July 18, 2012
NEW YORK – That is a familiar choice at the gas pump, with a cheaper price for cash payments and a higher one for credit card purchases. But will this fly at a grocery store, hotel or other retail outpost?
Visa Inc and MasterCard Inc's proposed $7.25 billion settlement with retailers over swipe fees, which credit card companies charge to process payments, could lead to a two-tiered payment system for a host of transactions, analysts say.
The agreement allows retailers to collectively bargain on future swipe fees, which are also known as interchange rates. It also opens up the possibility that more retailers can add surcharges for credit card transactions, although they would have to explain them to consumers in clear, concise language.
The settlement is not a completely done deal since one of the plaintiffs, the National Association of Convenience Stores, is rejecting it. Even so, here are the answers to four questions consumers should be asking now:
1. Will it end up costing me money or saving me money?
The answer is not easy since it is unclear how retailers will react.
One choice is for retailers to add a surcharge for credit card transactions at the cash register.
"Merchants have to be really careful about that one," says Greg McBride, senior financial analyst for Bankrate.com. "If they charge more, there are a lot of customers who aren't going to pull out their wallets and get cash instead. They're going to turn around and walk out the door."
Ed Mierzwinski, consumer program director of advocacy group U.S. PIRG, says transparency is good for shoppers. "If it's done right, consumers have more information about prices, and they can make their decisions about payment methods based on what the price may be," he says.
The costs of credit card transactions are written into the price of everything at a store. So people who pay with cash are already paying extra.
"If (retailers) go to surcharging, the theory is that the extra cost of accepting credit cards will be captured by the surcharge, and everyone else will pay less," Mierzwinski says.
2. What will it actually cost to use credit if there are surcharges?
That equation will be based on a charge fee that does not repel consumers, since banks want to keep their customers. "So the threat of surcharging by retailers may cause the banks to renegotiate the interchange rates," Mierzwinski says.
Most of the swipe fee is profit that banks use to fund credit card rewards programs. So rewards may decline as banks try to keep their swipe fees low, Mierzwinski says.
Then stores will have to decide whether to pass along surcharges to their customers. "There are plenty of people who are sloppy with their finances, but savvy consumers are not going to pay 6 % more to get a 1% rebate on their credit cards," McBride says.
3. What information will I get about the charges?
Presumably, consumers will find out about the cost of their payment options at the cash register, which may end up upsetting them and causing longer lines.
The settlement outlines rules about what can be charged and in what way. Retailers will "have to make it very clear," says Mierzwinski.
Also, 10 states, including Texas, New York and California, prohibit surcharges. So the settlement is a moot point for residents of these states.
4. Should I just start paying in cash?
Cash is always a good budgeting option, but McBride says he does not expect stores to start encouraging people to use paper money.
"It doesn't reduce their costs if people use cash," he says. "You have to make bank runs every day. What if you run out of quarters? There's risk of theft and manpower."
So if not cash, then what? "It will be interesting to see what, if anything, changes," says McBride. "A lot of this has been bluster by merchants."