The Corner

Credit-Card Fraud, Ctd.

After I linked to Todd Zywicki’s op-ed, one of my regular correspondents e-mailed a defense of the merchants who want to use the power of the government to get the fees they pay to credit-card issuers lowered. I took the liberty of forwarding the body of the e-mail to Zywicki, who replied to its arguments. I’m going to quote part of the exchange.

Reader C.B.: [O]ne question I fail to see answered is how the actual fees are implemented for individual purchases.  I’ve seen a number of retailers put in place policies that disallow purchases of certain amounts or less with a card, simply because the interchange fee eats up so much of the profit for those items.  This becomes a bigger problem because retailers often analyze sales and profits on an item by item basis, discontinuing items that bring back low profits.  Addressing the interchange fee based on the overall average of retail that it cuts into is a simplistic way of addressing the potential damage to sales or the effects the fee  has on the products retailers carry or the kinds of transactions they are likely to allow.

Zywicki: Actually, this one I did address–merchants are permitted to give cash discounts if they want to.  They can decide not to take credit cards if they don’t want to. They make a business decision to take cards because overall they decide that the benefits of taking cards exceed the costs.  Merchants don’t make up their costs on every consumer who comes and uses their free parking and don’t buy enough to cover it.  Or consumers who buy products that they later return, thereby taking up employee time for no purpose.  Or customers who ask employees to help them find things that they decide not to buy. Movie theater patrons who don’t buy popcorn.  People who buy low-priced milk but not high-priced candy bars at a convenience store.  Merchants make a business decision to accept checks that might eventually bounce and the merchant might not get paid by that customer for the product, yet they decide to accept checks because of the overall benefit.

Heck, a lot of merchants run their own in-house credit programs and extend credit to customers who don’t pay their bills.  Every dime of that transaction is lost–yet merchants decide that on average it is worth it to extend credit as a business decision.

There are all kinds of examples of individual customers, products, and transactions that are not profitable yet merchants decide to offer them because they make a business decision to do so.  The question is not how much profit a merchant makes on every single transaction but whether a particular business strategy overall is profitable.

C.B.: While I understand the need for banks to charge for services, the main criticism against them is that they have taken advantage of this fee, increasing charges even as the cost of providing the service (the technology in particular) has decreased. Ultimately, consumers will pay for whatever charges either the card companies put on the service or the retailers add, through either higher overall prices or surcharges by the retailers, as is the case in Australia now.

Zywicki: Look, every payment system has a cost–cash, checks, travelers checks, Revolution Money, paypal, you name it.  Merchants like cash and to some extent checks because they can force the public at large to pick up much of the cost of dealing with those payment systems.  The Federal Reserve clears checks at par, meaning that the merchant gets 100% of the value of the check even though the merchant is imposing huge costs on the banking system.  The merchant gets the government to bear the cost of printing cash and protecting it against counterfeiting.  If merchants were serious about this, then they’d insist on paying the full cost of every payment scheme.

And, of course, cash users impose costs on those of us who use cards.  For example, there are costs to handling, storing, and transporting cash (Brinks trucks and armed guards).  Yet I don’t see merchants breaking out this cost and charging cash customers for it.  Again, that’s a business decision.

C.B.: While I’m skeptical of any Congressional solutions, particularly ones from this Congress, there remains a real question as to whether the interchange fee is being applied fairly and whether the increases are justified.  The card companies know that their users like the convenience of using the cards (and know and profit from the fact that not everyone uses a check/debit card or pays their balance off on time each month). This puts retailers in a weak and uncertain position that they obviously would like to improve.

Zywicki: I’m sure there’s a lot of merchants who would like to charge for parking but can’t because they would lose out to stores that didn’t.  That’s competition.

C.B.: Perhaps if the credit card companies want to avoid unnecessary Congressional meddling, they could take some steps to apply the fee in a way that is fairer to retailers and better reflects the actual cost of the service.

Zywicki: This is the nub of it–this is a battle between retailers and banks.  There is absolutely no reason to believe that consumers will be made better off as a result of Congressional meddling–they’ll likely be made worse off because of dampened competition and consumer choice.

So what this is is an effort by retailers to transfer wealth from consumers to themselves.  Right now consumers get much of this back in the form of improved card quality, better customer service, rewards and the like.  There is no guarantee that merchants would pass on any savings to consumers–in Australia there is no evidence at all that prices have fallen as a result of the caps there.  And even if prices did fall, there is no reason to believe that the savings to consumers would offset the gains that they get now.  What is most likely is simply a wealth transfer from consumers to merchants.

The most telling example of this is that many retailers used to run their own in-house credit operations–pretty much every department store.  Some still do, such as Target.  And credit customers are more expensive than cash customers because of the cost of processing, billing, and the risk of non-payment.  Target’s credit card portfolio has been absorbing double-digit losses.

So when retailers run their own in-house credit operations, credit customers are more expensive than cash.  In fact, Target gives a discount when you open a new credit account.  So cash customers subsidize credit customers on Target’s own account.  But here’s the key point–Target charges exactly the same price for cash and credit customers.

So it seems that the only time that retailers object to the “unfairness” of all this is when they aren’t capturing all the benefits themselves.  Forgive me if I find their purported consumer advocacy a bit less than sincere.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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