From the merchant's perspective this works because bank transfers have to be free for both the source and the destination. So banks have an incentive to sabotage this and they will. By contrast bank fees on credit cards can go close to 6% now. That's why you get cashback offers, points, ... on credit card offers.
I think a lot of people (but not banks) would be very keen on having regulated fees for transfers. Of course, not banks.
But you are right about credit cards, it's not that much.
Right now I'm more or less fored to use paypal. They offer a very similar service. I'm paying a tiny bit less than 10% of my income directly to paypal.
Huh? Merchants definitely are the ones who pay card processing fees.
Some small merchants offer cash discounts, but that's comparatively very rare.
Edit: since you mentioned Paypal, I agree that they're horrible to both merchants and consumers. Stay far away if you can. (In fact, I'm curious why you're using Paypal instead of someone friendlier like Stripe.)
In my experience merchants in Australia often add the fee directly at checkout. You can't really pass on the costs any more direct than that. They often do provide PayPal for checkout, which is why I expect people use it. Stripe is simply not present, so how could we use it?
I'm mostly speaking from the US perspective, where credit card surcharges are extremely rare for online transactions (and only slightly less rare for offline ones).
Stripe is meant as a suggestion for merchants, not customers.
The merchants pass on those costs in the form of higher prices. The better your rewards the more someone else is subsidizing your credit card fees, but you're not breaking even either.
Sure, in the same sense that merchants pass on all costs in the form of higher prices.
That being said, if you play it right you can actually make far more in rewards than the merchants paid. There's a whole subculture devoted to it: I routinely earn around 4-5% back, to the point that I prefer to pay my taxes via credit card even with the surcharge.
Yea! Except for providing seamless global payments, distributed credit provisioning, fraud protection, rewards, travel benefits, purchase insurance, what have credit cards ever done for the economy?!
I don't understand why we don't do that here. People like the rewards but that only works because the cost of those rewards is subsided by a price increase for everyone, even the people paying cash.
I wonder, why we do not have cash prices and whenever you want to use a credit card you have to pay the fee on top.
I heard this is in the contracts between merchants and credit card companies. Merchants are not allowed to make prices more transparent to consumers or they will lose the ability to accept credit card payments.
>> Credit card transaction fees are regulated at a much lower level in Europe.
> I don't understand why we don't do that here.
It really comes down to allowing markets to operate efficiently. Such regulation, in order to be work as intended, creates a price ceiling for the credit card market. This ceiling produces a deadweight loss (in this case, you would likely see it as either a reduction in the aggregate quantity of credit extended to consumers or the perks associated with using the card like fraud protection, ability to file charge backs, and customer support). On the whole (producer surplus + consumer surplus), you will observe such a loss.
Now what makes the government more capable of determining appropriate prices than market participants themselves? Allowing a competitive market to determine prices for credit services will drive the cost of the services to an efficient level. Given that governments are tasked with many pressing issues, it's reasonable to believe that they can only afford to put so many resources into assessing price levels for each regulated good or service. However, each market participant is able to focus solely on determining a price for the product offered. Even if the government can determine the optimal price level for the market, there is necessarily a lag time for the regulation to be passed and implemented, reducing the ability of the market to respond to systemic shocks and changing conditions.
Along different lines, if price regulations on credit card fees are acceptable, should the government install price ceilings on housing (causing reduced incentive to build more) and other markets? Should the price of all meals at restaurants be capped at $10 so more people can dine out? In the latter example it's easier to imagine the ramifications of a price ceiling, but the same market forces are at work.
> People like the rewards but that only works because the cost of those rewards is subsided by a price increase for everyone, even the people paying cash.
That's not true in specific, observable cases, and I suspect it's not true in general either.
To provide concrete examples, many gas stations and vending machines offer discounts for paying with cash instead of card, specifically to avoid the impact of fees on their prices. Additionally, vendors can choose to set minimum thresholds at which they accept credit cards, in order to mitigate the impact on their pricing and profitability.
In general, I assume the rewards are not truly subsidized by merchant fees. From my recollection of previous reading on the subject (I'd appreciate more accurate numbers if someone can provide them), merchants pay 3% to accept the credit card. ~2.5% of the fee is consumed by the cost of fraud. The remainder is split between the payment processor (e.g. Stripe), the issuing bank, and the credit card company. Clearly in a world of 2% rewards cards, a 3% fee does not allow for fraud protection, servicing expenses, and rewards.
My guess is that rewards programs only become feasible when you consider the interest charged on unpaid balances. Somewhere on the order of 50% - 70% of consumers carry debt on their credit cards. At 6% - 30% APR, this expense can reasonably cover the perks conferred by a credit card. If all consumers suddenly stopped carrying debt on credit cards, I suspect rewards programs would disappear rapidly.
To elaborate on this further, a competitive market in payments allows for a great diversity in interchange rates for different payment types.[0] This allows competing payment networks (Visa, Mastercard, AmEx, etc.) to offer the exact most efficient rate for a transaction, based on their actual costs. Under a regulated system, less risky transactions would be subsidizing more risky transactions, because the rates are capped. Our current system allows a major grocery retailer like Costco to have flat rates at $0.30 per transaction.
I found your analysis very interesting but I think one thing is missing from it.
Once a product or service becomes ubiquitous, people will sign on partly due to the social pressure of being left out - e.g. I might get a social media account just in case my friends want to chat to me there, or a credit card because it is the primary method for online payment.
Customers like this are not necesaarily as engaged with the product/service as the initial, enthusiastic ones. The difference in engagement creates a pyramid scheme of perverse incentives, where the companies create more and more benefits for their "engaged" customers and offload the costs to everyone else. Companies get really good at evaluating just how mich cost to offload without disturbing the largely unengaged customers.
This leads to the creation of a secondary market, where you compete on extra features for the engaged part of your consumer base. Here on HN, we proudly acknowledge this fact when companies cater to geeks and techies - if i like your product, I will convince my relatives to use it.
This practice ia not neceasarily malicious, but the cost ofnpleasing your engaged consumers muat naturally come from somewhere. When a credit company adds bonuses and incentives, they are not trying to serve the interests of all their consumers.
I don't know if government intervention is appropriate in this case, especially simple and heavy-handed rules like a price ceiling. However, in this case, the incentives of the government are more closely aligned with that of all the consumers, compared to the company.
(I hope this post was coherent, I rarely write on mobile)
The EU cap is 0.2% for debit cards, so for transactions under €150, everyone gets that super Costco rate or less. Alternatively, the cap can be set to €0.05.
The card companies still appear to be making good profits.
The problem with capping the rate for all transactions is that some riskier transactions simply cost more than this to process. Without being able to charge more for them, processors will likely make the decision to just not handle these. Suddenly, entire industries and classes of customer will be shut out of the network, simply because they can't be charged fairly.
I think a lot of people (but not banks) would be very keen on having regulated fees for transfers. Of course, not banks.