RAA Group

The Card Game Navigator

A list of resources from around the Web on the consumer credit industry, as selected by the personal finance columnist Ron Lieber.

Debit Cards

• Tips for Avoiding Overdraft and Bounced-Check Fees
• Federal Reserve
• Guide to Debit Card Rules
• U.S. PIRG
• Report on Debit Cards and Overdrafts
• Center for Responsible Lending
• Federal Joint Guidance on Overdraft Programs
• Federal Reserve, Feb. 2005 (pdf)
• Report on Disclosure Documents for Checking Account Customers
• General Accounting Office, Jan. 2008 (pdf)
• Proposal on Overdraft Fees
• Federal Reserve, Jan. 2009 (pdf)
• 2008 Study of Bank Overdraft Programs
• FDIC (pdf)

How Visa, Using Card Fees, Dominates a Market

By ANDREW MARTIN

When you sign for a debit card at a retailer, the store pays your bank more than twice as much as when you enter a PIN – a strategy Visa hatched decades ago.

January 4, 2010 Your MoneyNews

Card Fees Pit Retailers Against Banks

By ANDREW MARTIN

As the use of credit and debit cards has grown over the last decade, merchants argue that the attendant fees have sharply lifted the cost of doing business.

July 16, 2009businessNews

Video

Visa Reigns with Silent Tax

The growing use of debit cards has meant big profits for Visa, and there are concerns that the company’s market power has led to unnecessarily high fees to merchants.

Credit and debit cards have become a profitable machine for the financial services industry, sometimes at the expense of consumers who can least afford it. Even as Washington considers clamping down on deceptive practices, financial firms are finding new ways to generate revenue from their cards. Articles and multimedia offerings in this series, which is part of a joint reporting project with PBS “Frontline,” will examine the changing world of the consumer credit business.

The Card Game series is a joint reporting project with the PBS program “Frontline.” Watch the documentary that was broadcast Nov. 24 here: pbs.org/frontline/creditcards.

The Card Game series is a joint reporting project with the PBS program “Frontline.” Watch the documentary that was broadcast Nov. 24 here: pbs.org/frontline/creditcards.

Every day, millions of Americans stand at store checkout counters and make a seemingly random decision: after swiping their debit card, they choose whether to punch in a code, or to sign their name.

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Your Money Guides

Credit and Debit Cards »

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Monica Almeida/The New York Times

Mitch Goldstone, in his digital photo-processing shop in Irvine, Calif., is part of a suit against Visa and MasterCard.

The Card Game series is a joint reporting project with the PBS program “Frontline.”

Multimedia

Graphic

Becoming the Debit King

Graphic

Toward a Cashless Society

Related

You’re the Boss: Does Visa Play Fair?

More Articles in This Series

Readers’ Comments

“Smart retailers take advantage and offer a ‘discount’ on debit purchases. Sharing the savings with the customers is a great incentive.”

Tom, Texas

• Read Full Comment »

It is a pointless distinction to most consumers, since the price is the same either way. But behind the scenes, billions of dollars are at stake.

When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.

The difference is so large that Costco will not allow you to sign for your debit purchase in its checkout lines. Wal-Mart and Home Depot steer customers to use a PIN, the debit card norm outside the United States.

Despite all this, signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud.

How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Visa has managed to dominate the debit landscape despite more than a decade of litigation and antitrust investigations into high fees and anticompetitive behavior, including a settlement in 2003 in which Visa paid $2 billion that some predicted would inject more competition into the debit industry.

Yet today, Visa has a commanding lead in signature debit in the United States, with a 73 percent share. Its share of the domestic PIN debit market is smaller but growing, at 42 percent, making Visa the biggest PIN network, according to The Nilson Report, an industry newsletter.

The Risk of Refusing

Critics complain that Visa does not fight fair, and that it used its market power to force merchants to accept higher costs for debit cards. Merchants say they cannot refuse Visa cards because it would result in lower sales.

“A dollar is no longer a dollar in this country,” said Mallory Duncan, senior vice president of the National Retail Federation, a trade association. “It’s a Visa dollar. It’s only worth 99 cents because they take a piece of every one.”

Visa officials say its critics are griping about debit products that have transformed the nation’s payment system, adding convenience for consumers and higher sales for merchants, while cutting the hassle and expense of dealing with cash and checks. In recent years, New York cabbies and McDonald’s restaurants are among those reporting higher sales as a result of accepting plastic.

“At times we have a perspective problem,” said William M. Sheedy, Visa’s president for the Americas. “Debit has become so mainstream, some of the people who have benefited have lost sight of what their business model was, what their cost structure was.”

Visa officials said the costs of debit for merchants had not gone down because the cards now provided greater value than they did five or 10 years ago. The costs must not be too onerous, they say, because merchant acceptance has doubled in the last decade.

The fees are “not a cost-based calculation, but a value-based calculation,” said Elizabeth Buse, Visa’s global head of product.

As for Visa’s market share, company officials maintain that it is rather small when considered within the larger context of all payments, where, for now at least, cash remains king.

While Visa may be among the best-known brands in the world, how it operates is a mystery to many consumers.

Visa does not distribute credit or debit cards, nor does it provide credit so consumers can buy flat-screen televisions or a Starbucks latte. Those tasks are left to the banks, which owned Visa until it went public in 2008.

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Sign in to Recommend Next Article in Your Money (5 of 28) » A version of this article appeared in print on January 5, 2010, on page A1 of the New York edition.

Franchisee Columnist Todd Michaud has spent the last 16 years trying to fight IT issues, with the last six years focused on franchisee IT issues. He is currently responsible for IT at Focus Brands (Cinnabon, Carvel, Schlotzsky’s and Moe’s Southwestern Grill).

Envision a world where credit card transactions are free. How could we accomplish such an outrageous feat? Well, crazy things can happen when you start to apply IT problem-solving initiatives to business issues.

I just finished reading “Free – The Future Of A Radical Price” by Chris Anderson. Chris, the author of “The Long Tail,” discusses how several factors–including the constant reduction of technology costs–have enabled companies to give away valuable services to their customers. Examples include Google giving away search functions and videos on YouTube, eBay giving away free phone calls with Skype and Linux as a free version of Unix software. But for some reason, the costs of processing credit card transactions have been immune to the same trends that have provided free versions of far more complex technology. Why?

Somehow, the system has evolved in a way that primarily protects the banks at the expense of retailers and, ultimately, customers. From a purely technological perspective, credit card transactions should cost a fraction of what they actually do. Moore’s Law, loosely translated, states that the cost of technology will reduce by roughly 50 percent every 18 months. If this law is true, then why, after decades of credit card processing, does Home Depot pay more for credit card processing than it does for employee healthcare benefits?

A credit card transaction is fairly complicated and involves several different organizations/people:

The issuing bank: The bank that provides the credit card to the consumer.

The cardholder: The person who uses the card to make purchases at various retailers.

The merchant: The retail organization that accepts the credit card in exchange for goods or services.

The acquiring bank: The bank that processes the credit card transactions.

The bankcard association: Visa, MasterCard, American Express, Discover, etc.What is the big problem in this ecosystem? The merchant is the only one hit up for a fee to process a credit card transaction. The merchant pays a “merchant discount” to the acquirer, which then splits up the fee among itself (processing fee), the issuing bank (interchange) and the bankcard association (assessments). In the case of credit cards that offer rewards programs, the merchant also funds these customer perks through a forced higher interchange fee. Ridiculous! So how do we change it?Interchange rates should be demolished.
Issuing banks will no longer be paid an interchange fee; instead, a transaction processing fee will be charged to manage the costs of providing authorizations, settlements and money transfers. The rate should be about equal to the current ACH transaction costs, which should serve as a good benchmark for the costs associated with moving money between two bank accounts. Rewards programs would then be completely funded by the issuing bank.

Remove Overhead From The System.
In this crazy New World, the bankcard associations are no longer in the transaction processing business. With 88 percent of all cards issued by the top 10 issuing banks, the acquiring banks should process directly with each issuing bank. They will take on this responsibility in exchange for lower assessment fees.

Reduce Costs Through Improved Efficiencies.
And what about the acquiring banks? Because their job will also be one of transaction processing, they will earn a flat monthly fee from each merchant rather than a transaction fee. A flat monthly fee? That is crazy talk! Now, imagine travelling back in time to 1999 and telling Michael Armstrong (then CEO of AT&T) that in just 10 years an Internet company would offer unlimited calling to anywhere in the world for just $24.99 per month. (Vonage recently announced this plan.) I’m pretty sure he would have told you that you were nuts.

Subsidize The Remaining Costs With Someone Who Gains Value.
OK, but I said that in this crazy New World credit card processing would be free. Except that the previous examples still add costs. Granted, this solution is a ton better than where we are today. But you were promised free. So, how do we get there? I’m going to leverage more of what I learned from Chris Anderson and his book. In the book, Chris discusses the concept of “free” as a “three party market,” where a third party subsidizes the costs of providing the goods or services between the merchant and the consumer.

An example is how TV stations can offer you free programming in exchange for broadcasting advertisers’ commercials. In our crazy New World of free credit card transactions, we are going to subsidize the costs of credit card transactions by leveraging a three party market. So how do we do this?

Sell Receipt Space.
Acquiring banks can work with merchants and POS companies to pass along small “banner ads” that are displayed at the bottom of each receipt. The merchant has the opportunity to set parameters for which ads are displayed to avoid conflicts, such as making sure that no competitors’ ads are run. In today’s media-heavy world, eyeballs are worth money.

Sell Signature Banners.
Let the acquiring banks display small banners that are placed above the spot on the electronic signature pad where a customer signs for credit card purchases. This option could be used in conjunction with selling receipt space.

Sell Data.
Allow marketers to access information about spending at your location. Each company would be aligned with a central catalog of different merchant types. The transactions would then be categorized and aggregated in a central system that can be used by marketers for a fee.

Sell More Data.
Provide the line-item details of the transactions to a centralized database. The products and services would also be categorized and aggregated from many merchants. Although most large organizations would not dream of giving away such intimate data, thousands of small businesses would be happy to provide the data anonymously (only the industry would be required) in exchange for lower transaction fees.That’s my case. It feels a little like a Sprint/Nextel commercial doesn’t it? (What if IT people ran the world?) Find major holes in my theories? Disagree with the concept? Love it like RockBand? Let me know: Todd.Michaud@FranchiseIT.org.

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Job Growth Hindered by Interchange Fees

Hefty credit card interchange ‘swipe’ fees prevent small business owners from hiring new employees

INDIANAPOLIS, Dec. 4 /PRNewswire-USNewswire/ — Consumers for Competitive Choice (C4CC) president Bob Johnson has a suggestion that will spur more job growth: interchange fee reform. The President and his economic team gathered yesterday to hear from some of the best and brightest CEOs, small business owners, and financial experts about ideas for continuing to grow the economy and put Americans back to work at a Forum on Jobs and Economic Growth. The meeting was held in advance of the Bureau of Labor Statistics’ announcement today that our national unemployment rate remains in the double digits, at an unsettling 10%.

Interchange fees are the charges that merchants, local governments, universities, or anyone else who accepts plastic, are assessed every time a transaction is completed by swiping or keying in a credit or debit card. Last year alone credit card companies received $48 billion dollars in these fees, this number up 300% since 2001. Not surprisingly, small business owners say that if they were not saddled with these skyrocketing fees, they would be able to spread those resources elsewhere – like hiring additional employees.

“In 1995, CN Brown paid $353,000 in interchange fees,” said Jinger Duryea, President of CN Brown, which owns Big Apple convenience stores across Maine. “In 2007, we paid $3,494,000 in interchange fees. This amount of money could stretch very far if any portion were available to us to hire additional employees or lower costs for consumers, rather than lining the pockets of credit card companies.”

Every dollar spent on interchange fees is a dollar not spent hiring workers or providing savings to customers. At an average cost of 2% per credit card swipe these fees add up quickly, and the potential savings or job growth that could result if the funds were not going to big banks and credit card companies is one that we cannot afford to overlook.

“With the national unemployment still at a troubling level, we have a very long way to go before this economy is where we need it to be,” said Johnson. “I have spoken with small business owners throughout the country these past few weeks and they all have one thing to say – credit card interchange “swipe” fees are increasing and are hurting both small business and consumers. This fact was recently supported by the Government Accountability Office’s report on interchange fees.”

“Interchange fees are currently the highest expense for small businesses behind payroll and healthcare. The cost is astronomic, and we don’t need a job summit to know that the jobs that could be saved or created if these fees are reduced are real. The numbers don’t lie. Any level of relief would be a significant step toward our economic recovery. With unemployment holding steady in the double digits and small business growth being impaired, it is imperative that our Representatives and Senators in Washington take steps to reduce this unfair burden, especially considering the economic impact such reform could have.”

About The Credit Card Con

The Credit Card Con is a project by the Consumers for Competitive Choice. For more information, visit The Credit Card Con website at www.thecreditcardcon.com.

SOURCE Consumers for Competitive Choice