Most everyone is really down on financial companies these days. What kind of scam are they running, anyway? It seems as if everywhere we turn, there are fees, fees, fees. Because most everyone has some kind of credit or debit card, the popular mind is particularly focused on them, expecting to find signs of exploitation and graft.
Let’s look a bit closer.
A friend of mine is in a Virginia diner and receives an odd offer with the check. There is a note: If you pay with cash, you get a 5% discount. And why? Credit card fees. The place would rather not pay them. My friend forks over the cash and saves himself 60 cents. Keep in mind this was an established business, not some street vendor.
Of course, we’ve all experienced something similar a thousand times when working with individual proprietors. The person who mows your lawn, paints the kid’s room, fixes your plumbing or gives you a taxi ride would much rather have cash. And why? Let’s just say that cash is more liquid than plastic. Everyone knows that.
But for established businesses to routinely discount the use of cash over debit/credit is not entirely usual. But it is increasing. Neither government nor credit card companies are going to tolerate the spread of this practice, which is considered price discrimination. There will be new rules, new interventions, new restrictions, all in an attempt to stop it.
What will restaurants and other businesses do? What many have already done — refuse credit for charges of less than $5 or $10. This should be the age of micropayments, especially with digital commerce. Instead, we are going the opposite way.
This plastic card price pressure is only now boiling over, and this is a direct response to government regulation. The relevant regulations were passed last year, with hardly any debate and very little public awareness. The credit card companies objected and warned, but given today’s anti-business climate on Capitol Hill, their protests were dismissed as special interest pleading.
The relevant legislation is the Dodd-Frank Act, which went into effect late last year. The Durbin Amendment capped the fees that card companies can charge for debits at 21 cents per transaction. This was supposed to reflect the “actual cost” of processing. And this would supposedly stop the practice of charging more than twice that amount on average.
Seems like a good idea, right? Save the consumer a bit of money, right? Curb the plastic-based scams. Surely, these companies make high enough profits.
It’s not so easy. A complicated formula typically determines the fees that the companies charge for processing. And before we go any further to describe them, let us be clear that these fees are agreed upon by both parties to the contract: merchants and card services. No one has forced anyone into the deal.
The formula in the past used a graduated scale so that the higher the transaction price, the higher the fee. Some transactions would have a far higher than average fee. Similarly, smaller transactions would charge lower fees. Most of the small transactions for movie rentals, coffee at the convenience store and the muffin at the airport charge the merchants only a few cents per transaction.
This isn’t about charity or a desire on the part of card processors to help the little guy. It is a matter of making the deal. If you want the mom and pop shop and the small Internet merchant to make a go of it, you have to move beyond cash. The companies were using the large merchants to “subsidize” the small merchants. The high fees covered the losses from the low fees.
The system worked. Then Congress intervened with a price control — just like central planners in socialist states — that flattened fees.
An immediate effect was that renting from Redbox went up 20 cents last year. People blamed the movie distributor. Actually, it was the politicians, but who knew?
There’s more legislation in play here. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 put serious restrictions on the ability of card companies to raise interest rates on existing balances. This was supposed to protect consumers from the evil and rapacious people who were lending them money at a fee.
Guess what? This backfired, too. Instead of raising card fees for legacy balances, companies were being forced to impose very high fees at the outset. This not only took from the companies a major marketing strategy; it also ended up costing consumers far more than they used to pay for carrying balances month to month. It is the relatively poorer class of card users who end up being hurt by this.
Whom do the consumers blame? Visa, MasterCard and all the rest, of course. They are charging 15% at a time when banks are paying negative rates on deposits. The whole thing is absolutely perverse. People look at this system and correctly figure that some people must be collecting loot like bandits.
I’ve covered only two of the most-recent and egregious pieces of legislation. There are thousands, tens of thousands more. All of these regulations together distort the market in more ways that we can possibly know. But again, who catches the blame? It’s not Congress, Treasury, the Fed or the White House. It is private enterprise.
Now consider the greatest and most egregious of all regulators that affect interest rates and financial markets: the Federal Reserve. It is attempting to falsify reality in ways that contradict every principle of the market economy. And what are the results? It’s a crazy, mixed-up world. Whatever the distortions, they are huge and potentially very scary.
We’ll soon know the full implications. Whether people understand the underlying cause (government, and not markets) may determine the future of the free economy itself.
