Thursday, March 31, 2011

How Credit Card Companies Want To Debit You

The Guardian explains How credit card companies want to debit you "If Visa and MasterCard succeed in overturning regulation of debit card charges, the prospects for financial reform are bleak."

Basically because of their duopoly the fees are high (1-2% of transactions) and costing retailers $12 billion a year. Dodd-Frank instructed the FRB to regulate them and determined a fee of 10-12 cents per transaction. The banks are fighting.

I don't like the government setting prices, but then there is this duopoly. I remember in the 70s when AmEx was charging fees that retailers found too high and many stopped accepting the card. I'm not sure why MasterCard and Visa aren't competing against each other on this.


Anonymous said...

Master Card and Visa run their businesses thru banks...major banks.

As you mentioned, Master Card, Visa and the "Banks" make their money on a per-transaction fee that the retailer pays. But the reality is that we all pay the fee, even if you pay for your purchase in cash. In fact, gas stations are the only businesses that I can think of here in NJ that charge more for credit card purchases (about 2% more).

The sad reality is that major banks don't get prosecuted for fraud, so why should one think that their close business partners (MC and VC) would be prosecuted for anti-trust or monopolistic practices .....collusion anyone?

Funny thing is that price fixing has been prosecuted recently in other industries, like pharmaceuticals. But apparently, if you are a bank or a bank-partner, no worries for you about such trivial details.

These financial business models are just like the mob; simply figure out how to get your 1-2% skim off the action, any action, and any way short of obvious theft.

The MC/VC model really is a form of extortion. MC and VC say to merchants - "pay us the money or watch half your business instantly disappear". The mob would say "pay us the money or watch your business burn down".

Either way, if you don't pay you are outta business. And, at least with the mob, you also get street level protection as part of your premium.

You are right, the government should not set prices in a market economy. But, that's the only option left if the Justice Dept. refuses to prosecute illegal activities, such as price fixing, in the financial industry.


Karl said...

Credit cards are as interesting and convoluted as most other financial products. After a little poking on the web, I found Master Card and Visa (unlike Amex, which appears to fund its own cards) are just brand names to facilitate payment between banks. The separate banks actually issue the cards and set the terms. Of course this conflicts with use as a consumer, since stores accept them by network, not by bank. I remember a few years back a bunch of my cards switched networks. I'm not sure what drove this, but I certainly found it to be a headache. It probably fits into why there is little competition between MC and Visa. Their customers are banks, not people, and there is a large overhead to switch. I'm sure there have been anti-trust law suits brought against the companies in the past, but I don't remember any of the details. (I'd expect that to be in your knowledge base)

The web also suggested that the fees from the merchants are largely used to fund the rewards programs offered by the cards to generate new customers.