Paying with plastic could be more costly than ever

3/4/2013

How closely do you look at your receipts? Notice any new fees lately?

As of late January, nationwide, retailers large and small have been given the go-ahead to start imposing surcharges on consumers who make purchases with debit or credit cards. That means everyone – from the eclectic little Mom ‘n’ Pop on the corner to your favorite Big Box store – can now add up to 4% to your purchase every time you pull out the plastic.

I think it’s safe to say that the last thing American consumers want to hear about right now is more fees.

So why would merchants want this? Why now?

And most importantly, will they really go through with it?

The secret fee you’ve been paying all along

There’s more than a good chance that at least once or twice in your life you’ve run into a little convenience store somewhere in the evening hours of a long day looking for just one item – a bottle of water, a pack of gum, an unnaturally colored, cellophane-wrapped treat that you know you shouldn’t eat but your craving simply cannot be ignored. You take your prize to the counter where you notice a crinkled and torn notice taped roughly to the side of the register:

“$10 minimum for credit card purchase”

Why do merchants do that? You either end up buying $9 worth of things you didn’t need, or simply put your purchase back where you found it and leave. And isn’t that illegal anyway?

First thing first – in 2010, new legislation was passed that makes those $10 minimum purchase signs completely legal. (Before 2010…not so much.)

Secondly, those little stores actually have a pretty legitimate reason for requiring you to spend a minimum amount. That reason is something called an interchange fee.

What’s an interchange fee?

When you use a credit or debit card to make a purchase the merchant pays an interchange fee to the credit card company for processing the transaction. The fee is usually 1-2% of the purchase price, but it varies and is higher for smaller transactions. If you buy a $1 pack of gum with your credit card, the merchant may end up paying $0.05 to the credit card company, which doesn’t sound like much, but can cut significantly into the profit margins for small businesses.

Where did the surcharge come from?

National retailers have been going back and forth with credit card companies for the past several years regarding interchange fees. That struggle ended recently, resulting in an agreement that includes a reduction in interchange fees for a fixed period of time and, most importantly for you, the ability for retailers to add a credit card surcharge in order to offset the remaining interchange fees.

Not in MY state…

It’s important to note that individual states still have the final say over whether or not retailers can charge fees for using credit or debit cards. The following 10 states currently ban the practice:

California
Colorado
Connecticut
Florida
Kansas
Maine
Massachusetts
New York
Oklahoma
Texas

Could this be a GOOD thing?

It’s hard to imagine that added fees are ever a good thing, but there is a thought that the changes stemming from the settlement might benefit consumers in the long run. How would that work?

Well, because of these interchange fees every transaction using a credit or debit card incurs a cost to the merchant. As a result, the price of goods is higher as merchants adjust prices in order to compensate for the fees they pay for processing credit or debt payments. So you end up paying more for certain items whether you use a credit card or not. Also, the interchange fees vary depending on the card – high end “reward” cards that accumulate points for users cost retailers more to process. Again, that cost is absorbed by the increased purchase price for everyone.

In theory, the surcharges would replace the flat inflation on the purchase price, meaning prices for goods and services would decrease while consumers would only pay a surcharge in direct proportion to the interchange fee paid by the retailer. Meanwhile, credit card companies would increase their reward offerings to entice consumers to keep using their plastic (and paying those fees) and cash customers (who aren’t seeing any points or benefits) would save a little money.

In theory…

As it stands, for the time being you’re very unlikely to see these fees from most retailers. Too many consumers use credit or debit cards to make the majority of their purchases and retailers are very wary of upsetting potential customers with the sudden introduction of new fees, even if the trade-off were ultimately beneficial to consumers. However, these fees are now a possibility, so if you don’t live in one of the ten states listed above be sure to check your receipts a little more closely from now on.