Does the Recent Credit Card Settlement Signal the Beginning of the End for Us?

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In case you missed it, late last week a settlement was reached between Visa, MasterCard, etc., and merchants who alleged that those major banks had worked together to price-fix the fees that are charged to the merchants every time someone uses a credit card to make a purchase.  I won’t even pretend to be an expert on all the nitty-gritty of this lawsuit or settlement, but I do want to make sure you at least have a high-level overview of this settlement since rewards credit cards are such a major component of the miles and points world.  I think this settlement is something to be aware of, but not overly alarmed about.  Here are some bullet points that brought me to that conclusion:

  • Part of the settlement includes a repeal of a rule that was in place that stated that if a retailer accepted Visa or MasterCard credit cards, they could not charge customers a surcharge for using the credit card.  Now that the rule is no longer in place, the fear is that now retailers will pass on the 1.5 – 3% “swipe fee” to customers.  This would mean that the value of using rewards credit cards for the sole purpose of racking up miles and points would be dramatically reduced or erased.
  • However, retailers could already offer a “cash discount” for those not paying with a credit card.  In my area, there is exactly one store that I know of that does this – Spec’s Wine, Spirits, and Finer Foods.  Everywhere else I shop has cash and credit at the same price, even though they could offer a cash discount.  I know in some states, like California, it is already common place for gas stations to offer “cash discounts”, so it certainly does happen – it just isn’t exactly pervasive.
  • My understanding is that ten states have laws on the books that prevent retailers from charging more for people who use credit cards, and those laws aren’t impacted by this settlement.  My own state, Texas, is thankfully on that list.  Some other highly populated states like New York, Florida, and California are also on that list.  The full list is: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.
  • Since ten very populated states have laws preventing a “credit card surcharge”, then it just seems unlikely that national companies would really charge those fees to the other states.  If they did, I bet those states would get on the ball and pass similar laws to the one that the other states have already enacted.  Of course, that doesn’t prevent retailers from offering “cash discounts”, but they could have already been doing that, and yet most do not.
  • I wouldn’t be surprised to see some non-chain or local stores, doctors offices, and other small businesses charging a surcharge to use a credit card in the states that don’t have laws preventing that type of charge.

Even if a “rewards credit card doomsday” occurs and there is now a surcharge to use rewards credit cards for virtually all purchases, that still wouldn’t necessarily mean the end to earning miles and points using credit cards.  When the credit card is paying out in miles or points that are worth more than the transaction fee that might be charged (which could happen – especially with category bonuses), it would still make sense to use cards for those purchases.  Additionally, working on meeting minimum spending requirements to get sign-up bonuses would still be a lucrative strategy since the sign-up bonuses are so large.  There are also still times that many of us would want to charge something in order to get the consumer protections that often come with using credit cards, or because we don’t have the cash on hand to pay off the purchase immediately.

I have a hard time envisioning a return to a “cash society”.  Perhaps we will see a resurgence in debit card use, which stinks for us since rewards debit cards have taken a huge hit in the last year or so since the “Durbin Amendment” on the Dodd-Frank Act cut the fees that the banks were paid from merchants when customers paid with debit cards.

My takeaway from this is to certainly pay attention and see what happens as a result of this settlement, however I am not overly concerned at this point.  Again, I am certainly not an expert in picking apart settlements, lawsuits, etc., but I think knowing some basics is helpful.  As always, I would love to know what you think!

Comments

  1. It could be that the card companies will offer more bonuses for using the credit cards if retailer fees become the norm. They will still want to generate the transaction revenue it just puts the burden on the card user to pay that fee in exchange for points or miles or spending requirements.

  2. Plus it’s not like hotels, airlines, etc. are going to suddenly start expecting customers to pay in cash. This might mean I use cash at Kroger at some point down the road, but not on the big purchases

  3. Oddly enough (because I’m cheap), I don’t use cash at those gas stations in New Jersey that offer a cash discount — and the discount is generally about 3%, so it’s not insignificant.

    Gas stations are a special case because their credit card fees are a percentage of the transaction while their profit is generally a fixed number of cents per gallon. Therefore, credit card fees eat up a much larger part of their margin as gas prices increase.

    However, when you say that you are thankful that Texas (like my own state of New York) has a law that prevents credit card surcharging / cash discounting, you are aware that the effect is most likely to push both cash and credit card prices higher by a percent or two?

  4. I for one will no longer use a form of payment that requires me to pay more money — TO SPEND MONEY!

    Will. Not. Happen.

  5. I heard this last week when the news broke and I am with you…no sky is falling (yet). Amex (I believe) already allows this charge back to customers, but it hasn’t happened. One might argue some of that may well have to do with MC and Visa disallowing these, however I might suggest it has more to do with the variety of charges. Each cards have different fees, even amongst Visa from the same bank. The complexity of handling the charge to customers based on their arbitrary (and changing) card fee would be a business unto itself.

  6. @DaninSTL, very well could be the case – at least in the short run.
    @James, right?! I’m certainly not going to carry lots of cash around with me.
    @LarryInNYC, I think it is too hard to say exactly what will happen in states like TX, NY, CA, FL, etc. That may be the result, but frankly I am unlikely to go back to using cash as my primary form of payment regardless.
    @Jayson, I’m sure you are not alone with that opinion. 😉

  7. I was thinking more about this last night. I will vote with my feet. If retailers i use regularly start doing this I will stop shopping there, and tell them why! If enough see the customer move to retailers who don’t charge extra they may think again. This has a bigger affect on smaller chains and local businesses though. Telling a Target, Walmart, Home Depot, or other Mega store that they have lost your business and why is like whispering into a hurricane. They know they are big enough to overwhelm your feablie attempts to right the market, and don’t care what you do.

  8. I dont think that V and MC agreed to a huge settlement and new terms if they thought they were gonna get a worse deal out of it.

  9. I live in one of the states that outlaws credit card surcharges, but I have seen “cash discounts” at gas stations. I wonder if retailers can get around the law by calling things “cash discounts” rather than “credit surcharges” even though they are effectively the same thing. I sure hope this doesn’t signal the beginning of the end.

  10. @Scott, love the “whispering to a hurricane” line. So true!
    @Ken, I would assume they think they certainly got at least a fair deal, or as good of a deal as they thought they could reasonably get.
    @Big Skinny, I’m sure they can offer cash discounts, and in fact, already could before this settlement. However, many didn’t offer a cash discount before…..we’ll see what happens next.

  11. “It just goes to show ya; it’s always something.”

    Nowadays, I find myself often reading blogs with an eye out for if the entries are right for the blog. This one is. Something happened; but it’s not likely to be a real big deal.
    For years Chase could not get any of my money. Then through their deal with Continental; they got me a checking account, a debit card, a credit card, and most importantly a savings account. “Durbin” killed off the initial value of the debit card. And, the Merger with United brought an end to the credit card for me. But the Chase accounts proved handy, so I’m carrying them along with me for awhile.
    I really got to the party late over at AAdvantage. So, I get miles when I rent a car. People say that’s a terrible thing to do because the rental car company charges a fee for those miles. Hey, I’m going to rent many cars over the year(I’ve flown American once in the last two years). I can afford to pay the fee, so I will until AAdvantage figures out what it will take to get me back on American Airlines.
    What keeps me centered is my bucket list. I’m not stressing over the cost/value of every little point or miles. I’m focused on did I get to make that trip; or did I get to see that sight, this year.
    I’ll be making my second bucket list trip of this year soon. I’ll pass on flying, rent a nicer car, and skip the upscale historic hotel for a new one out by the airport for about a third of the cost.
    What about breakfast?! I can buy one off the senior menu at the local Denny’s. 😉

  12. I think that many people would vote with their feet and the effect would be pretty ugly for most any business. I think the large chains would be just as fearful because the negative publicity could sink them. Imagine WM losing 10% of it’s business overnight. China would probably jump in to subsidize the fees for us!

    OTOH, it would not be difficult for the large companies to do this state-by-state. They aleady deal with variations in sales tax rates that go down to a local level in many places, and they manage to handle things like tax-free weekends on a geographical and product basis. It can be done, and if they though there was a dollar to be made they’d do it. I just think they’d (correctly) fear for their lives.

    Now, getting rid of the price fixing might be a problem for us if those fees drop as they should.

  13. Local burrito shop started charging 50 cents per credit card transaction. I switched to cash, but a few weeks later the fee disappeared. After asking why, lady said too many people didn’t have cash but wouldn’t pay the fee and were simply going elsewhere. In the end, I think they changed service providers because now they enter the last 4 digits of the card when doing the auth.

  14. @Dbest entering the last 4 of a card, or the 3/4 digit CSC is an optional thing merchants can do to lower their processing costs, because it lowers the likelihood of fraud/chargebacks for the processor. Smallish company I work for started asking for the CSC only a year ago and it’s saving us $10k/year in processing costs. My guess is that you’ll see more businesses start doing something like that than implementing fees. It’s as much ignorance on the part of merchants as it is customers.

  15. @Scott. You may well vote with your feet – and the impact of your wrath will only be felt by smaller retailers. However, smaller retailers are also far more likely to be paying massively higher transaction fees than large retailers – four or five times as much in some cases.

    As the charges (which are already usually over 2%) reach towards 3% (so double that if you look at the margin), I think it’s inevitable that retailers will do whatever is necessary to encourage debit card or cash usage instead of credit card usage.

  16. Unfortunately fees are now the norm in the UK, Australia and New Zealand, especially for “big ticket” purchases from airlines and hotels. Sometimes there is a minimum flat fee, which can be 5-10% of the transaction for smaller purchases. I think charges are assessed where a significant percentage of purchasers get reimbursed by their employer or by clients. Unfortunately, leisure travelers sensitive to cost and value get the shaft.

  17. “ten states have laws on the books that prevent retailers from charging more for people who use credit cards”

    My home of state of California is on that list, and this is news to me…because I’ve been to businesses here that already have been charging extra for credit card payments. This isn’t a “cash discount”– they have signs on registers that specifically inform customers of these fees.

    This settlement doesn’t seem to change much, but we’ll see what happens.

  18. I agree with Explore (number 16) above. I am recently back from Australia and did pay a 1.5% fee for using my credit card for my hotel bill. But I also found the surcharge in some retail stores catering to consumers, so the surcharges are not assessed only on business travelers. I have seen reports from some in the UK that at least some airlines do have a surcharge for buying airlines tickets.

    With large companies such as Kroger (supermarkets under many names across US) bringing the suit, I personally see no reason to expect that large retailers supported this suit but will not, in fact, implement the surcharge. They may choose to call it a “cash discount” as some gas stations do already, but the effect is the same: those using CC for payment pay more than those with cash, checks or debit cards.

  19. I just wanted to add that despite my “addiction” to miles and points, I avoid using CC for payment for small purchases at small stores and restaurants. I know they pay a fee for my doing so. However, occasionally, the use of real cash finds them unprepared. I have twice had a local restaurant struggle to provide change from a $5 purchase for a $10 bill 🙂

    I do have concern at what this could mean for my points collection via CC spend, but what really annoys me is this: Larger retailers such as Kroger, Meijir and WalMart have been replacing their cashiers with kiosks through which they expect me to check myself out and through which the easiest payment options are debit and credit cards. If they ALSO add a surcharge on one of those two viable payment options, I will be even more annoyed and will switch absolutely as much purchasing as I can to other means, most likely Amazon, if Amazon does not add the surcharge.

  20. It seems that every merchant will now be facing the decision of whether to annoy (and perhaps drive away) their credit customers by establishing a differential between cash and credit; or, alternatively, annoying (and perhaps driving away) their cash customers by not doing so. Any decision will affect behavior, and each has to guess how. It also gets more complicated for the consumer, who must, if trying to maximize value, always take into account who does what, if that can even be known in advance. My only hope is that as many people decide that fee cards are no longer viable and cancel them, the credit card companies will step up their enrollment bonuses to try to take market share from one another.

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