Happy CARD Act Day

By James Kwak

Most provisions of last year’s CARD Act restricting certain types of behavior by credit card issuers go into effect today. Card issuers, of course, are adapting by seeking out new ways to make money. One, pointed out by Felix Salmon, is expanding their usage of rewards cards, since (according to the Times) they get a higher interchange fee on rewards cards than on other cards. (This baffles me, but whatever.) Rewards programs, as it turns out, are subsidized by everyone in the form of higher prices for all goods bought at retail.

Put another way, this is the credit card industry (partially) shifting its sights from consumers, who benefit from (modest) legislative and regulatory protections, to the retailers, who don’t. It’s also what you would expect when you have extremely high concentration among card issuers (and transaction networks) and low concentration among retailers. Perhaps consumers aren’t the only constituency that needs a little protection.

22 responses to “Happy CARD Act Day

  1. So, the more people who sign-up for “reward cards” drives the card-vendors to further gouge the merchants who, in turn, further gouge their customers regardless of payment-type for those purchases. Thus, thanks to the issuers of “credit” we are all stealing from each other and ourselves to further inflate the incomes of the racketeering banksters! What a country! It seems deceit, theft and stupidity truly has become “The American Way.”

  2. What would you do with a product that is free, simplifies things, gives you free money, and reduces the cost of doing business. Credit cards are that product. Most are free, allow you to complete a transaction in under two seconds, allow you to float money for a month, and reduce the cost to merchants (how many would prefer to handle cash or checks for all transactions). If you don’t want a credit card, you don’t have to apply for one. Used responsibly, it is a great product that has provided tremendous benefits to many people.

  3. Alright, this is getting to be a bit too much. I absolutely love this site; I love the insight and the caliber of dialogue. But are we really getting to the point that we’re just angry credit card companies are able to make money? Simply because the actions of the company create slightly higher retail prices, James implies there should be legislation against this (even if in jest), and the first post I see likens it to theft and deceit.

    Get over yourselves. I continue to be shocked at everyone’s ability to be continually shocked that banks, or anyone for that matter, will operate in a way thats beneficial to themselves. You can argue there shouldn’t be a credit card industry, you can argue that the industry as it exists is an overall detriment to society, but don’t pretend that every single thing that the banking industry does is criminal and representative of every evil imaginable. So many times I see otherwise intelligent dialgoue here degrade into ‘Ahhh, greedy bankers! Now I’m angry!’ and then its just emotional nonsense.

    I wouldn’t have cared if it wasn’t the 20th time I’ve seen something like this.

  4. Get over yourselves. I continue to be shocked at everyone’s ability to be continually shocked that banks, or anyone for that matter, will operate in a way thats beneficial to themselves.

    Are you paraphrasing James Inhofe’s “outrage over the outrage” that people felt over Abu Ghraib?

    In spirit, at any rate, even if not consciously.

    Yes, people tend to be shocked that a rapist feels entitled to get his jollies the way he does. It’s “beneficial” to him, right? Or any thief, any murderer? They can look to your criminal logic to absolve them all.

    I can’t speak for the others, but I’m not shocked, I’m enraged, and I’m trying to figure out a way to put a stop to these crimes and bring these criminals to justice.

    Simply because the actions of the company create slightly higher retail prices, James implies there should be legislation against this (even if in jest), and the first post I see likens it to theft and deceit.

    Yes, higher retail prices for those who don’t use credit cards. Higher prices on necessities to subsidize luxury purchases. You sound like the typical welfare leech who doesn’t pay his own way, who enjoys his “benefit” in burdening others with his own wretched costs. Like in this case. That’s why you wrote this post.

  5. The only problem I can see in trying to stop credit card companies is the same problem you get when dealing with any industry that really, truly gets its profit from sticking it to people: legislating away their behavior is an arms race. The shots this law fired over the bow of credit card companies have already been ignored, and they’re getting back to business as usual. Can this fight actually be won?

    I suppose the only real ultimate “solution” to the problem we have (and make no mistake, I do see a problem) would be for people to take responsibility and stop being idiots with credit. Use it responsibly or don’t get it to begin with. But, obviously, there’s too many ignorant/stupid folks out there, very few of which are introspective enough to see if they can handle such tools.

    Banning usury altogether (with fairly strong definitions for it) might work, but there’s no way to get it done with lobbyists fighting against it. So we find ourselves pushing a patchwork of laws that seem like they’ll work for a week until the financial geniuses sit down with their lawyers and “innovate” their ways around the laws.

    Arms races are never pretty, but will the attempt to regulate the companies ever be anything else?

  6. Two sided platform theory shows that the platform (in this case the credit card company) should charge a lower price to the side with the higher elasticity of demand for the product (in this case the consumer, who will quickly abandon rewards cards if the fees get too high) & a higher price to the side with the lower elasticity of demand (the merchants who cannot turn away certain types of credit cards, & must accept at least Visa & Mastercard for fear of turning away customers.) Ergo it is not baffling at all.

  7. Dan wrote February 22, 2010 at 4:17 pm:

    “Alright, this is getting to be a bit too much. I absolutely love this site; I love the insight and the caliber of dialogue. ….I wouldn’t have cared if it wasn’t the 20th time I’ve seen something like this… Get over yourselves. I continue to be shocked at everyone’s ability to be continually shocked ….”

    This is not Bolivia

    Timothy Geithner said 02-22-10 07:53 AM:

    Vogue/Huff Post – excerpts

    “During the financial crisis, as the public called for limits on the $168 million in bonuses to be paid out to AIG employees, Treasury Secretary Tim Geithner had one stark response, The Wall Street Journal reports this morning. “This is not Bolivia,”

    Treasury Secretary Tim Geithner

  8. You be the judge.

  9. Watch the face of one woman in the audience behind Mr. Geithner, 2minute 50 seconds in.

  10. In responding to this, I want to take it as an assumption that many of the actions of the financial industry are equivalent to rape and murder. So as a natural consequence, we agree (and in reality, believe me, we do) that there should be measures in place to both punish and in the future prevent what has happened. This does not mean, however, that the next thing they do necessarily merits the same level of outrage. Anger over bonuses and no change in behavior? Fine, great, no problem. Outrage that a bank isn’t selling overdraft protection as if its a terrible service…not so much.

    At no point in my post did I claim that the banks didn’t do something criminal. At no point did I claim there should not be people within the banks held accountable. My point was that otherwise justified outrage gets spilled over into areas where it isn’t justified, and it dilutes the dialogue. But I’m not entitled to dialogue I like, so oh well.

    I was far more instigatory than I intended, and I apologize. It’s just disappointing to repeatedly see such good conversation turn into a lynch mob.

  11. Russ, your response to Dan is insane.

    As for James’s post, who has uses a non-rewards card anymore? I held out for years, because ultimately we all pay for it, but it’s a classic prisoners dilemma. But the problem is the rewards card concept itself. Whether the interchange fee differs is more or less irrelevant.

  12. Does she know John Edwards? She would make a great trial lawyer.

  13. The interchange fee is not going to be irrelevant to merchants. The cards are horrific for retailers (despite whatever evidence that people spend more when they use a card) There is no way the average retail person at the register is going to have a clue what kind of card it is, isn’t allowed by agreement to turn any of them down anyway, and has no idea how much they are going to be charged until they get shortchanged on the deposit to their account (because of course, the thieves get to take their money first and then make you fight for it if they are wrong!)
    The only thing a merchant can do is estimate, and they will always estimate on the high side in the never-ending spiral.

  14. Hillbilly Darrell

    Visa Interchange Rates 10/09

    http://usa.visa.com/download/merchants/october-2009-visa-usa-interchange-rate-sheet.pdf

    Visa Interlink Rates 10/09

    http://usa.visa.com/download/merchants/october-2009-interlink-interchange-rate-sheet.pdf

    Mastercard Interchange Rates (123 pages detailing innovation)

    http://www.mastercard.com/us/merchant/pdf/MasterCard_Interchange_Rates_and_Criteria.pdf

    Wikipedia Definition of Interchange Fees:

    http://en.wikipedia.org/wiki/Interchange_fee

    In essence, the card issuing banks get the majority of the fee, Visa or Mastercard get a cut, and the merchant’s processing bank which provides “merchant services” gets a cut. It is virtually impossible to know how much of a margin cut one will take by processing any given card, for any given transaction, on any given day. But, the fees currently average around 2%, but can go much higher. Anyone who has actually run a business, and paid interchange fees, can verify this statement, and offer statements which show vastly different rates by card type.

    Thus, I ultimately stopped taking credit cards in my business, and accepted only cash and/or checks. Many merchants I know have followed suit. Ironically, many merchants actually offer cash discounts-yesterday I paid $1075 cash for $1146 in auto service.

    Anyone who plowed through the information on the above links can attest to the idiocy of the credit card “innovation”. 123 pages of gobbly gook hiding and confusing fees. Delay in getting net deposits into account after unknown fee haircut. Machines….internet connections….hassle…..

    Cash is legal tender for all debts public and private. Get paid in cash, walk to the bank, deposit cash, get credited 100% for cash deposited, and if done before 3:00 it shows up in account that day. Pretty simple. True “innovation” would improve on this tried and true transaction mechanism, which credit cards don’t.

    The credit card companies have inserted themselves into the middle of transactions without providing real value, and are continuing to price themselves more and more out of the market.

    Their next ploy will be to outlaw cash…so we have no choice, reagrdless of their cost.

  15. this is the credit card industry (partially) shifting its sights from consumers, who benefit from (modest) legislative and regulatory protections, to the retailers, who don’t. It’s also what you would expect when you have extremely high concentration among card issuers (and transaction networks) and low concentration among retailers. Perhaps consumers aren’t the only constituency that needs a little protection.

  16. They’re the worst robbers in history, and anything they do has to be seen in that light.

    We have every right, on not only moral but indeed on rational grounds to assume the worst intentions on their part in every case.

    On the contrary, it would be irrational to assume that their mindset regarding overdraft rents (which, however trivial you consider them, are an economically unproductive rent scam every bit as much as naked short-selling or HFT) is any different from their mindset when they lobbied to have Glass-Steagall repealed or for CDS to be removed from the purview of the rule of law completely, and of course when they subverted and destroyed democracy completely by perverting what was supposed to be our government beyond all recognition or redemption. In every case they have the mindset of a mugger or pickpocket (depending on the context), and have nothing but contempt for the people or for democracy itself. The people are a slave resource to be mined. That’s all they believe in any context.

    It’s all part of the same monumental skein of crime. If you want to focus on the big picture and not get angry over smaller details, fine. But that doesn’t make the details innocent.

  17. Here’s a stimulus we could use: Obama should direct the US mint to come up with a way to do e-currency that everyone can use, preferably without having to go to an ATM. People use credit cards and debit cards because they can’t be bothered with cash. The trouble is it is a private system that governs those systems, allowing the service providers (credit card companies) to find ways to gouge consumers and retailers.

    The government should provide this service for free and without fees. No more 1% surcharge on buying a coffee at your local coffee shop.

    That would make a big difference in retail.

  18. I have been thinking along similar lines, but with a different twist. Why not a Basic Government Services Act that allows states or the federal government to compete in banking services. The government could provide a basic credit card without frills, advanced loans, points, or rewards, a low interest rate of 10%, low merchant fees and a low credit card limit of say $5000.00. The interest rate and merchant fees would go to the treasury and none of the amount charged would be subject to discharge in bankruptcy.

    If the consumer wants a card with a reward program or other benefits, they can use the private market.

    Recently, a caller on a talk show suggested that the federal government convert consumer debt by paying off the consumer debt and charging the debt to the individual consumer with a reasonable interest rate. The consumer then pays the loan back to the government and if necessary as a deduction from income through a separate payroll tax.

    I like the e-account idea with low fees. Why should the consumer and the merchant be gouged with high fees for simple commerce? The fees earned by the big banks cost us all more money as it adds to the cost of commerce and is not recycled into the economy. Rather, it goes towards 145 billion in bonuses for a few. The fees are a drag on commerce and inflationary. We could do with cheaper transaction costs.

    I agree, you e-currency idea would be a stimulative boost to the economy, reducing the cost of commerce.

  19. As a separate matter, why are the card companies and banks claiming that they are losing money? They have been raising fees, interest rates, and minimum payments for years. I do not buy their assertions the CARD will cost them money. I think that it is just another rip off.

    Next, why is it that they give out credit cards like they are penny candy and then complain when people default on their accounts. If that is not bad enough, the card companies turn around and claim that the rest of must pay for their losses. I am a small business owner and have never been able to pay along the cost of my losses.

    If they were required to assume their own losses, they would be more prudent in their business practices. Many small businesses must be prudent or risk bankruptcy.

    Why should I have to pay for the losses self created by bad business practices?

  20. 1) There is no such thing as “free money”.

    2) I can do the same things with my Debit Card.