As more and more information comes to light in regards to how credit card companies earn their profits, merchants and consumers are asking for a change. For many years prior to the recession, a large number of consumers were cruising along thinking all was well in the world of personal finances. This is common in an economy that isn’t struggling. It isn’t until things take a turn for the worse that people remove the blinders and begin taking a hard look at the reality of their situation. This has recently occurred in a big way with regards to the banking industry and credit card companies. Here we are going to look specifically at how credit card processing has helped the issuers of these cards see billions of dollars in profits annually.
The role of credit card processing
As a consumer, you may not spend a lot of time thinking about how a business gets paid when you use your credit card for payment. What many people do not realize is there is an intricate process that happens once their credit card has been swiped or entered for payment. The credit card processing system allows for money to be transferred from the bank backing the credit card to the merchant making the sale. This process is not without fees, which are passed on to the merchant for the privilege of accepting credit cards.
The role of the credit card company
When a merchant wants to accept credit cards as a method of payment, they must first enter into an agreement with the credit card association and agree to certain terms and conditions. In the past, one of these conditions is for the merchant to agree not to charge a different price to consumers who are paying with cash compared to those paying with credit cards. This was to discourage merchants from passing on the cost of credit card processing fees to those consumers who use their credit cards while offering a discount to others who pay cash. The result of that type of practice could very well encourage more consumers to holster their plastic and consider paying with cash. As a result of this restriction merchants incur credit card processing fees which can be estimated at approximately 5 percent of each credit card purchase. It has been discovered that while merchants and subsequently consumers pay the cost of credit card processing fees, the profits for major credit card companies continue to soar. In 2009 credit card companies profited an astonishing $35 billion dollars by prohibiting retailers from offering different prices.
Merchants and consumer benefit from changes
Fortunately this practice has been called into question and merchants may soon be able to offer more options for consumers. While the credit card industry supports the restrictions in place, claiming any change will result in consumers using credit cards to be “punished” with higher prices- the Justice Department seems to disagree. In fact, a lawsuit brought against the major credit card companies (Visa, MasterCard and American Express) for unfair business practices displays the seriousness of this issue. When merchants have the ability charge consumers more for payment options that cost more, individuals have the right to choose which method of payment is most affordable. This freedom of choice is more about saving money for both the consumers and merchants than punishing people for choosing to use a credit card.
Photo via spamdude060
