The Last Temptation

Nothing makes purity more interesting than temptation.  This applies to ideological purity just as much as the physical sort.  As a libertarian, my greatest temptation to call for government action comes when I deal, as a retailer, with Visa and Mastercard (V/MC).

This post is not a call for government action, so I guess I am resisting temptation.  But I at least need to vent, sort of like a monk pounding his head on the wall after getting the Victoria's Secret catalog in the mail.  So here is my rant.

First, let's start with how credit card companies make their money.  I will confess that I do not know how the card companies (V/MC) and the card processors (often large banks) split the take, so this is how they make money together.  V/MC and the processors charge fees to merchants.  Typically this is a fixed fee per transaction plus a percentage.  On average, a merchant might be paying 2.5-3.5% of a transaction.  The card companies also make money from card holders, charging annual fees, interest fees, etc.

You will have seen of late that most credit cards offer various loyalty programs, from airline miles to cash rebates.  You might have thought those were marketing expenses paid by the credit card companies.  Wrong.  The card companies simply charge merchants a higher fee for processing transactions using these cards.  In a sense, the card companies have organized with card users to use their power to extract extra value from merchants.

All of this I can generally live with.   Visa and MasterCard, through both their credit facility and their implicit standardization, bring enormous value to retailers and customers.  Its a big circular game anyway -- customers get 1% back and think they are getting a deal, merchants pay this extra 1% in fees, and then add it into the price of what they are selling.  It's a wash, except to the extent that customers with reward cards in the end extract a bit of value from customers who pay cash (for reasons explained below).

For this value one must accept the typically arrogant and indifferent customer service provided by any monopoly  (American Express is particularly awful to deal with as a retailer).   But they are no worse to deal with than the government, so its unclear how the government could make the service any better.

What tends to tick me off, though, are rules and restrictions.  Like the creeping work rules in the UAW contract, these are in many ways more insidious than the service and pricing.  Here is what set me off today, from one of my card processors  (in this case Bank of America, which, to be fair, is someone I would recommend for merchant account processing).  Click to enlarge.


So, why are businesses breaking these rules so often?  Let's take a look:

  • No minimum transaction. Remember that V/MC charges a minimum fee, from 10-40 cents or so, per transaction.  So if someone buys a pack of gum in our store, likely 100% of the sales price is going to V/MC.  Typically it takes at least a one dollar total sale for there to be any money left over beyond paying cost of goods sold and the credit card folks.  So merchants logically want to set a minimum.   V/MC hates this practice, but it is rampant.  I plead the fifth on our own practices.
  • Surcharging. Credit card customers cost more than cash customers.  Sure, we get some non-sufficient funds checks, but the eventual cost of these is nowhere near 2.5% of sales.  Merchants logically don't like having their cash customers having to subsidize the frequent flyer rewards of their credit customers.  However, unlike transaction minimums, card processors have mostly been able to drive out cash discounts.
  • Requiring ID and Fraudulent Transactions. I will take these two together, since they are so ironic one after the other.  V/MC is telling merchants that they can't check ID, which is the only reasonable approach to limiting fraud, but that they can't submit fraudulent transactions.  You say that the text says "known fraudulent?"  Well, read on --

To the latter point, I think most people assume that the credit card companies are absorbing the fraud, which is how they justify the fees they charge.  Wrong again.  Credit card companies only absorb credit risk.  Over the last 10+ years, they have pushed fraud back on the retailer.  If a consumer claims fraud on his card with some transaction, then the credit card company refunds the customer and takes the money from the merchant unless the retailer can absolutely prove he made delivery to the consumer personally (which he can't prove because he can't check identification) .  Merchants bear the cost of fraud, not card companies.  Which I could accept (since I have more ability than the card companies to control fraud) expect the card companies ban me from controlling fraud.  So I have to take financial responsibility for something I am not allowed to prevent.  And that really ticks me off.

Anyway, maybe someday we can organize a large merchant boycott, where, even for a day, we all refuse to accept Visa and Mastercard.  Of course we would be breaking the rules, because that is not allowed by our V/MC agreement.

Postscript: I suspect that a few retailers with some power are starting to crack this, at least for themselves.  Costco only takes American Express.  Sams Club only take one card (MC, I think).  My guess is that both, with their large size, bargained for exclusivity in exchange for concessions on fees and/or terms.

Postscript #2: I expect comments like, "Well so-and-so always makes me show an ID."  I don't doubt you.  I am merely saying that by doing so, they have either negotiated an exception to the V/MC agreement (very unlikely, as V/MC holds to these rules like the Maginot Line) or the retailer is breaking the rules.


  1. Jay:

    My company accepts credit cards for industrial B to B transactions. I pay about 2.5% for that privilege. The other day I noticed an additional charge for Visa cards that took it up to 3.5%. Talking with the bank, they explained that the additional 1% was to pay for the Visa Rewards Program! What??? I'm paying for their rewards?

  2. Tom Mahoney:

    Excellent post. At Merchant911, we're a growing group of 3800 on-line merchants that have united to help each other prevent credit card fraud. We, of course, know everything you've said but we love seeing outside the retailer circle. Truth is, there's a huge percentage of merchants out there that don't know the rules and don't know they are responsible for fraudulent transactions either. THEN they start doing their homework and find us. Sadly, it's already too late for some of them. They've already lost their money and their product and paid a fine of $15-$30 for being the victim of a crime.

    Visa and MasterCard which, by the way, are associations comprised of the card issuers and processors, have gotten totally out of control with their fees and hidden charges.

    Tom Mahoney, Director

  3. Gene Hoffman:

    I've been a long time reader so it's funny to see our worlds collide.

    There is some logic behind the "don't check ID" rule. If the card is signed on the back and you have a scan of the magnetic strip (through your machine) and the customer signed the receipt it is an utterly reversible chargeback.

    If you don't have a card present... That's a whole 'nother matter. This is my day job:


  4. Mesa Econoguy:

    There is a lot more to this in retail and even institutional brokerage. See Bernie Madoff, for example.

    That’s about as much as I can say right now. There’s much, much more here.

  5. BlacqesJacquesShellacques:

    Yeah they're a bunch of a-holes, but so what? I live in an oil producing jurisdiction and I constantly hear whinging about the eeeevil oil companies.

    My standard response: If it's so goddamn easy to make money in the oil business why don't you shut up and do it yourself. Although I leaven the advice with copious f-bombs.

    The same applies to banking and credit.

    If you don't like effen Visa then start your own effen credit card effen company or else shut the effen effety eff up.

  6. Rick C:

    "So I have to take financial responsibility for something I am not allowed to prevent. And that really ticks me off."

    Yep, that's insane. I used to work in a gas station, before prices started the upward spiral a year or so before Katrina. At the time, we weren't allowed to require cash customers to prepay. Whenever I worked third shift, tho, I always made 'em do it. I was the only person I knew who _never_ had drive-offs. I think one real advantage of the high prices we've been paying for the last few years is that it's mostly killed the idea of not making cash customers prepay. It kinda sucks but it's just not worth it from the retailers' side.

    “Well so-and-so always makes me show an ID.” I rarely see this--or minimum charges--except at small indy gas station/convenience stores.

    Regarding ID, IIRC the Mastercard agreement requires the cardholder to have the card signed, and if it's presented to a merchant, the merchant is supposed to require the cardholder to sign it, with ID present, before accepting the card. Never seen one do that. By contrast, Visa says a merchant cannot accept an unsigned card at all. I've seen ONE merchant insist I sign a card in her presence before accepting it, except it was a Visa, not an MC. Go figure. I bet most small/independent merchants don't read the agreements closely.

  7. Rick C:

    Oh, and BlacqesJacquesShellacques: nice use of the chickenhawk argument.

  8. BlacqesJacquesShellacques:

    I think I just got insulted but happily I know not what the chickenhawk argument is, nor after an appropriate and reasonable number of cocktails, do I care.

    Happy New Year to all, Rick C., Visa, Coyote and Chickenhawks included.

  9. John Moore:

    When I worked for VISA, USA (20 years ago), they were a not-for-profit association of banks. They probably still are. However, the laws of bureaucracy mean that even not-for-profit organizations seek to maximize their revenue for the benefit of their higher ranking employees.

    BTW, the general purpose credit card was invented by Dee Hawk of Bank of America. Before that, the only credit cards were issued by individual retailers.

    One thing I don't understand, as a consumer, is why credit card interest rates are so high.

  10. LoneSnark:

    I always assumed there was a cost associated with cash transactions too, as you must hold money (risk of robbery), make change (must hire a supplier and then mistakes are made), and deposit it (a drive to the bank), assuming your clerks didn't pocket the cash themselves). These costs impact various businesses differently. A detroit gas station might suffer deeply as cash transactions require installing a safe, robbery losses, security glass, and arming staff. None of which would be necessary if it went cash-less.

    So, on average, I wonder what the percentage costs are associated with cash. Surely they are less than the 3%, but neither are they zero.

  11. KeoniPhoenix:

    Here in Buffalo NY, Kwik Fill has been running advertisements on how using credit cards raise the price of gasoline and using their gift card/company credit system saves customers up to 5 cents a gallon. Gas stations will likely be the first area of retail to throw off the shackles of insane merchandise fees by the credit card companies as a vast majority of them are independently owned and operated.

    -- John O.

  12. dearieme:

    In Britain the German-owned supermarket Aldi won't take credit cards, nor cheques (checks) - cash or debit cards only.

  13. Harry Becker:

    Sam's Club only takes Discover

    Sam's prices aren't always as good as Costco but since my no fee Discover gives me a little kickback it is cheaper than cash! (Over $200/yr!) + On average I have over a month to send Discover my 'check' online. I carry a no fee VISA (MC?) for the few times I want to charge & Discover isn't accepted.

    I'd prefer the discount on prices at the discount store & Costco gets a lot of my business because it is cheaper than Sam's on average but average doesn't count when the brands are different - - catch as catch can...

  14. Jody:

    Actually, Sam's where I live takes MC and Disc (and all forms of debit cards).

  15. John Costello:

    I work as a cashier in retail in MA. If a customer has not signed his/her card they _must_ show ID. Some have "See ID" or "CID" on their cards anyway. Without a signature on the card or an ID we will not take the credit card. I have had customers go back out to their cars to get their drivers's licences (women only -- men keep them in their wallets.)Some customers have offered to sign their cards in my presence in lieu of showing an ID, but that is also a non-no, although the liklihood that a thief would _not_ sign an unsigned stolen card before presenting it to a store is rather small.

    Generally, most of our losses occurred with checks -- I used to have a 50 page book of names of check bouncers -- but that was ended when we got telecheck.

    In my store every square foot is watched with cameras and everything is recorded, including every one of the cash registers (something I am thankful for, since it got rid of a nasty little sneak thief who was driving us all up the wall.) We still have shrink (I have no idea how much was lost this year)but every so often a shoplifter will be tackled by a manager in the parking lot and the cops called, to the cheers of our employees.

  16. Elliot:

    Sam's Club recently started taking MC, in addition to the Discover they took for years. I can also use my Sam's card itself as a credit card.

    In the past couple weeks, I've been asked many times for an ID when I used a credit card. I was asked several times at Disneyland a few days ago. I was also asked at Toys R Us and other retailers before Christamas. I thought it might be because I'm visiting from out of state, but I was also asked in my home state once or twice in the past month, if I recall correctly.

    If they are breaking the rules, I don't mind. I'm actually glad when they do so. If some crook stole my card, that might prevent him from using it.

  17. Matthew Brown:

    I don't get WHY they don't want retailers to insist on ID.

  18. Mike:

    I blantantly offered cash discounts to my customers. I never feared having v/mc come to my store and tell me I was in violation of the agreement. I even told my banker I was doing so. I was particularly frustrated with the unknown discounts and surcharges attached to the various reward cards. If you took a payment (my contracts often called for mulitple payments) from an existing customer over the phone, the discount and fees could exceed 10%. I was in kitchen remodeling. Often doing large (over $100,000) projects. There was one phone transaction that wiped out all the profit on a small job.

    Once of my most difficult customers was an executive vp for mc. After that job, I really had no problem offering the cash/check customer a better deal.

    So at the end of the day, I was set up to take credit cards, but actively discouraged the use of them.

  19. ou_steve_o:

    It's funny that someone in a credit card thread used a Detroit gas station as an example. I was just denied a purchase at a Detroit gas station because they require you to enter your CC billing address ZIP code before they'll authorize the sale. Well, it was about eight degrees out with a stiff breeze, and my big fat gloved fingers must have hit a wrong number, because it said, "not authorized, see inside attendant."

    Anyone know if asking for a ZIP code is a violation of the standards terms of service? Obviously, online retailers do it all the time. As I've never seen this before, it leads me to believe that Detroit must have a particular problem with people using stolen credit cards to buy gas. Why does that not surprise me?

  20. ou_steve_o:

    What are the typical transaction fees for merchants on debit card transactions? Also, I've always wondered if it'd be worthwhile for one company to send its employees to the competition to get in line and buy 10 cent item after 10 cent item with a credit card. If you could cost them .25 cents per transaction, you don't need that many before it costs them more than it costs you. I guess they'd just kick everyone out.

  21. feeblemind:

    There are gas stations here in Nebraska that offer cash discounts for fuel. Some have done so for years. But what griped me about my VC to the point I dropped it was the payment due date. The payment was deemed late if they posted the check after the 'due' date. I could send in a check 2 weeks ahead of time and a couple of times a year it was posted a day late. It is a license to steal as the customer has no way of knowing/controlling when the check arrives.

  22. Tom Mahoney:

    Just to clarify...

    It is perfectly OK to offer a discount for cash. It is against regulations to surcharge for a credit or debit card transaction.

    Visa's rules for merchants can be found here: There is a similar document for MasterCard but I don't have the URL in front of me. They are essentially the same.

    Tom Mahoney, Director

  23. TC:

    CC co's are close to EVIL!

    Merchants today are becoming STUPID!!!!!

    Especially allowing small purchases by CC or Debit card for that matter, both carry fixed fees. Both can and will cost merchants millions of dollars this year.

    Merchants need to take a stand and refuse to take plastic for small purchases, say less than $5. If that messes with the Car co's, so be it. They should take a share of this loss and NOT charge any fees for small purchases, they soon will begin to understand that merchants HAVE to make a PROFIT on every sale. Even little ones. It's that profit that allows them to even accept the plastic in the first place!

    The car companies should also heavily invest in customer education about using plastic for small purchases, after all it's for the convenience of the customers that merchants even take plastic for such. The customer should be the one paying for such, not the merchants!

    I've been a merchant for 40 years, have seen and experienced the movement from cash to plastic for a very long time. Not saying it's bad, (which it is for some), but different. One thing you learn and learn quickly is that taking them costs you money! So you raise prices a bit and all is somewhat well.

    I recently did a short stint as a c-store clerk. I was totally amazed that they accepted plastic for less than a dollar sale! I, (foolishly), had the temerity to actually question the practice of doing such, to my ($6 an hour boss getting paid $20), about such. Oh well, needless to say, I did not last very long there. I also made attempts to sway those customers to using cash instead, always using humor and friendliness with the approach to educate them that such would lead to higher prices in the future and such.

    Oh well, leading a horse to water is a much different task than getting them to drink.

  24. Rob:

    I've noticed gas stations with signs that say "6 cents" per gallon additional charge per gallon for credit card and debit card use. While I was filling, I called the credit card company and told them. I walked inside, while on the phone, and demanded my 15 gallons * 6 cents = 90 cents :) They said "blah blah we can't blah blah". I said that I have Mastercard on the phone and that I know you are violating a merchant rule (my father used to work for MC and my uncle is a banker, so I've known this for awhile). I handed the cashier the phone (probably the owner since he was Indian) and he gave me my change back.

    Typically, I don't care about minimums, but getting charged extra.... no way!