The New York Times has another great story about the credit/debit card market. The main idea is that Visa pushed up merchant fees (e.g. it’s charge to the grocery store, gas station etc. where you shop) and split the revenue with the issuing bank (e.g. the Bank of America Visa card). Mastercard soon followed and prices charged to merchants increased because of competition:
“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”
If consumers see lower prices when Mastercard undercuts Visa on merchant fees, the traditional model of competition would apply. There are two reasons this cannot happen (1) prices are not allowed to differ between cash and cards, let alone one network or bank to another, and (2) the merchant would have to pass on the lower cost to buyers.
The simplest way to remedy this would be to allow merchants to charge different prices for different methods of payment. If your Mastercard gets you gas for cheaper than your Visa, you’ll use your Visa and Visa will not be able to raise fees so easily. If paying by cash gets you a better price, this disciplines both Visa and Mastercard and issuing banks.
Update: Here is an interesting article by Josh Gans about this topic. He seems to suggest that allowing merchants to charge surcharges for credit card rules would help to cut merchant fees and has papers on the topic. Allowing surcharges is similar to allowing different prices for different payment methods. And I noticed that there is some lively dialog at Marginal Revolution.
Cheap Talk 
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January 6, 2010 at 7:31 pm
Steven
“The simplest way to remedy this would be to allow merchants to charge different prices for different methods of payment.”
Merchants are allowed to charge different prices for different payment methods. In the US, the contracts typically allow merchants to offer a discount for cash, but do not allow a surcharge for credit or debit cards. They believe that the framing is important. In other countries (e.g., the UK and Australia), both cash discounts and credit card surcharges are allowed. Where allowed, such surcharges are uncommon but not unheard of.
January 6, 2010 at 8:43 pm
sandeep
The rules are confusing but as far as I can tell MC cannot undercut Visa AND pass on price cut to consumers. This prevents competition.
January 7, 2010 at 12:26 pm
Tim Randall
Merchants can also specify a minimum purchase amount for each method of payment. I’ve seen stores with different limits for credit & debit card payment. If the minimum purchase for VISA is $5 and that for MC is $3, some customers may – far from having a choice – feel obliged to pay with the cheaper card.
January 10, 2010 at 9:38 am
chug
“The simplest way to remedy this would be to allow merchants to charge different prices for different methods of payment.”
I wonder how many merchants would do this? Most merchants factor in the credit card charges as overhead and overhead is covered in the (single) price.
Even with automated retail point of sale systems, a merchant may not be able to ascertain what is the appropriate charge for using different payment methods. For example, a MC is not a MC is not a MC. You have debit MCs, plain old MCs and rewards MC. And the rate the merchant pays for each is different.
Currently, the consumer can choose which payment method they want to use based on the features and benefits they get from using that particular method.
I use different cards based on what the reward is for that transaction. For example, I have a Shell MC that gives me a 5% rebate on all my purchases at Shell gas stations. My Exxon/Mobil card (and SpeedPass) gives me a 12 cents per gallon rebate on my gas purchases at Exxon and Mobil stations.
My Shell card is used ONLY at Shell stations, and paid in full each month. My Exxon/Mobil card is used ONLY at Exxon and Mobil stations and paid in full each month.
Another card pays me 1.5% cash back annually. That card is used for almost everything else, and paid in full each month. If a vendor offers a 3% discount for paying a bill within 20 days, then I pay by check. If less than 2%, then I use the 1.5% cash back card.
Not all rewards are created equal, especially for small businesses that have vendors who accept credit cards and offer no discounts for paying by check or EFT. Then the cash back from using the card is a “discount”. And that cash back is rarely accounted for at tax time.
YMMV.
January 12, 2010 at 6:48 am
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