Transparent and Visible Cross-Subsidy: Unethical; Invisible Legally-Mandated Cross-Subsidy at the Behest of a Special Interest: A-OK

From Engadget, apparently the EU has banned retailers for adding a surcharge on credit card purchases.  Since it is an absolute fact that credit card sales cost retailers at least 3% more (due to merchant processing fees) than cash sales, I likely would have written about this story something like "EU knuckles under special interest lobbying from credit card processors and forces non-customers (ie those paying in cash) to subsidize credit card purchases."  Of course, given the consistent and predictable economic ignorance of Engadget, that is not how the story actually was written:

Thanks to new EU regulations, you won't have to put up with irritating card surcharges for much longer. Unfortunately, minimum card spends you come across in small shops and such will stick around, but from January 13th, the Payment Services Directive comes into play. This stops retailers from charging you more for, say, using a credit card than a debit card, or generally just passing the transaction fee onto the customer. It won't, however, make your Just Eat delivery any cheaper. That's because yesterday, ahead of the new EU rules being implemented, Just Eat did away with its 50p fee for paying by card, and instead created a new 50p "service charge" that applies to all orders.

What's particularly cheeky is pay-by-cash customers now also have to fish between the sofa cushions for an extra coin -- a move Just Eat calls "fairness for all" (lol) -- meaning it's making even more moolah while sticking a middle finger up to the spirit of the EU directive. Just Eat told the BBC it had previously thought about tweaking charges, while also totally confessing that "the change to legislation did play a part in prompting the review." A spokesperson also said, predictably, that it'll enable the company to keep providing its stellar services: "The 50p charge simply means that along with our restaurant partners, we can continue to deliver the best possible takeaway experience."

The law essentially forces cash customers to subsidize credit card customers.  I know what retail profits look like (think small single digits) and the lost surcharge is not coming out of profits, it is going to be covered by establishments in generally higher prices paid by everyone, including cash customers.  In my mind, this retailer is a hero, by actually making this legally-mandated cross subsidy transparent.


  1. Matthew Slyfield:

    "The law essentially forces cash customers to subsidize credit card customers."

    Not really. it just regulates how they advertise the price difference between cash and charge. Raise all prices by the amount of the surcharge, then discount the surcharge for cash customers. Abracadabra it's a cash discount (legal) rather than a card surcharge (prohibited).

    Similar regulations exist in several US states.

  2. Brad Warbiany:

    Note that governments MUCH prefer that cash customers subsidize credit customers, because then more and more cash customers might step out of the 'dangerous shadows' where their purchases aren't all tracked.

    The more customers they can get to do that, the easier their argument that the only people who still use cash are doing so because they're engaging in illegal activity that they want to hide from the authorities.

  3. F.Inahoy:

    There are many retailers who either have or are going to a "no cash" policy. I've been to gas stations that have big signs posted that they refuse to accept cash payments at night. I would guess that burglary, along with the risks in handling/transporting cash and potential employee theft are just some of the causes for this.

  4. texasjimbo:

    Texas has a law against charging a credit card user for their credit card use, and that is exactly how some merchants work around the law.

  5. Matthew Slyfield:

    I didn't know about Texas specifically, but I've heard about exactly that from other states.

  6. BernieFlatters:

    In my experience, credit card customers buy more, so this compensates for the credit card fee. Another way to look at it: for $30, the retailer just got a customer to buy $1,000 of merchandise. That is a really cheap acquisition cost. But that $30 should be a cost of doing business. I find it petty to add credit card surcharges. By the way, many merchant service agreements don't have per transaction charges, the charge to process the transaction is just a straight percentage. Why any merchant has a minimum check is beyond me. You can sell a bottle of water for a buck and still make a profit selling it on credit, and the fee is just 3 cents. Isn't 25 cents of profit worth a fee of 3 cents?

  7. Daniel Barger:

    Part of the rationale behind this is to punish those who use cash. Because those in power would like to eliminate cash.
    Cash is impossible to control and cash transactions are harder to skim for tax revenue. Thus the constant efforts of all
    kinds to punish those who use cash. As in virtually EVERYTHING that emanates from a political entity the goal is CONTROL.

  8. Stan Jackson:

    I used to offer a cash discount when the credit card agreement prohibited a charge for card use. I now charge a 5% "convenience" fee for credit cards. It used to be a huge effort to figure out what you actually paid in fees per transaction. Several annual costs, tech support costs that were astronomical, then different fees for each type of card. With Square and such it's simpler now. I still prefer cash. I was considering accepting canned goods and bullets, but things seem to be improving so I'll hold off on that.

  9. Not Sure:

    "But that $30 should be a cost of doing business."

    It is. So are employee's paychecks, the electric bill and about a thousand other things. A business that doesn't account for those costs doesn't remain in business very long.

  10. Jerryskids:

    You're replying to someone who thinks retailers make a 25 cent profit on a one dollar sale, so.....

  11. marque2:

    I don't agree with the law - but I also doubt that businesses lose 3% on credit card transactions relative to cash. Note that indo think 3% is a bit high for charges but.going with that - if you run a cash business your bank actually charges you to provide the bundles of cash you need to run the business. Tipically the day starts with lots of ones and fives and as you give change during the day you end up.with 20s. Federal reserve actually charges banks about 1% for that money (order a thousand from the fed and they charge 10 bucks plus shipping and insurance.) and the banks charge customers for this service. Then you have shortage and transaction issues, from employees pocketing money or giving incorrect change. It also invites roberies which leads to greater insurance costs. Those who pay with credit cards tend to buy more which brings in more money to apply to fixed costs. Transactions with CC also take less time and can even be automated. Lost opportunity sales. This happens especially with cash vending machines. I would really like that soda pop, but only have 1.95 so I walk away. If my transactions double because I allow CC on the vending machines my opportunities greatly outweigh any costs.

    I am sure I can think of more reasons why money transactions have costs comparable to CC and/or why CC costs are actually less or advantagious.

  12. marque2:

    I forgot a biggy accounting. Cash needs to be counted every day and rebundled/balanced. In big stores like a Macy's you actually would need to hire a person to count the money in registers daily - see if that amount matches the register and then transport cash back and forth to a bank via Loomis (armed cash transport service) with credit cards all the accounting is automatically done by computers. No counting nickles to figure amounts.

  13. ErikTheRed:

    This. Also, you don't have to worry about register theft with credit cards.

  14. ErikTheRed:

    In the US, most credit card processing agreements flat-out forbid charging higher rates for credit card use. Some gas stations were given exceptions (Arco comes to mind), and based on my own (probably fallible) observations Ikea was the first major retailer to work around it. As marque2 noted, dealing with cash isn't free either - I haven't done a formal analysis but I doubt our business saves money with cash customers for the reasons listed.

  15. me:

    I would not be surprised if this was intentional - a cash economy (and most european economies are predominantly exchanging cash for goods and services because credit cards are perceived as more expensive) is harder to understand and control. With this step, we'll likely see credit card activity pick up, and with that come reliable paper trails of income and spending.

  16. Mike McDonald:

    The nature of some businesses drives the credit card vs cash decision even with the visible surcharge. We own vacation rental properties and have gross rentals of approximately $200k. For a number of years, we added a 3% surcharge for credit cards. Even with that transparent charge, 75-80% of our renters chose to use credit cards for the perceived protection they offered. We decided to just raise the prices one year and drop the explicit CC surcharge. A few people had previously commented on the CC surcharge but we have only had a few people ask about a discount for cash or check. From a marketing preception viewpoint, it was the correct decision for us.

  17. Not Sure:

    Slide card, it didn't read. Slide again. Still didn't work. You have a chip? Then you have to insert. No, you need to insert it like this... (comes around counter to help). Card declined? Insert it again. Want a printed receipt? Click "Yes" or "No". Cash back? Enter amount. Ok- $X. Wait- no, changed my mind- make it $X + $Y. Take your card out and re-insert. Don't forget to enter your PIN.

    "Transactions with CC also take less time..."

    If you say so. :-)

  18. marque2:

    Yeah, about a two years ago I had problems like that. But if you are still having these troubles often, you might be the issue not the card.

    Pin number for a credit card? Not unless you are trying to extract cash.