March 23, 2020 at 5:00 am ET
The last time you bought coffee or a pair of jeans, how did you pay?
Recently, we’ve seen lots of reports about how premium credit cards have become more expensive for consumers because of increased annual fees. But that’s just the half — or even a third — of it.
Most people are looking for the easiest, most convenient way to make purchases, and for some that means moving away from cash. For the first time, electronic payments have recently surpassed cash as the most-common payment method.
Using your card may be convenient, but are you aware that the card industry gets richer on every purchase? And that their profits are coming out of your pocket?
When we pay with cash, we know exactly how much we’re paying each merchant. Why is that different with card transactions?
It boils down to profits.
Namely, the credit card industry profits in three ways: fees charged directly to consumers, interest charged on account balances and “interchange” fees charged to merchants.
Consumer fees are the obvious culprit, and there’s no shortage of them: annual fees, cash advance fees, balance transfer fees, late fees and more. And reports show that the annual fees for premium travel and rewards cards are increasing by 10 percent or more. According to Bloomberg, annual fees on six Delta cards will rise by $100 to $550. Chase recently raised the annual fee on its Sapphire Reserve card from $450 to $550 a year — a 22 percent increase.
In addition, the banks that issue credit cards profit from interest rates. The average credit card interest rate is the highest it’s been since 2001 and the spread between the prime rate and credit card rates is the highest since 1993, according to CardTrak.com.
But if you conclude that Visa, Mastercard, Bank of America, Chase and others are just “double-dipping” with consumer fees and interest rates, you’d be wrong. They’re actually “triple dipping” when you include interchange fees.
Interchange fees are a percentage of the transaction banks charge merchants for processing credit card transactions. The amount averages around 2 percent and can be as high as 4 percent with some premium or business cards and certain types of transactions. At a time when the retail industry is transforming, the highest end of the range comes with online transactions, which cost merchants more than in-store transactions. Card companies keep retailers from showing interchange fees on cash register receipts, and don’t disclose them on monthly credit card bills either.
A few percent might sound small, but it adds up. According to the Nilson Report — a newsletter that follows the card industry — banks, card companies and card processors charged merchants $86.3 billion to process electronic payments in 2018.
At the National Retail Federation, our members tell us interchange fees rank as their second or third highest cost behind only wages and health care. With retail industry profits averaging only about 2 percent, there is no room for retailers to absorb these expenses, so they have no choice to pass them on to customers. The card industry has also made it difficult to offer cash discounts, so consumers usually pay the credit card price even when they pay by cash.
According to NRF’s calculations, that extra 2 to 4 percent from interchange fees means the average household pays hundreds of dollars more a year because of interchange fees regardless of whether they use a credit card or not. In other words, the average consumer pays what amounts to an annual credit card fee roughly equal to those paid by holders of premium cards even if they don’t have a credit card at all. That not only drives up costs for consumers but impacts the U.S. economy by hurting retail sales when money that could be spent on merchandise is siphoned off by banks and card companies.
So while you decide whether the plastic card or app on your phone is worth the annual fee or the interest you incur if you do not pay on time, also keep in mind the hidden fees you will never see on a credit card statement.
Stephanie Martz is chief administrative officer and general counsel at the National Retail Federation, a member of the Merchants Payments Coalition. MPC is a group of retailers, supermarkets, restaurants, drug stores, convenience stores, gas stations, online merchants and other businesses fighting unfair credit and debit card fees and advocating for a more competitive and transparent payments system that works better for consumers and merchants.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.