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.
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 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.
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’.
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.