You’re standing in line at the grocery store, you swipe your debit card and the cashier asks you “debit or credit?” If you’re like most people, you default to one or the other. But why do they ask you? That money is coming out of the same account isn’t it? Even if you use a credit card, it’s all going to eventually come out of the same account. Why does it even matter if you select debit or credit?
If you are a frequent swiper, you’ve probably come across the occasional store that doesn’t accept American Express, or won’t allow you to do a Visa credit card, or just encourages debit over credit transactions.
When you use your debit card, you have the option to run the debit card as credit, or debit. Debit transactions are usually done by entering you PIN, and credit transactions are done with a signature. Even this isn’t always the case unfortunately, as you can do a debit transaction by signing.
Certain merchants encourage you to run your transaction as debit, because the fees charged by Visa and others are less. Visa and the banks want you to run credit, because it costs the merchants more to run the transaction that way. This is why people like me like to use credit cards for the cash back and the rewards. What’s basically happening is when I swipe my card, the merchant is giving me some of my money back with the bank/Visa as an intermediary.
The merchants don’t like this:
“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 counters by pointing out that basically most merchants have never been able to make a dollar when they are paid a dollar. If someone pays in cash, they have to pay for someone to take the money to the bank. In many circumstances they have those armored cars come and pick up cash. If payment was processed by check, there was a fee associated with that. The checks have to be taken to a bank as well to be processed.
Visa continues to point out all the benefits of using their cards, such as secure transactions and no cash management problems (like theft). But the merchants are convinced they are being raked over the coals by Visa, MasterCard, and the banks.
The merchants say they must pass on these fees to the consumers. I find this to be a bit of a stretch. If Visa did lower a fee from 1.5% to 0.5%, do you really think we’d see a 1% discount? I don’t expect my favorite ice cream at the grocery store to go from $4.50 to $4.455. You’d see a lot of very weird prices with spare pennies. There will always be costs associated with completing a transaction.
But, that isn’t to say that Visa is right. Credit card revenue doesn’t seem to have suffered much in the recession. This is because, while we’re buying less, the banks and Visa have raised the transaction fees. That isn’t fair to the merchants. With inflation, Visa should expect their revenue to grow in line with the retailers. Instead, Visa should be focusing their efforts on helping the merchants get more sales. More sales means more transaction fees, which is more money for everyone.
There is a secret war going on between merchants and the card companies. Methinks it may spill over into main street very soon. Who would you side with?
Read The Card Game: How Visa, Using Card Fees, Dominates a Market via NY Times
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
| Related Websites |
Said,
What the merchants fail to remember is that they make more money when people use credit because they charge more. When I’m using credit I buy what I want – when I use cash I buy only what I have cash in my pocket for.
I try to pay for small purchases (under $20) with cash. If I’m in a Mom n Pop store or restaurant I try to pay with cash or a check if they take it (places like my hair dresser, dog groomer will take checks and prefer it – I just have to remember to take my check book). But if I’m at Walgreens or a retail store I’m using credit – they’ve already marked up their prices accordingly into the margin so why should I give them a discount with cash/debit?