
Electronic payments are valuable. Visa, Mastercard, and American Express actually do provide a valuable service. Retailers charge a price they believe consumers are willing to pay, raising that price (through surcharges) will reduce sales.
Except that in countries like Australia where credit card surcharges are permitted they’re also common.
It remains to be seen how this will play out, and it may ultimately change little. I have to believe that Visa and Mastercard believe this, or else I’m not sure they’d have settled. They’re paying billions of dollars and surely must believe they’re getting something in return. And that something can’t be an end to their business model. The $6 billion must be buying them, or at least they believe is buying them, the ability to continue to operate and grow. So if they know their own business, then it would suggest much ado about nothing.
But we’ll see how that plays out next year, and to some extent even before — if it changes the calculus for the banks of what the profitability of a new customer looks like, that’ll change their willingness to pay signup bonuses. And that could happen even sooner.
Update: Since 10 states — California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas — have laws against adding surcharges to credit card transactions, I don’t expect this settlement to have much immediate effect.
National chains and online retailers will have a hard time adding those fees.
I expect flurry of lobbying in these states, and counterlobbying for laws such as these in the states without such laws. Since Visa and Mastercard won’t be able to prohibit the fees via contract, retailers and the credit card processors will tussle in the state legislatures, likely for years.
So mark this one as ‘developing’ and my guess is over a period of years before it has major effect.
Never realized fee-charging like this was not allowed before as they used to always charge more at gas stations here (Arco) and 7-11 once told me I had to pay a fee to use credit card when buying a lottery ticket.
On the bright side, who knows? In the future, you may be able to buy your next car and put the entire portion on your Chase Sapphire for an extra pctage.
Credit card processors like the banks do provide valuable services, but “value” is relative. Consumers will be able to decide if credit card processors’ services are worth 3% of the purchase with their wallets.
If the cc processors reduces the card processing rates for merchants due to fair competition, then the likelihood of reduction of signing bonus and points for spending are guaranteed. (remember they charge the merchant 3%, we get back 1%, if the can only charge 1% we’ll end up with 0)
This will be bad for the us(points seekers) but it will be a positive for the general public who do not care for 50k signing bonuses.
what is the likelihood that credit card points will suffer the fate of Blue Chip Stamps(BRK)?
I’ve noticed that in Australia, when I’m told that an extra fee will be added for a credit card purchase, I hesitate before using the card and usually pay cash if I have enough on me. I suspect the same effect will occur here for many people given the current economy and will result in a measurable reduction in credit card use.
I have a personal policy — I will not buy from a merchant who offers a cash discount (my only exception is my veterinarian, who I really like). When this goes into effect, I sureashell will not buy from a merchant who charges a premium for credit card purchases. We’ll see if I’m able to maintain that policy.
Many gas stations in my area (Connecticut) have upcharges for using a credit card, and most of them can’t distinguish (or choose not to) a debit card as different, so to avoid the upcharge you have to pay with cash. This amounts to 7-10 cents/gallon, usually… an amount slightly more than offset by the 3% back I get. How does that differ from what’s covered in this ruling, particularly because you say it’s already illegal in CT to offer a credit card upcharge?
This sucks. I’m guessing that eventually many merchants will charge a credit card surcharge.
“Why should it become widespread now that surcharges are permissable?” Because most retailers already have such thin margins. That’s what this lawsuit was all about.
Gary, at some point, can you explain why the mileage programs are profitable? Thx!
Two words: free market.
This settlement makes the market more open and more efficient.
You guys (and me!) have been gaming the system, and I don’t blame you. You’re playing by the rules, and I think what you’re doing is entirely ethical.
But VISA/MC have abused their power over merchants, and while I’m personally sorry to see the gravy train slow down, I think this decision is fair and just. And overdue.
@Barry – like it or dislike it, using the threat of government antitrust rules to extract a settlement hardly can be described as “free market”
@Gary – there might be only one credit card processor under the “FREE” market. The Sherman Act is there for a reason. This is not the first Antitrust issue that Visa and MC have had.
It’ll be interesting to see what future studies will show how this affects profitability because some percentage of consumers will balk at purchases utilizing credit due to the fee and these are likely to be larger transactions.
This doesn’t even get into the cost of hiring people to handle these transactions let alone how this could affect online transactions.
Go to almost any gas station in NY and they charge 8 to 10 cents more per gallon for using a credit card. Someone will have to explain to me how that is not adding a surcharge to a credit card transaction.
I have been saying for a while…The gravy bubble days of huge signing up bonuses are soon to be over. This is just another step towards that. I wonder how many bloggers will give it up when they can’t get as many people to sign up for cc’s (not you). Maybe this hobby needed a good bubble bust to…rise again:-)
And I so hope and pray I am wrong!!!!
I’ve the same questions as others. How come gas stations are allowed to charge more for any credit purchase, either CC or debit? I already will not shop at any gas station that charges more, I will not use an ATM that charges me to get my own money, and non I will have to add merchants that charge a fee to use a card!
In NY almost EVERY gas station now charges a premium for credit cards. I try to only go to places where they don’t, but that is getting harder. Market pressure is making those that DON’T charge a surcharge look more expensive than their neighbor who posts discounted pricing on the street without specifying that its a cash price. There needs to be VERY strict laws on HOW this can be advertised.
Get used to it everyone. You may not like it but the Australian experience shows it will stick. Alternatively, minimums to use cards will become common. Surcharges of between 0.5 and 2 per cent for Visa and MasterCard and 2 to 4 per cent for Amex are the norm here and I would expect to see similar amongst small merchants in the US.
And the difference between this and a discount or cash, is that I don’t expect to see prices dropping when establishments switch from a discount to a surcharge.
On the plus side, at least most of the points you earn in the states are worth a 1 per cent surcharge. The QF points we earn here aren’t worth even that.
The airlines may be hurt by this. Chase etc won’t be buying nearly as many miles.
I predict a devaluation in the value of miles. There won’t be the margin for cc companies to charge and give you a cut anymore unless they are cheaper…
I find this only to be a problem with small merchants, I doubt the large chains with large purchasing power will do this. I also try to purchase as much as i can from the online malls, which of course are credit card dependent.
This is not good for customers. Merchants will keep the prices same and add surcharge to that price. They will never reduce the prices for cash transactions. For e.g., if item X costs $100 now I assume merchants have already factored in the credit card processing charges. When the new rules come into effect they will charge surcharge on $100, not reduce the price to say $98 for cash customers
It’s my understanding one of the reasons the CC issuers are settling is that the agreement precludes any further suits of this sort. Since they have now lost a series of these suits, I think they are cutting their potential future losses on suits that now won’t be brought, that they assume they would have lost.
In California, where surcharges are illegal, the only places I have seen charge for credit are gas stations, and primarily non-name brand ones at that. I guess they get around it by calling it a “cash discount”, not a surcharge. And they always display a sign with both cash and credit prices clearly displayed. I never buy at these stations, since I can find station, such as Costco or Von’s supermarkets, that have a credit only price below the cash price being charged elsewhere.
Going to a cash preferred system will be a disaster for most stores. Think about being in a supermarket lane, and seeing someone ahead of you wait until the bill is totalled up, and then pull out their check book. That’s two more minutes of both your time, and the cashiers time wasted. And I’m guessing the cost of the check verification systems is pretty much the same as the cc processing fee.
For these reasons, as well as the one’s Gary has mentioned, I don’t see stores wanting to go to cash. Just having the amounts of cash on hand to make change, and the amored car service to pick up and drop off cash will be a pain. Without even mentioning the higher likelihood of armed robberies.
Hidden in the articles I’ve read is that different ccs have different charges. The ones we use for huge sign up bonuses charge merchants the most. So stores could easily start to only accept cards with low fees. Or only charge surcharges on “branded cards”, like Airline, Hotel and Cash Back cards. Discover could issue a no sign up fee, no cash back card, that nearly every merchant would accept due to it’s low processing fee.
Just as ARCO gas stations in California only accept debit cards, and my local single location wine shop will not take American Express, due to it’s higher processing fee, stores could implement “low fee only” cards. Or only charge surcharges on the very sort of cards we all specialise in using. 🙁
Will this hurt the banks? Yes Will this hurt the Airlines? Yes Will this hurt the Chain Hotels? Yes Will this lower the GDP of the entire country? Yes Will this bring down consumer prices? No It just means Walmart and Krogers will make a miniscule more yearly profit.
One more government imposed regulatory cost that will lower everyone’s standard of living. But compared to the drag on the economy of Obamacare, cutting back on oil drilling on all 3 coasts, no Keystone pipeline, onerous EPA rules on nearly everything, higher taxes on small businesses….”just another brick in the wall”….
An isolated data point, but I believe since officially Massachusetts prohibits surcharges on credit cards, and gas stations do charge extra, I’d once asked Amex about it — they said that I could submit the receipt to them and they would reimburse me the surcharge. Never followed up on it, but sounded reasonable on their part. Also, while surcharges are prohibited in MA, it wasn’t clear if discounts on cash are allowed — it seemed (Googling around a bit)that as long as the Cash and Credit rates were clearly posted (i.e. the surcharge wasn’t added at the last minute), it was borderline legal. Again, I didn’t followup on this with the state authorities.
I am resident of Long Island, New York and I have noticed that ever since the price of gas has risen over about $3.00 per gallon, most gas stations charge 5 to 15 cents more per gallon for using credit cards. It is often difficult to spot these stations while driving, as these stations highlight their cash price while noting their credit card price in extremely small letting. Since
I absolutely refuse to pay extra for gas simply because I choose to use my credit card to pay for my purchase, and I steer clear of gas stations which charge extra to use a credit card. I have found that the only gas station chain which does not charge extra for using a credit card is Hess.
“Raising the price on credit will make credit less used, and I don’t cheer this. And as I argued earlier in the week, consumers and merchants benefit greatly from electronic payment by credit card.”
Master card just raised interchange rates. It cost over 3% to make a transfer. If you take $100 and transfer it a few times and pretty soon you left with nothing.