Thursday, May 14, 2009

Paying With Cash Could Soon Pay Off

Cash-carrying customers could catch a break if a couple of Senators have their way. Senators Durbin and Bond are trying to push legislation that, if passed, would allow retailers to offer discounts to debit-card users and put an end to restrictions that payment networks such as MasterCard and Visa place on retailers who charge less for non-credit-card transactions.

From the Wall Street Journal:

"The extra charges the establishment has to pay for the use of a credit card are kind of hidden inflaters in the cost of the product," said Sen. Richard Durbin (D., Ill.), who is pushing the measure with Sen. Christopher Bond (R., Mo.).

Small banks and credit unions, which stand to lose revenue if consumers cut back card use, are pushing back, along with the rest of the card industry.

Retailers seeking the change "do not want to pay their fair share for the significant benefits they get when accepting debit and credit," said Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a group representing bankers and credit card networks.

My guess is that this proposed legislation, which is part of the larger credit-card bill in front of the Senate, will not survive. Banks, which have every incentive to make sure that consumers keep using plastic, will do all they can to put this proposed legislation to sleep.

Read the rest of the story here.


  1. Good guess, Marcus. This will not become law.

  2. As a small retailer, I fail to see the benefits of this monopoly that continually raises fees while offering little in the way of service.

  3. Who exactly is making the money here?

    I mean, we know that retailers benefit despite the fees they pay, because study after study shows that people spend more when using plastic (either debit or credit).

    And I assume that the card-issuing bank or credit union sees some of those merchant fees as well, since without that we wouldn't see all these banks offering excellent interest rates on checking accounts that require X number of signature transactions on the debit card per month.

    So the question is how much of the fees paid by the merchant go to the networks (Visa, MC), the banks, etc.? (I assume the provider of the equipment gets a cut as well?)

    And then, how much of the revenue in banks' credit card divisions do these fees make up? Same for Visa/MC/Discover/Amex...what's their revenue from merchant fees compared to however else they make their money?

  4. I think debit cards are a whole different kind of rip-off, and their use entails another set of pitfalls and "gotchas" that politicians like to rail against in the case of credit cards.

    The way things are going, responsible users of credit cards are likely to lose in order for people to be protected from themselves -- and the purported beneficiaries of this protection will just find other ways of screwing up.

  5. It's not just the credit card companies that have an incentive to keep people using plastic; it's the companies themselves, who see higher spending per transaction when credit cards are used and gain easily queries transactional information for data mining as well as the government, who through First Data and the like are sitting on an investigative gold mine because of the use of plastic. I agree that anything that creates a direct incentive for the use of cash over credit is unlikely to survive.

  6. How is giving the consumer a choice a bad thing? In this case the consumer is the merchant, consuming the product (credit card transaction access) and reselling it to the end consumers.

    I can't think of a single other item the merchant purchases for resale where the merchant can't set the selling price.

    If a merchant could add a percentage and/or require a minimum sale to use credit, then the end consumer (you and me) could vote with our wallets. Merchant "A" will promote their no-credit-card-surcharge policy while merchant "B" adds 25¢ to all CC sales under $25. And you and I can vote by where we spend our money.

    Maybe the merchants charging a credit card surcharge would see a drop in sales and quickly drop the idea. Or maybe consumers would flock to stores offering a discount for cash.

    It's a consumer friendly law, so of course the banks are against it.

  7. Merchants can offer a discount for cash, now. They just can't add a surcharge for credit/debit cards, and the "hidden inflators" include a number of benefits, including the ability to charge back when merchandise is faulty and the merchant will not take a return. Also, many cards come with additional benefits like automatic warranty extensions, etc. The fact that most consumers don't pay attention and use them is the consumer's fault.

  8. "I can't think of a single other item the merchant purchases for resale where the merchant can't set the selling price."

    This is not correct. Manufacturers and vendors do set minimum price agreements for retailers.

    Please Washington Post story on Supreme Court decision allowing this practice:

    Also see WSJ story discussing the State of Maryland's response to the Supreme Court decision:

  9. Merchants can't offer a cash discount OR a minimum credit card purchase without violating their merchant account agreement. We still do, however, at least the minimum purchase thing, since it's not really enforceable. They've bent us over and the least we can do is struggle a bit.

    How much do merchants pay? It's a moving target as the rates continually rise with no recourse other than a cash only business. The reason for the rate increases? The increased "service" to us, often defined as reward cards. See, if they offer an incentive program for the consumer to use their card, like frequent flyer miles, that's considered a benefit to the retailer, and thus our rates increase to reflect that. They actually talk like this! It's not like we were asked if bonus miles were a good idea. Kill all bonus miles and cash back rewards and businesses would see profits rise by about 1% across the board (that's a big number).

    As for rates themselves, they're generally around 2-4% of the purchase, depending on the type of card, plus a transaction fee of around $.35. ATM cards are a flat fee; around $.65. Thus a $100 purchase on an Amex card, the most expensive, costs me roughly $4.35. A $100 purchase on an ATM card is still just .65. ATM cards are great for medium to large transactions.

    So how do I use my credit cards as a small businessman? I go for cash rewards and miles of course. I stick it to the next guy.

  10. What are they saying? That because it costs money to process credit cards, that government wants to give a discount to the people who pay with cash?

  11. The government is stepping in and trying to restrict processors from preventing retailers from offering cash discounts and the like. Offering a cash discount violates the merchant terms of service.

  12. BlackDiamond you are completely wrong. Cash discounts are allowed.

  13. I'm all for giving small merchants a break. I'm happy to keep them in business. But don't think any merchants will actually lower prices if their cc transaction costs were to eventually decline. Besides, as a consumer I enjoy the protection of using a credit (not debit) card, for those times a merchant won't accept a defective product back, etc. Of course, the banks are the ones with the most skin in the game, so we, as consumers, might as well take advantage of the schemes they've set up -- miles, cash back, purchase protections, etc.

  14. I think the "chargeback" portion of this RARELY works out for the consumer. With the noteable exception of American Exress, if you use a Visa or Mastercard, you're screwed with a chargeback on both credit and debit cards.

  15. "BlackDiamond you are completely wrong. Cash discounts are allowed."

    Anonymous is right. Doing the research: you can't charge a surcharge for credit card fees, but you can provide a clearly stated cash discount.

  16. @ Anonymous:

    "I think the "chargeback" portion of this RARELY works out for the consumer."

    I may have been one of the RARE ones, but in a whole different way: I was being stonewalled on a refund for a product I had returned. The sale was made by one company, but serviced by another. The selling company went out of business. I disputed the charge with the bank, they called me and got further details, and posted a credit to my account (over $1400). I kept after the servicer (threats to complain to BBB and the state attorney general, etc.), and they finally sent me a check. But they aren't the entity the bank is charging off against, and therefore don't know anything about the chargeoff. Now, with everybody (including myself) holding the bag on losses caused by the financial meltdown, I ask: What would you do if you were in my position?

  17. This is one of those proposed populist legislation that pretends to benefit the small merchant and the consumer while actually benefitting nobody.

    In an ideal world, the merchants will take the initiative to pass the savings onto cash paying customers upon the bill's passage. Unfortunately, very recent history (I'm talking about events and investigations that occured less than two years ago!) has shown us that they won't do that.

    Instead, merchants are more likely to turn around and exploit this situation. It's not completely unrealistic to believe that they will raise cash prices while levying an additional surcharge to card carrying customers.

    One of the arguments made was that people will vote with their wallets. That lone merchant who charges the same price cash or credit will be rewarded with more business. Unfortunately, that's an overly optimistic view in light of recent history yet again! Merchants and suppliers can easily collude to prevent that from happening. The lone defiant holdout might face a group sanction, effectively preventing the business from continuing.

    Certainly, the surcharge is one way to discourage credit card usage. Unfortunately, it simply provides more incentives for unethical, dishonest merchants to continue with their antics unchecked.

    It's not a strong enough deterrent to those circling the financial drainhole. The same people who might desperately need the benefit of lower prices (e.g.: those with little liquid capital who are caught in the credit trap) are the same people who are likely to get socked with the surcharge.

    Furthermore, for those responsible with credit card usage, will find themselves having to pay a potentially large premium just to continue receiving the same set of consumer benefits provided by the credit card issuers.

    The consumer loses.

    This isn't entirely a consumers lose, businesses win situation either.

    Studies have shown that consumers spend more on average with a credit card. Marcus has posted an article about this and his family has participated in the cash-only challenge as well. Last time I heard, the challenge was working. Less spending with cash.

    From the card-accepting merchant's perspective, it's the comparable volume of business that merchants stand to lose when credit card use is artificially restricted.

    If you look at the type of fees that banks imposed as recently as 10 years ago (before credit card usage became this ubiquitous), you'll notice that banks like Chase Manhattan charged many checking accountholders to cash checks, use Chase ATMs and at a stretch, even to make deposits in certain situations!

    With extra cash on hand, merchants will find an old challenge facing a revival (and banks acting accordingly to capitalize on the situation). Cash has to be counted and transported, even if it's not deposited at a financial institution. It's not without costs (monetary and time) or risks (more incentives for robberies due to a higher payout odds)

    The business community loses.

    Even the U.S. Government stands to lose out on this proposal. It is a given that cash is relatively hard to trace. And what's to stop dishonest merchants from fully and honestly reporting cash income if they know the actual chance of getting audited is slim? Suddenly, the government finds itself with smaller tax revenue in times of record deficits from continuous public spending.

    The U.S. Government loses.

    Ultimately, this bill, if passed intact, stands to effectively make everything much more expensive for everybody. Yes, including the cash paying customers which this bill is purported to benefit. The irony!

    Pick your poison and tread carefully. It's a no-win situation. As a relatively responsible consumer, I personally prefer the status quo, even with its flaws.

  18. You make a good argument azntg. A great one actually. Let me read it again in the morning and see if I can still stand behind my statement.

  19. I live in a state where Gas stations are allowed to give a cash discount.

    What a joke! There is no discount for cash. Instead, the stations are simply charging more for the use of a credit card.

    Whatever they choose to call it, under this sytem, you are paying to use your credit card.

  20. It's a simple mathematical statement that a discount for X is equivalent to a surcharge for not X. Discounts for cash should be prohibited in merchant agreements just as surcharges are.

  21. Anonymous its all about perception. If you put surcharges on credit, credit will be construed as to be more expensive and consumers are less likely to whip out their card. If you are giving discounts for cash then it looks almost like a coupon. Its easier for the retailer to mark up 3% then mark down every item 3% even though the mechanics are basically the same.

    Also, Australia already tried interchange caps - and it had no desired effect on pricing. Prices remained flat meaning merchants kept the difference. For those merchants who decry taking credit cards they have a choice - just do not take them or just take debit. However, study after study has shown not only do cards boost the average ticket price but also boost the number of transactions. Retailers do not pursue this strategy because ultimately it leads to a decline in their business of greater then the 2% - 3% they pay for credit card services - hence why the number of places that take "cash only" continues to dwindle.

  22. There are protection for debit cards. By the way merchants can charge for pin transaction when using a debit card unless it is against state law. A few bank also charge a pin transaction fee but most do not.

  23. If you have $100 in your wallet, you’d most probably spend it just because it’s there.
    The whole concept of settling with a cash-only budget is that when you run out of cash, you do not resort to using other forms of payment; meaning you do not use credit cards but stick to the cash only budget you’ve set up. Let’s put it this way … Maybe you could do with a $50 weekly budget for food, transportation, entertainment, and other expenses; and you think $200 is too much. Now let me ask you this: have you experienced putting yourself on this cash-only budget providing adequately for the essentials but ended up spending on non-essentials that were not in your budget item anyway? If you did, then what’s the difference of not using a credit card when you still ended up short against your budget?

    Here’s my point. Cash only budget can be very effective in preventing unnecessary expenditures; but that’s not saying it’s the only option or that it’s always the best. My take is it all comes down on whether you have that sense of discipline in dealing with your finances or not.

    But I guess we have to admit the reality that credit cards are not really that helpful if you want to instill financial discipline because you tend to spend more with credit cards. Now there’s a rationale why credit card companies enjoin consumers to use cards; these companies realized that people spend more using cards compared to when the use cash!

  24. I think that is a fantastic idea. The main reason people use so much credit these days is mainly for the convenience factor. If people used debit cards more often, i think they would be much less likely to overspend.

    Incentives would help people switch over from credit to debit and would save consumers a ton in interest fees. People are used to using their credit cards, once they realize their debit card can serve the same purpose, i think they will switch for good.