A long-running legal dispute pitting Visa and MasterCard against a group of retailers over payment processing rules and fees might finally be reaching a settlement that would compel the card networks to relax some of the regulations they currently impose on merchants who accept their cards. If that sounds like pretty dull stuff, just know that it has serious implications for everybody who uses a credit card — in other words, nearly all of us.
One thing retailers have been fighting for is the right to charge people more if they pay with a credit card, and sources told the Wall Street Journal this week they’re likely to win that battle. Americans threw a collective fit last year when banks wanted to charge us to use our debit cards. How will we respond to the idea of paying more to use credit cards?
Although regulations implemented last year cap the amount card-issuing banks can charge stores that accept account-linked debit cards, credit cards weren’t affected, and a group of retailers including shoe chain Payless ShoeSource and supermarket Safeway Inc. are pushing to have these fees lowered, or else be allowed to pass them directly onto the customer.
Financial industry observers think it will happen. Morgan Stanley analyst Glenn Fodor predicts that Visa and MasterCard “will drop their no-surcharge rules and possibly allow merchants to reject high interchange cards (e.g. airline co-brands, platinum, etc).”
For cardholders, this raises the prospect of diminished rewards programs (how do you think banks pay for those frequent-flier miles?) and possible inconvenience if they can’t use their cards when they get to a cash register. It would also make comparison-shopping for all sorts of goods and services on an apples-to-apples basis a huge pain in the neck if some prices include surcharges while others don’t.
The retail industry’s rationale is that if people have to pay more to use credit cards, they’ll get fed up and switch to another payment method, like cash or debit cards. Deprived of their credit interchange revenue, the thinking goes, banks and network processors would lower how much money they charge merchants.
“If there were surcharges in the market place… the networks, who are primarily responsible for establishing prices for acceptance, would bring their product costs down,” Mark Horwedel, CEO of a retail industry trade group, tells the Journal.
But it might not work out like that. Instead, we might just shrug and fork over the extra money. In a blog post on psychologytoday.com yesterday, New York University marketing professor Hal Hershfield explored how the psychological impact of buying something differs when you pay for it now versus paying for it later.
Paying with cash “hurts” more because we’re more aware of how much we’re spending in the moment. Paying with a card, on the other hand, imparts an out-of-sight, out-of-mind mentality. Hershfield calls this phenomenon “decoupling,” and this effect could insulate us from the sting of paying another percent or two as a surcharge, since we won’t actually have to pay it until later.
Retailers would probably be happy either way, since they’d end up with lower fees or else just pass the current higher costs onto their customers, but it’s bad news for cardholders’ budgets. We’ve already displayed a tendency to spend more on credit cards recently, and in the face of flagging income and employment figures, that’s worrying.
Federal Reserve data shows that in the month of May, Americans added credit card debt at pre-recessionary levels. And although banks’ borrowing costs, along with rates for other products like mortgages, remain at historic lows, data released Monday from CreditCards.com shows that the average APR for new credit accounts still hovers near 15 percent — close to the all-time high.
Could a surcharge for credit card use be the straw that breaks the camel’s back, or will it just be another instance of nickel-and-diming we gripe about even as we pay up?