Visa and those Fees, II: For the Activists

Once again, read that article about Visa’s fees. Especially activists who are interested in reforming the financial sector. What happens at the level of the entire sector is similar to what happens at the personal level, and the arguments about price transparency, market failures, political and market clout and consumers getting squeezed in invisible, but real, ways are strikingly similar at the derivatives level as they are at the credit card level.

A few additional points, especially as people think about how to frame this issue and create activism around it.

Reforms

A straightforward goal is to give the retail market the legal power to differentiate between credit cards types. Here’s Ronald Mann on this topic. Debit cards have less fees than credit cards which have less fees than premium credit cards. If your credit card gives you more rewards that are paid for by the business through these fees, they should have the right to charge more for that card, or reject the card outright. That’s a no-brainer.

Another question is what is the long-term goal of this sector? It’s simple: debit cards swipe “at par.” No fee. The long-term trend is that debit cards are going to replace checks entirely, and cash in large part. We have a historical precedence for regulation to guide us, and that is from when checks first started appearing.

This excellent article, Let’s End the Debit Card Fee-for-All, explains the historical parallel: Over a hundred years ago, you would get charged a “foreign check” fee if you cashed a check from one bank with another bank. A $100 check would become, say, a $98 check. The Federal Reserve was created in part to regulate this, and back when it was capable of standing up to the banks, it declared that checks had to clear “at par”: If I write a $100 check, it is worth $100. Now when I give $100 to a store with my debit card, the check of the 21st century, it isn’t worth $100. It is worth something less, more like $98.

Why not relearn how to do what we’ve already done, and make my debit card trade for what it is worth, which is called “at par”? Not a credit card, where the money isn’t there yet, but actually physically move my money where it needs to go. Why does someone need to get serious percentage points of that?

I’m trying to research more about this historical moment for upcoming stuff; ideally I’ll get you some great early 20th century quotes of the “How dare you trample on this market!? Capitalism can’t survive unless the banks get a serious cut of every check written between two private parties!” Bernanke wants to prove to us that the Federal Reserve will stand up for consumer protection and finances: so, any movement here? Or do we just keep paying these fees until the banks are re-capitalized?

Small Businesses

Small businesses for once are open to the idea of, and even organizing for, increased government regulation. Small businesses. Remember these fees are very open to negotiation, and though data on this is kept very hidden from the market and the population, it is entirely reasonable to think that larger businesses are getting better rates than small businesses. Grocery stores have very tight margins, and if MegaGrocer gets an extra half a percent on their fees they can squeeze LocalGrocer hard in a way that distorts the regularly functioning market.

Occasionally you’ll hear stories about Wal-mart trying to purchase a banking license, like this story from Businessweek in 2007. There’s a lot of reasons why they try to do this, but one is to get an edge on credit and debit card fees to put a further squeeze on smaller businesses.

Whatever benefits businesses used to feel from “lift”, where people purchased more because they were using credit cards, is disappearing. Plastic has become a new currency, and as consumers become more conscious of how they spend it these fees are stinging harder than ever.

Constantly phrase this as a “tax” on businesses from the financial sector. That’s exactly what it is as plastic takes over the real economy. Now taxes aren’t always bad – they pay for services. But what extra services are we getting recently that are causing these rates, in a market where the technology has matured and the market saturation to become larger, a market primarily about information technology which has plummeted in price in all other industries, to be increasing at such a large rate? Activists on the left or center-left of the spectrum may be very uncomfortable with phrasing arguments as a “my money” and “tax revolt” issue, but remember, as we’ve shown elsewhere, this tax is a flat, regressive tax, and the tricks and traps come at a giant transfer from the poorest to the richest.

Specific Numbers

Here’s an approved quote I got from investigating this issue earlier, which you should feel free to repeat:

“Credit cards are the lifeline of my business as customers use plastic for everything from; a cup of coffee, to a pack of gum, to a tank of gasoline. Credit cards and debit cards are easy to use, but what customers don’t know is that every time they use a credit card, I pay a fee. For example, a customer purchases a local newspaper (75 cent retail) my profit is 9 cents. If the customer is using a debit card I would pay 25 cent for the transaction fee plus .08% interchange fee. If the customer puts down a Visa credit card the transaction fee would be 19 cents plus 1.68% interchange fee. Regardless of the payment option I lose money on the sale.”

–Jinger Duryea, President of CN Brown which owns Big Apple convenience stores across Maine

It’s hard to get retailers to go on the record with specifics on fees they pay out of fear of reprisal, so this is a great example to peek at. Think about this. I want to buy a newspaper with a debit card from a convenience store. The owner wants to sell it to me. That’s my money; there’s no credit risk or interest rate risk from a revolving loan, the transaction is completed. Yet this poor, hard-working store owner loses money on this. Why does this need massive fees from debit cards? Now you know why they have those $5 minimum charges at a lot of local businesses.

Another fun number. Remember that “Drill Baby Drill!” stuff? Drilling in ANWR was predicted to reduce gas prices by 3 or 4 cents a gallon by 2027. Taking reasonable numbers from Adam Levitin you are paying around 10 cents per gallon in credit card fees. Just sayin’.

Running Scared

Levitin also recently posted an image he saw in a DC metro stop:

As Levitin brought up, how often do you see an company advertise what it doesn’t do? I wrote a blog post about Visa’s Financial Football program last November that incorrectly implied that Visa lent credit (a sloppy mistake on my part), and within days Visa contacted me so that the post could be corrected. For a blog post. They are worried about protecting these profits.

Talking on background with many people involved in the industry, I was surprised at how often there wasn’t a “there-there” to these fees. I’m a finance geek, and a data geek, and I was ready to parse all kinds of complicated statistical arguments. For whatever reasons, they release little data, and hold their cards very close to their chests.

My favorite: the third best argument for why retail stores should be happy with the credit-card industry I got from one person was that the industry was losing billions in unpaid credit cards dollars that were being written down, and that was consumption that would haven’t had happened otherwise, so the retail sector should be happy at this stimulus-like effect. I loved it cause it was so out of left field. When I asked what % of what was being written down was consumption versus interest and fees, silence.

There are a short projects and long projects, and reform in this sector is going to be a long project. Luckily it is one worth fighting.

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7 Responses to Visa and those Fees, II: For the Activists

  1. LoneSnark says:

    “Why not relearn how to do what we’ve already done, and make my debit card trade for what it is worth, which is called “at par”?”
    The Federal Reserve was able to make checks trade at par because it assumed all the overhead of processing checks (we nationalized the check clearing houses). We the citizens of America were and still are paying these processing fees, we are just now paying them through our taxes. Check handling is not free, the government employs an army of people processing checks. Which is sort of sad: in a nation where only the well off had checking accounts, the government stepped in to cover their check processing fees for them. In effect, taxing everyone to pay for a handout to the well off.

    Don’t worry. You can do it again. The poor today that cannot get a checking account will be happy for the government to take over the job of processing your debit transactions just so you (through your retailer) no longer need to pay for this work yourselves.

    The question is not whether VISA is taking a cut, it must take some cut or its employees will quit due to lack of payment. The question is whether VISA is taking monopoly cuts, which it is not: the vast majority of the cut goes to the issuing banks. And because of that, the customers get free checking and lower fees. My bank pays me interest on my checking and never charges me a fee for anything; it is only able to do that thanks to the fees it collects from retailers. You can outlaw transaction fees, maybe the fee structure will reverse, with the banks paying VISA a cut out of their customers wallets (annual fees, overdraft fees, fewer ATMs, ATM fees, etc). Or maybe the government will take over the costs of operating VISA and Mastercard like they did with the check clearing houses. But it is unclear to me that would be a better world than the one we already have.

    • Not the Mike You're Looking For says:

      You beat me to the punch with the argument about taxpayer-financed clearing! Indeed, one of the reasons why debit cards took longer to take off in the US was the government subsidy on check clearing. This is so not the Fed standing up against the banks.

      Also, good point about the middle- (and upper-) class transfer. It would be great to have a list of all the ways that the government steps in to help the relatively well off (IRA accounts, state universities, etc.), but I figure nobody will do it because it would take too long.

      Still, I disagree with one part of your argument. The amount of funds going to banks does not necessarily mean that Visa is not taking monopoly rents. The way I understand it is this: Visa uses the increased payments to banks as a way of keeping competing firms out of the industry. It then earns monopoly rents on the resulting volume of business, i.e., its increased market share.

  2. Stephen says:

    Wow! What a different market from Europe. The EC has capped cross-border interchange within Europe to 30 basis points for credit and 20bp for debit, at least for MasterCard. (Visa is the subject of separate regulatory action).

    Local regulators are responsible for each country’s domestic interchange, and I’d expect those to come down to similar levels too eventually.

    Why is the US so backward? And what’s the deal with signature? Europe’s been 100% PIN for years!

  3. jj says:

    Every transaction has a real cost. I don’t agree that debit transactions should be free; nothing else is! Small businesses incur costs of handling cash in-store, and depositing it at the bank. If the bank doesn’t charge a direct fee for cash deposits then they get it back with lower interest rates. Cheques are paid for by the cheque writer instead of the depositor.

    Anyway, just give businesses the ability to charge different fees for different payment methods, and the problem will go away. I’ve seen signs at some merchants saying they’ll charge extra for debit transactions under $5, but I don’t know if that’s legal.

  4. LoneSnark says:

    Perfectly legal, as long as it is charging extra for debit/credit. What the merchant agreement does not allow is offering discounts for cash, but surcharges for debit/credit are perfectly acceptable and, as you yourself notices, are already used by various merchants.

  5. Kaleberg says:

    I don’t have any problem with the government taking over electronic fund transfers and setting terms and payments. They did it with dollars, and it turned a cheesy backwater currency into a world standard of value.

    There’s a hobbyist magazine out there called the Bank Note Reporter. Nowadays it is read by people who collect paper money the way some people collect coins. Back before the government stepped in it was a business man’s essential since it let you know how much the paper money your customers might tender is worth and how likely it was to hold that value. That’s right. You could pay in silver or gold, real money, or you could pay with paper money, but you might get less than par if the merchant didn’t like what the BNR said about your issuer. (Nowadays you’ll notice that those government documents you carry around in your wallet or purse are marked “valid for all debts, public or private”.)

    Maybe its time to move on. Paper has worked well enough. Like silver and gold, it is hard to duplicate cheaply, and there are simple tests for authenticity, but the world is going digital. Maybe it is time the government started issuing its own digital currency instantiated as cards or perhaps an iPhone app. Most businesses would be more than happy to go along and upgrade their software, just as they went along and bought cash boxes and registers with those slots for government standard bills and coins.

    There are just some things that the public sector does better than the private sector.

  6. Pingback: An Interview About Interchange Fees with The Credit Card Con « Rortybomb

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