By RON LIEBER
Published: January 8, 2010
For several years, I’ve wondered whether my aggressive pursuit of credit card rewards made me a selfish consumer.
Would you ever give up your rewards cards?
After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.
Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.
So the risk is that we perpetuate a sort of reverse Robin Hood problem, as Prof. Steven Semeraro of Thomas Jefferson School of Law in San Diego puts it. It’s possible that the poor pay subsidies to finance the rewards of the affluent.
Andrew Martin’s article in The Times earlier this week noted how quickly the fees that merchants pay to accept certain debit cards had risen, too. That suggests a related question: Wouldn’t we all be better off if those of us who use plastic to earn free travel or cash back laid down our cards en masse?
So this week, I tried to figure out what would happen if we did just pay cash, or if there’s a better course of action for people who spend in a self-interested fashion but still have a conscience.
Quantifying the damage the cards cause merchants and the poor turns out to be quite difficult. Each card in your wallet can bear a wide range of costs, and retailers may pay different amounts to accept the same card. You can get a rough sense of your cards’ costs by punching in the first six numbers at truecostofcredit.com.
Here’s one finding: Rewards-earning credit cards with the Visa and MasterCard logo often cost merchants more than plain-vanilla ones, which hints at the card companies’ laserlike focus on subsidizing rewards for the affluent customers who are still spending, even if they are paying their bills off each month and thus paying no interest.
But cards undoubtedly also benefit retailers. People can use credit to spend more than they have in the bank at the moment, and some may spend more on a card than they would if they had to lay out a pile of money. Merchants who handle less cash, meanwhile, bear fewer costs for counting it, calling the armored car, and theft by employees or armed bandits.
As for the cost to consumers of all the card use, the National Retail Federation figures that the so-called interchange fees that their members pay to accept Visa and MasterCard alone cost an average of $427 an American household in 2008. Add in other fees the stores pay, plus costs for American Express and Discover, and that number could approach $600.
Bringing that cost down to zero means that everyone would have to quit cards cold turkey. That’s a tall order, given that the campaign wouldn’t work unless all Americans were in on it, especially those who earn well over that $600 each year in rewards.
Besides, cards offer other benefits besides rewards, like ease of budgeting and record keeping, allowing you to avoid checks by paying monthly bills with a card, the ability to dispute charges and the time savings in not having to refill your wallet at an A.T.M. as often (and cost savings in not paying A.T.M. fees).
But let’s pretend that a boycott is feasible. Then what? Some merchants would keep the money they no longer had to pay to the banks instead of lowering prices. Banks, having lost that income, might try to make it up by charging consumers higher fees.
There is no way for consumers to win. No way, that is, unless merchants started giving us all discounts for using cash instead of cards. Then, we could decide whether the card rewards were worth more to us than the discount that any given retailer was offering. Visa, MasterCard, American Express and Discover all say that this is perfectly fine (not to mention the retailers’ right by federal law); they allow cash discounts but prohibit surcharges for card use.
But most merchants find this problematic for a variety of reasons. What difference is there, really, between a discount and a surcharge except semantics? And what retailer needs the risk of inadvertently breaking one of the rules and having to pay a fine or losing the ability to accept cards altogether?
Other retailers find it offensive on its face that they should have to offer a discount to people who use United States legal tender. How, they ask, did we come to a point where anyone would even be bold enough to suggest something so outrageous? Besides, it makes little sense to hand over money to people who are already paying cash without knowing how many card users will join them, if any.
Then, there are the rules in some states that require retailers to display both the cash and credit price on every single item. That might work for a gas station but be expensive for a big-box retailer.
John Rydman, co-owner of the Spec’s chain of wine and liquor stores in Texas, offers a 5 percent discount to customers who use cash or punch in their PINs when using their debit cards. He decided to mark every item in the store with two prices, even though the state didn’t require it. “We do it for the ease of the customer, because they can’t do the math generally,” he said.