The Visa fees article

Everyone is blogging about it, here is the link.  Kevin Drum has one good summary, or here is Yves Smith or Felix Salmon, both of whom are upset.  The upshot is that the supermarket pays Visa a fee if you use a "sign for it" card rather than entering a PIN number for a debit card, though it's a little more complicated than that.

My practice does not match the setting of the article exactly, but here's how it goes.  As Natasha forced me to internalize years ago, when I use my Visa credit card, and sign for payment, I receive frequent flyer miles.  When I use my Visa BB&T debit card (yes, my two main payment cards are both Visa), I don't get anything back.  By using the credit card, resources are redistributed away from the store and to both Visa and me.  On net that's a better deal for me and that's why I end up signing so often.  This could be efficient too, in a constrained second best sense.  For one thing, it indicates the supermarket was earning ex ante monopoly profit; is it so tragic for some of that profit to be split by Visa and me?  One way to understand Visa is that it is supplying countervailing power by "organizing" consumers against the retail monopoly and distributing the gains from the new bilateral monopoly arrangement.

There's nothing to stop the store from offering me frequent flyer miles, or other forms of discount, if I use a means of payment which they prefer.  I've yet to see a deal good enough to make me switch.  (When Sears pushes this on me, I just say no because Visa offers me a better deal.)  And I find it easy enough to believe that the petty monopoly of the local grocer is more significant than the market power in the potentially more contestable cards and payment market.

Again, I don't know how much of the entire market works on the basis that I experience.  But it's one simple example of how "higher fees" can be good rather than bad. 

Not long ago Ronald Coase turned 99 years old and I am delighted to see he is still alive.  His ideas are still alive too.

Addendum: When issues of this sort arise, there is a common pattern in blogospheric discussion: Blogger A criticizes a market practice with tones of absolute condemnation.  Blogger C (in this case, me!) responds with a plausible scenario, and a microeconomics-consistent first-order explanation, that things aren't so bad after all.  Blogger D tries to defend Blogger A by shifting the burden of proof to Blogger C to demonstrate that markets are efficient in such a case and by leveling charges of market fundamentalism and by citing some second or third best arguments that the market can fail after all.  Don't be fooled by that polemic slide in emphasis; the burden of proof is on the critics here — those asserting the existence of an evil and asking us to move beyond a loose agnosticism – not on me.


I don't contest the thrust of this post, but I do want to make two niggling points.

1. There is in fact something to stop the store from offering you a discount if you use a means of payment they prefer. Their merchant agreement with the credit card company forbids it. Now you can certainly take an absolutist position against the regulation of anti-competitve behavior ("nothing stops supermarkets from banding together to form their own credit card firm!"), but to the extent that you are willing to grant that it sometimes happens that anti-competitve behaviors in near-monopoly contexts create sub-optimal outcomes, this situation would seem to qualify. And the loosers in that case are not just the stores, but the consumers who would get a discount if the stores could offer one.

2. The whole "burdeon of proof" argument is really unhelpful, from both sides. This is not a court case. I have worked in science for many years, and I have never had a conversation that went like this: A says "I think this phenomenon works this way." B says "I think it works this other way." A responds "Well, the burdon of proof is on you." This is just not a helpful approach when you are honestly engaged in an attempt to understand something.

I find it interesting that banks that charge a 3-5% fee for the use of their services (including a substantial hedge against fraud and other unanticipated loss) are "bad", but trial lawyers who bring dubious "class action suits" against deep-pockets defendants, in which the individual consumer gets a voucher for a few dollars and the lawyers get 33% of the "take" are "good".

(At least if you're a leftist.)

Recently, last week, Sears offered an additional 5% discount on appliance purchases if you used a Sears credit card. Nothing stops sellers from trying to encourage alternative payment methods.

Small retailers may have fewer options, but they also avoid the need to create their own system to accept payment. The transactions cost are lower in the current system then any alternative they could create. They could offer cash discounts etc but they don't. Why not? Because the current must be the lowest cost option they have found. Easy for them, easy for customers.

Also under the current system, my credit cards reward me regardless of where I shop. If I buy at a small store or a big box store I earn my points. Small retailers do not need to create a loyalty program for me, unless they want to do it. To the degree that reward checks influence where I shop, they leave me indifferent between large and small stores.

God save us from all those who see regulation needed everyplace.

I'm not buying the argument that the grocery store enjoyed some degree of monopoly profits ex ante. That argument would only be true if the store did not raise the prices in response to the higher fees associated with "sign for it" cards. Part of the point of the original article is that merchants are in fact passing the fees onto consumers. Higher variable costs spread equally across the entire market should result in higher prices even in a perfect competition scenario.

Surplus isn't being transferred from the store's monopoly profits to you and Visa. It's being transferred partially from the store's normal profits and partially from all consumers (in percentages depending on price elasticity of demand) to some consumers who use "sign for it" cards and to Visa.

So now that I've offered a "a plausible scenario, and a microeconomics-consistent first-order explanation" isn't the burden on you to show that grocers enjoy abnormal economic profits, despite their meager (typically 1-2%) accounting profit margins?

As a former airline employee it's often amusing to see the lengths that people go to get a few miles that are worth about 1 penny each.

A question: how would people's attitudes or behavior change if they had to explicitly pay credit card fees (including perks) as part of a transaction instead of being buried in the advertised price?

Just because a bunch of bloggers learned something doesn't mean it's news. The Visa "story" is nothing new.

Actually, there is one case where I've found it's better to use debit than credit: Ikea. At least the Ikea in Ohio gives a discount coupon worth a percentage of the total purchase if you use a debit card. If the percentage of the purchase is greater than the fee I'll get charged for using my debit card plus the value of any bonus points I would have earned, then I use debit. In all other cases I use credit or (preferably) cash.


A buyer, a seller, and an intermediary get together to make a deal. The intermediary will, for a fee, help the buyer and the seller complete a transaction.

To encourage the buyer to use his services, he will give the buyer a rebate based on volume usage. To encourage the seller, he will create an easy to use, almost instant, way to process transactions. Quicker and more accurate then anything the seller could hope to build.

Now why does the government need to enter the relationship?

Visa jacks its fees to the merchant, who in turn jacks its fees to the consumer, who in turn is given frequent flyer miles or gift cards or even a fraction of a percent cash back in return for a higher bill from the merchant. How is this more efficient than letting the consumer keep more of his own money to begin with?

The merchant agreements seem unfair. They prohibit a merchant from offering a discount for paying cash, for example.

In effect, given the presence of frequent flyer miles or cashback bonuses, the consumer pays LESS when they pay via a credit card, even though the merchant would likely be willing to have them pay less if they paid cash.

Small businesses often resisted credit cards for years, but now feel they don't have much choice [similarly with accepting checks in earlier decades]. There are only a limited number of firms (Visa, MC, Amex, Discover) and they all have similar restrictions in their merchant agreements, so far as I know.

One local restaurant games this system nicely -- they are cash only, but have an ATM in the restaurant.

Poor Blogger B. His contribution was too slight to factor into the back and forth between Bloggers A,C, and D.

How is this more efficient than letting the consumer keep more of his own money to begin with?

Well it isn't, on balance -- but you could make the same inefficiency argument about all loyalty/rewards programs.

prohibiting a merchant from offering a discount if someone pays cash seems anti-competitive. i think that's the first reasonable place for government to step in -- the govt can refuse the assistance of the legal system in enforcing that part of the contract.

Yeah, not news. And not clearly justified anger. Credit cards offer some fraud protection.

This is one reason why I put a nominal amount on the credit card for tips at restaurants and pay the bulk in cash. What they put down for their taxes is up to them. I am quite sure they will not under-report. Not sure if I'm optimized in my tactic, but that's how I roll.

I need flyer miles like a hole in the head. Seriously, rather than making me fly commercial, just kill me.

I always use credit cards that pay cash instead of miles. If miles are only worth $.01 each, then a cash $.01 is more flexible and thus better than the miles. Currently I am getting 2% cash back, but I have to pay a $75 per year annual fee for that. Based on my annual spending patterns that is about 1.7%, so I am not sure how they are making money on me given the numbers in this thread.

A point: the customers Visa and Mastercard are trying to get are NOT you and me. The customers are the banks who issue the cards. So, Visa and Mastercard are trying to get the banks to issue their cards and offering higher fees to the banks. Banks probably like this arrangement. It makes no difference to me, or (prbably) you, whether I use a Visa or Mastercard debit card.

Btw, if I understand the Coase reference correctly, that's right.

And isn't what the credit card companies are doing exactly what B and D want the government to do with medical care and pharmaceuticals?

And yet, it's not a simple question. Should people be using credit for groceries? Well, they aren't really, it's just a convenient payment mechanism disguised as credit. Wait a second, OMG! Debt Panels!

Oh, and why is EVERYTHING these days a "tax?" In my world where words mean stuff, taxes are taxes.

And, how much do credit card companies deserve credit for building up the consumer system we have.

Here is the template I always see. A market innovation that is not perfect helps build a market. A and D then swoop in and start yakking about some trifle, not reflecting on how the innovation actually got us to the point where there can actually be a complaint.

Ex-ante monopoly profit...this does require the burden of proof in my eyes. I think it's bullshit.

There's nothing to stop the store from offering me frequent flyer miles, or other forms of discount, if I use a means of payment which they prefer.

Just because a bunch of bloggers learned something doesn't mean it's news. The Visa "story" is nothing new.

To encourage the seller, he will create an easy to use, almost instant, way to process transactions.

merchant agreements seem unfair. They prohibit a merchant from offering a discount for paying cash, for example.

I hate that, if your debit card is stolen, crooks get directly at your account, and even though you're not liable for what they steal, it can still be some time before the money is returned to you.

What is the downside of using credit cards? Is it just that some people feel more disciplined if they use a debit card? Is it really that difficult to pay off your card every month? I just don't see the purpose of the debit card. Please explain the appeal. I beg you.

Lots of good stuff here.

I own a small business that sells primarily to other businesses and a few individuals, and we accept all major credit cards. Our merchant agreements prohibit us from charging a higher price to those using credit cards.

We offer the same price regardless of method of payment.

We factor the credit card fees as a form of overhead into all of our prices.

Some cards, especially corporate and rewards cards, carry a higher fee to us. This higher fee amounts to about 1% (3% rather than 2%, approximately).

The big advantage to credit cards for us is that we get an approval from the bank within seconds and we get our money from the bank within 2 to 3 days. The risk of non-payment is borne by the credit card issuer or bank, not by us.

Do not underestimate how important the above is for businesses. Accepting credit cards reduced our ARs, reduced our bad debt, and meant that we did not have to sell our ARs to a factor or debt collector. It increased our cash flow and reduced our cost of doing business and bad debt to write off. Win-Win.

Once we began accepting credit cards, our revenues increased and our accounts receivable dropped. Good all around.

When we buy, we always try to pay with one of our credit cards UNLESS the vendor offers at least a 3% discount for paying by check/cash. We get a rebate on our cards of between 1% and 1.5%. Almost all of our vendors accept credit cards, including transactions that are in the $10,000 to $40,000 range.

When we pay by check, there is little float. When we pay by credit card, we do not have to pay until due date. We pay all of our credit card accounts in full every month, and by the due date.

Another advantage of using a credit card to buy is that if we have a problem with a vendor and they will not make an adjustment we can challenge the charge via our credit card. Even if we lose, these kinds of challenges count in how the merchant bank scores your merchant account – the more challenges and chargebacks you have the more likely it is that you as the seller business will pay higher fees or be suspended and no longer able to accept that card.

In the last 10 years we have had zero (0) chargebacks. Our charges are contested only 1 or 2 times a year, and those are always with buyers who forgot they bought something from us or did not recognize our name on their statement (in those cases, the buyer was too lazy to contact us to find our who we were).

We do not use debit cards. I get higher levels of protection and more rebates using credit cards.

The only advantages I see of using debit cards are that I don’t have to write a paper check, and it is faster to use a debit card than to write a paper check. So why use a debit card?

For credit cards it makes sense: Card companies compete for customers based on advertised % cash-back and rewards, so it's a slow arms race to raise fees against the store and pass them back to attract more customers. It's a net transfer from cash/debit customers & stores to credit card customers. (interesting what a 1% incentive can do!)

Debit cards I don't really understand since there are no rewards, just convenience/liquidity, and therefore debit cards are the main issue here. It seems to me only banks and card companies win (at least in $ terms). Although a quick google search does show "debit rewards cards" are gaining in popularity so soon customers may take part in the gains too.

Nuanced economics arguments aside, let's be serious here. Using debit+PIN *COSTS THE CONSUMER FIFTY CENTS*. Yes, fifty cents is not a lot of money. Yes, I understand the economics of incidence and realize that I'm effectively paying for the credit card processing fees whether I see them or not. At the relevant margin -- the individual consumer choice of what payment method to use -- none of this matters. The cost to me of using a signature card is the act of signing, and the cost of using a debit+PIN card is the act of punching in my PIN and then oh yeah fifty cents. Which am I going to choose?

The only place anyone uses debit+PIN is Costco because they don't accept Visa/MC. I have never EVER seen anyone use it anywhere else. Because you have to pay the fee! This is not rocket science, people.

anon seems to nail it.

I do need to add that I get the A and D gripe in the sense that they think we think markets are always perfect. I don't think this is what we think. We just think the government didn't get us to this point, so why think they will get the next innovation right.

At some point, we might get more granularity and less transaction costs ("taxes"?) on prices and more consumer options (Paypal, Mr. Thiel) but I'm not smart enough to dictate the solution, so I'm damn sure politicians and lobbyists aren't.

The claim that fees are "passed on" is really starting to bug me. Especially on an economics blog. In addition to the article itself, 'anon' says:

"We factor the credit card fees as a form of overhead into all of our prices."

That's lovely. *It does not mean that fees are passed on!*

Third party fees, taxes, and all forms of percentage or fixed-rate charges have an incidence that depends on the price elasticities of both supply and demand. Period. Sellers may feel/believe/think that they've "passed on" the fee by factoring them in as overhead or raising prices, but they haven't, because they have *changed the quantity demanded*.

The credit card fees discussed here may fall on consumers, or on merchants, or on some combination therein. One previous poster suggested that there is empirical evidence that the incidence is largely on consumers. That sounds reasonable. But evidence for the incidence is never, Ever, that the merchant/producer *says so*.

"Aldi, the German discount grocery store chain that is huge here in the midwest, only takes cash and PIN debit cards." They have the same rule in Britain. I usually take the opportunity of getting cashback.

P.S. I see that you chaps still use signing for credit cards. We use PINs, which are far more convenient but which, in my personal experience, have lead to more fraud.

"the govt can refuse the assistance of the legal system in enforcing that part of the contract"

The point of having a legal system is to establish and enforce a consistent set of rules. Granted, there are persistent attempts to alter that role, but if you think it through, I doubt you'd want to go down this road.

"they all have similar restrictions in their merchant agreements, so far as I know"

If credit card issuers have conspired in this, it would be an appropriate area for legal intervention.

"I just don't see the purpose of the debit card"

I'll second that. I cannot understand why anyone would ever voluntarily use a debit card.

I join those who are dubious about the grocery store monopoly story. There are several choices around here - more than there are of credit cards. And why are the fees they pay a reduction in monopoly profits rather than simply a reduction in the ROI of the grocery?

Just the act of contesting a charge costs the store money (a chargeback fee, and it's big).

That is not true. We have never been charged a fee when one of our charges has been contested. Successful chargebacks are another matter.

We are not in the gasoline business, but I suspect that there is a different agreement for gasoline sellers than for other types of sellers.

Anyone who does not pay cash for small orders, especially to mom and pop restaurants, needs to be educated to not do that.

Merchants pay both a percentage (approx 1.5% to 4%) and a transaction fee (10 cents to 50 cents) for credit card transactions. For low dollar charges, this really adds up.

And these charges vary depending on who your merchant bank and processor are. We use Elavon via Costco as that seems to be the most transparent and most fairly priced.

And to the poster who puts the tip, but not the meal charges, on the credit card, why not the other way? Most restaurants where I know the owner they deduct a fee from tips left on credit cards. Leave the tip in cash.

I have a credit card that gives me *5% cash back* at many places. There's no way that the fee is anywhere close to that. So in this case certainly I benefit when using this card and the issuer and store lose. I also have one that gives 2% anywhere. In this case that's probably around what fees are to the store, perhaps somewhat more if they have a good merchant agreement.

Just shows what you can do with theory and without understanding the facts of the credit card industry.

As all of the other posters have noted, there is a rich literature on this subject, and the loser is not the bank that issues the card; it is the consumer and the merchant.

The Visa antitrust case may change this by opening the networks to Discover and AMEX, but, that will take awhile.

Do more research before posting. People expect knowledgeable posts.

Here is a simple summary of the litigation that resulted in Visa paying 2 billion dollars in an antitrust settlement, and a consent decree.

Ironically, useless rags like the NYT used to complain that stores were evil because they wanted you to use debit cards -- they were depriving you of rights to make more profit! Now, banks are evil for wanting you to use credit -- they are driving up prices to make more profit! Egad.

Ironically, commenters like Jim like to complain about how the New York Times is stupid, and yet Jim is the person who thinks that an article about debit cards is arguing that credit cards are evil! wow!

Your addendum is terrific.

Someone beat me to mentioning Specs Liquor - now a large grocery store -- which offers 10% cheaper prices if you pay cash or debit. But until reading these comments I didn't realize how unique Specs is.

i think many people are incorrectly assuming that merchants cannot offer a different price for cash or credit. I do NOT believe that is the case, although the merchant may need to phrase the differences in price in a certain specific manner. However, i think they are prohibited from offering one price for credit and another for debit.

Weird how economists applaud private enterprise siphoning off 1% of retail sales in exchange for a fractional benefit to the consumer but decries it when government does exactly the same thing.

Also, not to nitpick or anything but that 1% private tax on transactions applies only to very large, high-volume stores. And sure, I guess you could claim that Safeway or Amazon has some kind of local monopoly standing. They charge considerably more to smaller businesses (as much as 3.5% as I recall.)

But even if they charged the same it's not clear to me, at all, how exactly you'd justify a claim that every barber and hairdresser in a town, for instance, is an ex ante monopoly. Or, even more to the point, how every bed and breakfast and online retailer who's pretty much obliged to accept Visa if they want to do long-distance business at all, engages in "ex ante monopoly pricing."

Seriously, though, if you're somehow claiming there's consequence-free merit to Visa increasingly skinning businesses in order to toss me perqs that's hard to reconcile with your dismay when government does exactly the same thing. Because, really, you might see a difference between Visa taxing businesses and giving me frequent-flyer miles and the city taxing businesses and paving the road to the airport, but I don't. Except that both I, and business owners, considerably more practical say in who collects our taxes and how they distribute it.

Final point: if you believe the little used bookstore around the corner from my house has an ex-ante monopoly on my book purchases then you'd have to agree that Visa has an ex-ante monopoly on credit card transactions, and that therefore there's nothing at all wrong with the government siphoning off some of *their* windfall and passing it along to me in the form of, say, light rail to the airport.

Point being that once again while you act as if there was a qualitative difference, to me as a consumer there's no difference between private or public taxation. You, nor I from the other side, can consistently applaud one and decry the other.


I often wonder what kind government indoctrination camps people like Figleaf went to.

Here is an article by Prof. Nicholas Economides with input from Bob Litan on the economics of the consumer credit card payments issues that have been raised in this post. It provides data and analysis for those interested in such things:

If merchants really have to charge more because of this fee, why don't they offer a discount for consumers using cash or PIN debit? Seems like the easiest solution for the merchants is to eliminate the same price for cash or credit. I'm sure cash registers and scanners could do this pretty efficiently.

As another commenter pointed out, part of the cc fees are for fraud.

As a merchant, I like cc's for the reasons stated earlier. It also means that I do not have to develop expertise in ascertaining the credit worthiness of buyers - that is outsourced to the bank that issues the buyer a cc. Small businesses that could never afford to develop "credit departments" are very very happy to pay merchant fees of between 1.6% and 4% to banks to perform that function,deal with fraud, and get me my money within a few days. And not have to deal with lots of cash, bad checks, etc.

To this small business owner, the fees I am charged for my merchant account are a very good deal.

Your addendum point is as far as I can tell dead right. But it really got me down. Lately I've pretty much given up on blogs -- the nastiness and style-over-substance crap gets me down. Even sensible, "nice guys" like Reihan Salam are letting it get to them and getting nasty. But then there's MR, the absolute gem of the weblog world even for us non-economists: always level in tone, always courteous, a million interests and insights. And suddenly we get this hint that even the mighty Tyler Cowen is getting frustrated by how the dialogue has been going.

Man, I've going to go suck down some Jameson's.

I always decline the debit option for two other reasons: 1) The risk that someone will steal my pin number and my credit card number and thus be able to drain my bank account is diminished. If they just steal my credit card number alone, my liability is limited by law. I am not sure about the liability when they drain by bank account, but in the meantime my money would be gone and the burden would be on me to get it back; and 2) Credit card companies are most helpful when one is ripped off by a merchant in that most will upon request simply back out the charge until the dispute is settled. This gives me much more leverage in restitution negotiations. This is expecially important in on line transactions, where rip offs are more likely. I recently cancelled my Ebay account after receiving no help from Ebay for dealing with a bad merchant. Had I used my credit card this would not have happened.

These issues are obviously why many merchants, like at gas station pumps, make not using a debit card, the non-default option. I would do the same if I was them but it is not the best deal for me.

I agree about the points issue too. Yet another reason is the time value of money. With the credit option, I can pay later with no extra cost if I pay off the bill in full each month, which I always do.

Bottom line: The credit option over debit option is a no brainer.

It seems that although he has anointed Gary Leff as Air Genius, Tyler disregards Leff's advice on credit cards ( ). I understand that hotel points don't match Tyler's travel plans, but the best frequent flyer cards seem to not be Visas.

The alternative is Canadian Tire Money.

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