Takeaway: A seemingly inconsequential payment decision by consumers may secretly cost them hundreds of dollars per year.
Merchants have become increasingly irritated by debit card fees, set by Visa and MasterCard and enjoyed by the card issuing banks. Retailers have responded by raising their prices in an effort to pass along these costs to their consumers.
The payment industry is dominated by a few major players and this dynamic has provided payment networks such as Visa with price-maker power. However, in a high stakes move, some businesses are now willing to sacrifice some sales in order to refuse certain types of plastic.
With billions of dollars on the line, only one thing is for sure – this battle of who cedes value to whom is unlike to be settled anytime soon.
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Excerpt from New York Times, “How Visa, Using Card Fees, Dominates a Market” by Andrew Martin, January 4, 2010.
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.
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.
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.
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.
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.
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 are among those reporting higher sales as a result of accepting plastic.
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 a Visa executive.
Visa provides an electronic network that acts like a tollbooth, processing the transaction between merchants and banks and collecting a fee that averages 5 or 6 cents every time. For the financial year ended in June, Visa handled 40 billion transactions
An executive from retail giant Best Buy said: “Every additional dollar we are forced to pay credit card companies is another dollar we can’t use to hire employees, or pass along to our customers in the form of savings.”
Merchants said they had no choice but to continue taking the debit cards, despite the higher fees, because Visa’s rules required them to honor its debit cards if they chose to accept Visa’s credit cards.
Safeway, 7-Eleven and CVS drugstores automatically prompt consumers to do a less costly PIN debit transaction. The banks, however, still steer consumers toward the more expensive form of signature debit. Wells Fargo and Chase are among those that offer bonus points only on debit purchases completed with a signature.
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Full Article:
http://www.nytimes.com/2010/01/05/your-money/credit-and-debit-cards/05visa.html?em
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