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Thursday, March 31, 2011

Credit Card Transactions Fees

I haven't given this issue enough attention:

How credit card companies want to debit you, by Dean Baker: Would you like to increase the sales tax in order to pay the banks another $12bn a year in profits? That is the issue that is being debated in Washington, these days. In case you missed it, this is because the issue is usually not discussed in these terms. The immediate issue is the fee that credit card companies are allowed to charge on debit card transactions.
We have two credit companies, Visa and MasterCard, who comprise almost the entire market. This gives them substantial bargaining power. ... Visa and MasterCard have taken advantage of their position to mark up their fees far above their costs. This is true with both their debit and their credit cards, but the issue is much simpler with a debit card. ... While ... costs are quite small, the credit companies take advantage of their bargaining power to charge debit cards fees in the range of 1-2% of the sale price. They share this money with the banks that are part of their networks.
This fee is, in effect, a sales tax. Since the credit companies generally do not allow retailers to offer cash discounts, they must mark up the sales price for all customers by enough to cover the cost of the fee. This seems especially unfair to the cash customers... Those paying in cash ... tend to be poorer than customers with debit or credit cards, which means that this is a transfer from low- and moderate-income customers to the banks.
This is where financial reform comes in. One of the provisions of the Dodd-Frank bill passed last year instructed the Federal Reserve Board to determine the actual cost of carrying through a debit card transfer and to regulate fees accordingly. The Fed determined that a fee of 10-12 cents per transaction should be sufficient to cover the industry's costs and provide a normal profit. The Fed plans to limit the amount that the credit card companies can charge retailers to this level.
This would save retailers approximately $12bn a year... The prospect of losing $12bn in annual profits has sent the industry lobbyists into high gear. They have developed a range of bad things that will happen...
The credit card industry and the banks really don't have a case here; they are just hoping that they can rely on their enormous political power to overturn this part of the financial reform bill. ... Brushing away their rationalizations, their argument here is that they want larger profits and they have political power to get them. That may turn out to be true.

    Posted by on Thursday, March 31, 2011 at 12:42 AM in Economics, Regulation | Permalink  Comments (59)


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