Free the retailer from credit card costs
February 10, 2013

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As a result of a lawsuit filed way back in 2005, retailers now have the option of passing on credit card fees to card users, a practice previously banned by the credit card companies. Credit card fees run from 2-4%, and although big retailers like Walmart have been able to negotiate lower fees, small retailers are at the mercy of the credit card companies. Most big retailers are saying they won't pass the fees on, but what they are really saying is that they will do so by including the cost in the price.

Ten states - California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas - have laws that prohibit surcharges. In other words, they force people who don't use credit cards to help pay the costs for those that do.

There is a simple solution: Prohibit credit card companies from charging the retailer. That will free the retailer from the entire hassle. Credit card sales will cost them nothing, so there will be no cost to pass along to any customer. The cost will be borne by the credit card user and will be collected by the credit card issuer.

The bill the credit card holder gets each month will include a flat, per-transaction fee for processing costs, for example, 25. On top of that will be interest, calculated separately for each transaction from the date of the purchase. The bill will provide the interest rate and the processing fee and explain how the total was calculated.

Like a lot of credit card users, I don't pay any interest although my charges range from $1000 to $2000 a month. As long as I pay off my balance before the due date, no interest is charged. It's a cost-free loan. That will end with the new system, but although I'll be stuck with the per-transaction processing fee, there will be ways I can avoid paying interest. One is by paying off any credit card purchases as soon as possible after they are made. That's  easy for me to do, since I maintain my account online and can easily transfer money from my bank account to my credit card account. Another way would be to keep a credit balance in my account from which each purchase would be paid - a balance that would have to be replenished from time to time. Still another way would be to arrange with the credit card issuer to treat all credit card purchases as debit card purchases, taking the money directly out of my bank account until it has reached a minimum I've set, and then treating further purchases as credit purchases.

People like me who use the card as a convenient way to pay, and don't need the credit, are called "convenience users." We comprise over half of credit card users.

Shifting the cost of credit card transactions from the retailer to the user has several advantages:

  • It is morally correct. Credit card users should pay the full cost of the service they receive rather than forcing others to pay in the form of higher prices. Many won't like it, but that's tough. They need to grow up. There were 114,825,428 households in the U.S. (in 2010) and credit card transaction fees run about $50 billion a year, so cost per household is about $435. Making credit card users pay their own fees would be a $435 per year gift to each family that doesn't use a credit card.

  • Less money will be tied up in loans to convenience users - people who don't need credit. The percentage incurred by convenience users of the $800 billion total outstanding credit card debt is hard to pin down, maybe 15%. That would mean $120 billion more available for legitimate borrowing, which could significantly lower interest rates.

  • Since no retailer would pay credit card transaction fees, big retailers like Walmart would lose the advantage they get by negotiating lower rates with credit card issuers.

  • Faced with responsibility for the full cost of their transactions, credit card users will seek ways to avoid those costs. New, cheaper payment services like Dwolla will spring up, reducing non-cash transaction costs.

Freeing retailers from the cost of credit card transactions is simply a matter if getting the U.S. Congress to pass a law prohibiting the credit card industry from charging the retailer. Unfortunately, Congress seldom does the right thing.