The Power of Plastic
The New York Times
By: Nancy Folbre
November 12, 2012
Credit card payment networks and card-issuing banks are taking advantage of their market power to extract more and more revenue from small businesses. In last week's post, I provided an overview of recent legal and legislative battles over rising swipe fees. But as an attentive reader points out in an e-mail, I should have called attention to how hard it is for merchants even to figure out what fees they will be charged.
Michael Latigona of David Michael's Salon in Berlin, N.J., provides a vivid description of the perils of a phenomenon known as "strategic price complexity":
Please, take a credit card out of your wallet and look at it closely. Any card will do. Now let me ask you. Can you tell me whether or not your card is a MC rewards class I, II or III (all of which have different rates)? How about your Visa? What type of Visa is it you are holding? Would it be a Visa CPS Retail card; how about a Visa Rewards 1 card? Or it could be a Visa enhanced business card?
You see, each card carries a different fee for the merchant. But how can a merchant ever know what the card is to ask the customer to use a different or cheaper card that carries less fees for the merchant? You can't. There is nothing on the cards to delineate the literally thousands of types of cards and fees associated with them.
I asked my merchant provider to give me a list to show me the different types of cards and fees associated with them. Well, that was about 20 pages long, and still, even with that knowledge, could never determine what card you are holding, how much I will be charged for such card, let alone ask the consumer to use a cheaper one.
So regardless of the ruling or future settlement, unless it is clearly marked on the card what type of card I am about to swipe, us millions of small businesses have no clue what that charge will be until we receive our monthly statement. It's like you going to the restaurant and eating, but not seeing the bill until it comes in a month. Would you receive a service without knowing how much it will cost you? Well us small businesses have no clue what our charges will be when we swipe that card.
Did you figure out whether you are a class I, II or III Visa yet? Now even if I gave you my 20-page list of types of cards, could you still determine it? No. So us small business will continue to be forced to accept a card, and have absolutely no clue how much we will be charged for that card, and that is something nobody is talking about.
I hope you can research this and do a story on this. After all, don't you think us small businesses should know ahead of time what we have to pay before we swipe that card? Or you could come to my salon and I could do your hair, not give you a price and send you a bill later. But I think you might not be happy without knowing how much that fabulous hair I just gave you would cost before the service and get sticker shock when you come to the register. Not quite fair to the consumer is it? And it's definitely not fair that your credit card doesn't tell me which one out of the thousands out there I am taking, the fees associated with that type of card and then have sticker shock each month when opening a statement because I have no clue what the actual charge will be when I accept the card.
Here's some economic background that Mr. Latigona and other small-business owners might find useful:
The credit card payment network is an oligopoly. Visa and MasterCard dominate the market, along with the smaller networks Discover and American Express. This market structure is hard to discern, because cards themselves are issued by different banks, with different terms -- and they come in many different colors. Among issuers, the top 10 credit-card-issuing banks accounted for more than 90 percent of outstanding credit card debt in 2009.
Both the payment networks and the card issuers operate in a "two-sided" market -- selling their services both to consumers and to merchants. Consumers can engage in at least some comparison shopping -- considering both terms of service and interest rates charged by different providers.
Small businesses, however, have long been limited in their ability to steer customers toward credit cards that charge lower fees, partly as a result of payment-network rules and partly because they fear inconveniencing their customers and reducing sales.
Payment networks and card issuers know how to exploit that fear, and they have a common interest in extracting as much revenue as possible from the merchants who rely on their services. Their market power puts them in a strong position to do so.
In a report on interchange fees (also known as swipe fees) published in 2009, the Government Accountability Office concluded that these fees had increased significantly since 1991, especially for so-called premium cards offered only to high-spending customers. It delicately pointed out that producers with market power "have the ability to charge high, noncompetitive prices" and went on to note that representatives of card issuers openly acknowledged that their fees were not determined by costs but "were one of several revenue sources."
The G.A.O. report also noted that the number of fee categories had proliferated over time, to 60 from four for Visa and to 243 from four for MasterCard between 1991 and 2009.
Here is where the concept of "strategic price complexity" comes in. In his study of retail financial markets, Bruce Carlin of the Anderson School of Management at the University of California, Los Angeles, contends that complexity itself can increase market power, because it reduces the power that buyers would otherwise have to compare prices.
This strategy seems to be working well for credit card issuers. A recent report from the Federal Reserve notes that credit card earnings have almost always been higher than returns on all commercial bank activities. The financial sector in general commands a far higher profit rate than the retail sector.
The proposed legal settlement that grew out of the antitrust suit I described last week gives small businesses more latitude to encourage customers to use cards with lower fees. But this settlement will not solve the problem because, as Mr. Latigona points out, it is difficult for businesses to determine which cards fit this category.
Paying with plastic is technically more efficient for everyone than paying with checks or cash. But the fees we are now charged for using plastic far exceed the actual costs. They reflect the market power of a financial oligopoly.
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