Why Using Your Credit Card Is Getting More Expensive?

 

Why Using Your Credit Card Is Getting More Expensive?

Every time you use your credit card, a whole series of behind the scenes steps and fees kicks in so you can get- (machine beeping) But this system has been getting more and more expensive. - Okay, your total will be 14.85, please. - 

This $15 lunch probably cost the shop around 37 to 46 cents in various fees. It adds up and it's why this place prefers cash. - We have the cash sign so that we don't have to pay fees. We save money. We save money on every sale. - 

Some businesses are even starting to implement surcharges adding around 3% to your bill if you pay by credit card. And now Congress is getting involved. - Swipe fees just aren't annoying to the retailers. They're anti-competitive

Here's how the credit card fee system works and what Congress is trying to change. Your credit card involves two main companies, your bank, which loans you the money, and the card network that handles the transaction like Visa or MasterCard. 

Those two companies handle the most credit card transactions in the U.S. When you use your credit card, the transaction runs through a store's processing system through the credit card's network to your card's bank. And there are fees throughout these steps. 

The processing systems fee is generally fairly low, around one 10th of percent of the total purchase. There's a large market the merchant can choose from, which can keep this cost down. Then there's the credit card's network fee, around a quarter of a percent. 

And the largest fee of the system also happens here. The interchange fee, it's usually around two to 3%. It's set by the card networks but it's paid to your bank that issued your credit card. 

You get rewards for every purchase - Everything? - Essentially, that fee helps to fund the rewards that we all get when we use our credit cards - Earn 5% on travel purchased through Chase with Chase Freedom Unlimited. 

Cashback credit cards or credit cards with miles for travel benefits, someone's paying for that. It can be only a few cents or maybe a few dollars but then, think about how much that adds up when you take into account all transactions being made. 

Merchants pay banks and other credit card issuers interchange fees set by Visa and MasterCard, roughly 55 billion just last year. Interchange fees vary by card. Generally a higher rewards card will come with a higher interchange fee and businesses have little control over this. 

They can't choose to not accept a high rewards card because of the fees. If they want to accept any of a network's credit cards, they have to accept all of that network's credit cards 

In the end, what ends up playing out is that because the interchange fees are hefty, merchants build that in to the sticker prices that we all see in many cases, regardless of how we pay. 

So the cash shopper and the credit card shopper are often paying the same price but the credit card shopper's getting the rewards. 

If a credit card network raises fees, which they did on many purchases this year, businesses have few choices. It's these rising fees that has Congress wanting the credit card system to look more like the debit card system. When you use your debit card, the transaction looks similar.

It runs through the source processor, through a card network, to your bank. But in 2010, Congress passed the Durbin amendment, that same Durbin. 

It lowered and set a cap on the interchange fees that card networks could set for many banks and it made banks enable a second network that merchants could use, instead of the card network that's on the front of your card. 

So the idea here is merchants should have the choice of being able to choose between the more affordable of the networks. 

So if sending the transaction over a network that's not Visa or MasterCard is cheaper for the merchant, then why shouldn't it be able to do that? So it was essentially meant to inject competition into the debit card space while also enabling for lower costs potentially for merchants. 

And that's what a Democrat and Republican senator want to do to the credit system. Their bill isn't imposing to cap on the fees, but it would require larger banks that use Visa or MasterCard networks to enable a second network to make it competitive like the debit system, which should lower fees. Banks and credit card companies aren't thrilled about it. 

There's a potential ripple effect here. If the banks are receiving lower interchange fees than they currently are, and interchange fees are funding credit card rewards programs, what would happen to those rewards programs? 

Banks are concerned that this legislation would limit the amount of rewards they could offer. And the networks also argue their fees go towards things like network security and innovation. 

Merchants, especially small businesses are concerned that the increasing fees are becoming too much on top of already rising prices. - There are two sides to this argument. Credit cards incentivize people to spend more than they otherwise would. 

Credit cards result in more sales than merchants would otherwise get. And there are also costs associated with not accepting credit cards. Like if you're a cash-only business, being concerned about cash theft and other issues. 

On the other side, the merchant industry is saying, "Yeah, but our costs continue to rise as credit cards become more and more common for consumers to use when they're shopping and fees increase." 

Businesses have few options to offset these rising fees. So more and more places are passing them along to consumers. So if the price to use credit cards continues to go up, so might your lunch. 

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