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Wednesday, January 20, 2010

Why the credit card industry does better when their customers are doing worse

Since 1990, I have owned and operated a photo imaging business in Irvine called 30 Minute Photos Etc. and now ScanMyPhoto.com. Times are tough for a lot of retailers just like they are for a lot of our customers. But it’s not just the economy that make times tough for retailers and our customers. It’s the credit card industry.

The credit card business is designed to do better when Americans are doing worse. Visa, MasterCard and their bank partners are arbitrarily raising interest rates on existing credit and debit card, raising credit card late fees, and even charging interest on credit card debt that is paid on time.

But what actually cost consumers more is the huge, hidden fees on every credit card transaction known as interchange that is passed through to customers in the form of higher prices. Two dollars out of every $100 spent in the U.S. in stores and gas stations goes to pay interchange also known as swipe fees whether the customer uses plastic or not.

But it’s not just credit card hidden fees that are skyrocketing, debit card fees are also rising. As Andrew Martin wrote in “The Card Game – How Visa, Using Card Fees, Dominates a Market” in the New York Times on January 5, 2010, Visa pushed signature debit over PIN debit starting in the early 1990s because they could charge 13 times the fee for signature debit than they could for PIN debit – even though PIN debit is the more secure choice for the customer and less prone to ID theft.

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That’s right. Visa decided to push signature debit even though it compromises cardholder security compared to PIN debit just to make more money for its member banks. Visa and MasterCard also have rules that prohibit merchants from telling customers that they are paying inflated fees at point of purchase due to swipe fees. Visa and MasterCard partner banks won’t disclose on their customer’s monthly card statements how much these fees cost them either. And merchants are prohibited from discounting the price for customers who pay by cash, checks, or lower cost debit, such as PIN.

It’s outrageous behavior like this by Visa, MasterCard, and their partner banks that led me to become the lead plaintiff in what may be the largest class-action antitrust litigation in U.S. history, one designed to help rein in the credit card industry.

Interchange fees were designed 40 years ago to cover the costs for manual credit card imprinting (remember carbon copy receipts?). Today, technology and other efficiencies have made credit card swipe fees all but unnecessary. There are no interchange fees when using store gift cards or writing checks – but due to unbridled market power of Visa, MasterCard and their partner banks there are still interchange swipe fees.

Ten years ago, when my company first started using digital scanning, it cost $5 dollars per photo because the process was so expensive. Today I charge 5 cents because the process has never been cheaper. Unlike the credit card industry, I operate in a free market. Even if I tried to charge $5 for digital scanning like ten years ago no one would pay it – they just go down the street to the next guy with a digital scanner.

It has never been cheaper to swipe a credit or debit card. But unlike the market for digital scanning – or for that matter gas, groceries, and all other retail goods and services — there is no competition down the street to lower the cost of card transactions. Visa and MasterCard control 80% of the card market and their respectively card networks set the price. That’s why credit card swipe fees, unlike retail prices, are the same in all fifty states. No wonder the cost of swipe to consumers has tripled since 2001 to $427 per average household.

Every other economically advanced country has either reformed interchange or is in the process of doing so. But largely because of the power of the credit card industry in Congress, Americans pay the highest credit and debit card swipe fees in the world. We pay four times what Australians pay for the exact same set of credit card goods and services. So write your congressperson, write your senator, and tell them that you want them to put out the fire that is burning a hole in your pocket.
Scan Photos, 35mm Slide and Negative Scanning, Photo Restoration, Digital Printing - ScanMyPhotos.com