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Credit card biz shift: Penalties to perks
Credit cards
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TEXT OF STORY
Kai Ryssdal: This may be just another Monday for most of us. For credit card companies, it's a whole different day. Not necessarily in a good way for them, either. The overhaul legislation that Congress passed last spring went into effect this morning. It puts restrictions on a lot of the interest-rate increases and fees that consumers paid -- billions of dollars worth. That's on top of perhaps $150 billion that credit card companies have lost since the recession started when consumers stopped using their cards as much or just walked away from the balances due.
So the card card industry is catering to a new credit card user now, as Marketplace's Stacey Vanek-Smith reports.
STACEY VANEK-SMITH: Back in the credit card boom years, you know, a couple years ago, careless was king. Credit card companies built their business on customers who spent more than they had and didn't pay on time.
Robert Manning is the author of "Credit Card Nation."
ROBERT MANNING: In the bubble era, the best customer was somebody who could never repay their loans, they would just pay interest and fees forever.
Credit card companies took in more than $200 billion a year from those interest payments and fees. But now many of the customers who paid all those penalties are in financial trouble and defaulting on their debts. So card companies are turning their attention to the customers they used to ignore, like Washington, D.C. doctor Elad Sharon.
ELAD SHARON: I wasn't carrying a balance so I wasn't making any money for them. I just sort of thought that they didn't care about people like me.
They didn't, but now they do. Because people like Sharon, who use their cards responsibly, are about the only customers card companies have left. But they're not going to bring in much in the way of interest payments and late fees, so card companies are finding other ways to make money off of them says Ron Shevlin, a banking products analyst for the Aite Group.
RON SHEVLIN: The best customers for the credit card issuers are going to be people who pay the balances off every month but make a lot of use of the card on a regular basis. That's going to drive a lot of interchange revenue for the issuers.
Interchange fees are what merchants pay card companies every time you use your card. They added up to nearly $50 billion last year. To push that number higher, card companies are looking for ways to convince the credit savvy to swipe with abandon. So, Shevlin says, card companies will give more to get more.
SHEVLIN: People who make heavy use of the credit cards are doing that to run up their rewards points. So you see firms going back now and strengthening and bolstering the quality of their rewards programs. As they compete for new business, they're going to look at the rewards programs as the new battlefield.
Elad Sharon gets cash back every time he uses his card, so he pulls it out of his wallet for just about everything.
ELAD SHARON: My American Express Blue Cash Card, I use it so much that the blue box that they have is actually kind of fading.
American Express and Chase's new Sapphire card are tempting consumers to wear out their cards by offering cash back, flexible rewards that don't expire and extra service.
CREDIT CARD ADS: New Chase Sapphire, you call, we answer, no waiting. The new premier rewards gold card from American Express, the only charge cards that earns triple points on airfare, double points...
To appeal to more frugal consumers, Discover and Capital One are touting the practicality of their rewards.
DISCOVER CARD AD: Discover Card customers are getting 5 percent cash back bonus at grocery stores...
Card companies have also started attaching rewards to debit cards, like airline miles, cash back and flat-screen TVs. Card companies will also be rolling out hybrid cards that can tap all your accounts and work as a credit card.
By rewarding credit card customers now, banks are banking on being rewarded in the future, says "Credit Card Nation's" Robert Manning.
MANNING: Banks are hoping that when consumer confidence turns around, they'll be coming around for a car loan, buy a new house.
In other words, credit cards are the financial industry's new gateway for things like mortgage loans and investment products. Cards will help lock in the loyalty of responsible spenders like Elad Sharon, who pays nothing for his cash back AmEx, and gets a few hundreds dollars back every year.
SHARON: Actually, I always kind of felt guilty about the way that I used my credit card. I felt like I was getting all these benefits and, you know, poor American Express was basically paying for my easy lifestyle.
Don't worry. They'll think of some way you can make it up to them.
I'm Stacey Vanek-Smith for Marketplace.
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In order to sell amex points for cash you should visit www.sellmilestoday.com
A cashless society is a reality that can be achieved sooner than most people think. The advantages are myriad - imagine being able to travel anywhere with just one card in your pocket. Bus fares to plane tickets, gasoline to car purchases, a snack from a street vendor to paying for a wedding reception, all on a single card. Monthly statements, graphical comparisons over time and purchase categories, ability to budget and trim expenses... the list is long, for both the users and the merchants. Why beat up on the banks and issuers just because large numbers of people knowingly ran up balances with no thought of repaying these unsecured loans. As a consumer, in closing I would add that blaming others for our own transgressions will only make the situation worse.
I cannot buy the argument that merchants are being penalized by accepting a credit or debit card. They reap the benefits of these cards listed in my previous posting and they pay a fee for this service. No one complains about the local merchants having to spend a couple of thousand dollars in advertising or marketing efforts. No one counts the increased costs and losses stemming from the use of cash, leave alone the risk of a hold up if relatively large amounts of cash are left in the till. The discount rate is a cost of doing business and should be factored into the pricing. Why should anyone feel sorry for the local merchants when it is a smart business move to accept cards? I am all for local merchants and will support them strongly even if they have to add a certain percentage to offer me the privilege of using my card there. The banks and the issuers are not the villains. The unscrupulous card users who knowingly splurge fully knowing that they will never repay are the true villains. They are the ones driving up costs for everyone. Regulations are needed, but over regulation to protect those who misuse this privilege is penalizing those who do use the card responsibly, by imposing obstacles to more pervasive use and acceptance of the card.
Retailers
Post the fees that the Credit Card companies and the Banks are charging when your customers use cards. Example, at a local co-op in Lawrence, KS where I used to live they posted a chart that displayed the cost to the merchant and which type of payment (card, cash, or check) would be the most cost effective depending on the amount spent. I know that it influenced me when it came time to pay at the register. There were a few times that I would stop by an ATM to make sure I had enough cash before hand. They took it down some time ago. If more merchants had something similar and explained the cost to them, customers might take that into account. If the contractual agreement won't allow you to post that, then have a sign that says why you can't post it. And include the contact info for the card company. Companies large and small will continue to abuse customers and employee alike so long as it isn't illegal and they can get away with it.
"As a small business retailer, the agreement with Visa,MasterCard, Amex prohibits me to offer a discount for "cash sales" but credit card sales add 2% to almost 5% to my cost of every card transaction.
"Debit Cards cost 25 cents per swipe --- if it's a $1 transaction (and convenience stores get them all the time) that's a 25% hit to their profit margin on that transaction.
"... The retailers have to build that into the COGS---the "Cost of Goods Sold."
"A standard credit card Visa or Mastercard (plain no fancy features) has fees of @ 1.80% in comparision the corporate card can be as high as 3.75 and more if it doesn't swipe. To accept a simple debit card, costs on average $.40 - $.70 depending on the fee stucture. It disturbing when people want to purchase an item worth less than a dollar, not knowing it costs the seller almost as much in fees.
"We pay on an average month @ $1,000.00 in fees, busy months can be two or three times that."
ATTENTION AMERICAN MERCHANTS
I feel your pain. I actually like using cash, particularly when I can give exact change, or put my pocket change in the employees' tip jar or local charity donation box. Hard to do that with charge cards.
So ... if you want to decry credit and debit card use, PLEASE PLEASE PLEASE start giving your cashiers training in politely accepting currency, instead of rolling their eyes when I fish out dimes, nickels and pennies,... rushing to give me my change while I'm still getting out currency,... remedial math skills so the change is correct.
At least a third of the time I use plastic, it's because some retail clerk is clearly in too much of a hurry to handle something as old-fashioned as "money." You merchants reap what you sow....
Credit card companies are "valuing" their responsible customers? BS.
Citigroup suddenly canceled both my gas company cards last October after over a year of regular, consistent use and "paid in full" every month. Why? They cited that five year old negative credit report issues. But they didn't cite those issues when they signed me up in 2008.
Bottom line, the credit card companies are serving themselves, not customers.
Oddly enough, they DIDN'T cancel my Sears Card, which worked out for them, as I just bought a new $1000 dishwasher. (Naturally, with no % or payments for 12 months, aka "free ride" when I pay it off on time.)
Meanwhile, my good ol' bank card has a rewards program that earned me a free Ipod Nano and Bose in-ear headphones recently. Hopefully my bank card isn't bleeding retailers dry.....
My husband has been a strong advocate of credit cards from the day he arrived in N. America back in 1991. He would patiently explain to merchants and restaurant owners who gave a cash discount or refused to accept cards on the advantages of accepting the card if not for the safety, ability to track, and accounting ease then at least to grow their business by understanding who their customers were, what their spending habits were, what their preferences were, and extrapolating outwards and finding more prospective customers to sell to. At first this used to embarass me and our kids but we have come to realize that this is his small way of giving back to the society that has given him so much. He has successfully converted countless small restaurant owners, corner drug stores, plumbers, electricians and such trades people etc. He is equally a missionary and would both defend and encourage card usage amongst his friends and relatives extolling its virtues and decrying those who take advantage of the unsecured credit card loans to splurge way beyond their means on merchandise or by taking cash advances, and drive up the costs for all users in the process. He proudly announced that he has commented on this piece in Marketplace and here is my addendum to it.
This game that credit card companies play will ultimately benefit the companies themselves and leave consumers hurting. What the companies fail to disclose to the consumer is that extra perks - i.e. cash back, reward points, etc. - get charged right to the vendors. Fees that the vendors pay for the reward cards are higher than regular non reward cards. In turn, to cover the cost of the higher transaction fee, vendor may raise the cost of goods sold sooner or later. In the end, banks win, consumers lose... again.
Using a credit card is the best way to budget and monitor spending. It is so much safer than carrying cash and there is recourse if the card is lost or stolen. It is highly portable and can be used world wide without the hassle of getting foreign exchange. It saves the user the time and expense of giving the exact change, as in the rare instances that I use cash, I usually end up asking the merchant to keep the change or, even if I do get the change back, drop it somewhere "safe" and lose track of it. What's more, it is far more elegant than counting out bills and coins. I can list the advantages to the merchant as well in terms of safety, portability, accountability, avoiding till dipping by employees, and so on. So I am more than happy to pay a nominal fee to enjoy these advantages over cash, and will happily pay an extra 5% if that is the premium the merchants mark up their wares to make up for the discount rate that they pay the card companies. If I am late in paying my monthly balance or avail of the privelege of an unsecured loan, naturally there is another fee to pay as well. I have been using credit cards for years and will continue doing so. I would strongly suggest that we don't over regulate to protect the irresponsible users of this truly incredible advance over cash transactions.
I think the story got some unfair criticism. As someone who previously worked for a credit card company, I assure you that issuers like Chase and Capital get to profit off the transactions, because (spoiler alert) they own Visa and MasterCard (which, also, by the way, has continually confused me as to why people buy Visa and MC stock when all voting stock is reserved for the original bank ownership)! By the way, if you bought Visa/MC stock, congratulations, you just helped pay for a series of antitrust judgments against both companies dealing with debit cards.
Interchange fees accounted for a full 10% of the profits of the credit card company I worked for, which at one point was the second largest issuer in the world. So, no, it's not just Discover, Amex, Visa, and MC that are making money; the banks are very much behind it. And, in terms of interchange fees paid by small merchants, they get screwed because they are dealing with a pyramid scheme, at the bottom of which are a bunch of shady sales guys that offer little to no negotiating room in onerous contracts that are designed to give everyone in the pyramid theirs (at the top, you guessed it, are the issuing banks themselves). Hope that helps clear some things up.
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