If You Had to Pay More

3 Allowance Mistakes to Avoid (Part 2) McElligot's Pool

If You Had to Pay More

If you had to pay more for an item because you were buying it with a credit card, would you still use your credit card or would you revert to paying in cash?

When merchants accept payment from you in the form of a credit card, there's a cost associated with that. Merchants pay somewhere between 2-4% of the sale price in any transaction for which they accept a credit card.

Let's say you go into a store and buy an item for $50 on your credit card. You'll owe your credit card company $50. But the merchant won't get $50. She may gets somewhere between $46 and $48. The rest is shared (not necessarily evenly) between the merchant's payment processor (someone like Visa or MasterCard) and the shopper's credit card company (most often your bank). The credit card companies make a killing on the fee they charge retailers – upwards of $4.5 billion in 2008 – and retailers can't do a thing about it.

The kind of card you use affects how much the retailer gets dinged. Premium cards carry higher fees from the credit card company. So if Bank of Nova Scotia is offering a premium card with big cash-back options, know that every retailer you use that card with is eating a bigger service fee for accepting payment on that card. That's how The Bank can afford to offer you so much "cash back".

According to a Bank of Canada survey, on an average $36.50 transaction, the cost to the retail for taking a credit card was 82¢ or 2.25%. Bigger stores pay less since the cost of an electronic transaction falls as the volume increases, which means smaller retailers pay a disproportionately higher cost for accepting your card.

So why don't retailers offer a discount to people using cash? It's a good question. They can. And if they want to reduce their costs, they should. After all, if they're paying 3% in fees, they could offer the customer 2% off and still be up on the transaction. In the U.S. there are states that require retailers to display both the cash and credit price of an item. And some retailers offer a significant discount – up to 5% — to customers who use cash rather than plastic.

Since the price is the same for those paying cash as for those paying with credit, it has been argued that those people who shop with cash are actually supplementing those who use credit cards. According to one report by the Consumer Payments Research Center in the U.S. "On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year."

Wow!

Retailer's only recourse to deal with the ever-increasing costs of processing card payments is to increase their prices to everyone. The result: those people who can't afford premium cards and so don't benefit from the rewards actually end up paying more. One report says the lowest income households (those making less than $20,000 a year) pay $23 a year, while the highest income households (those making $150,000 or more annually) receive a subsidy of $756 every year.

So, how do you feel about those reward cards now? Does it prickle your conscience to know that you might be contributing to the disparity between rich and poor? And as someone who uses a reward card, would you be willing to put it away to send the message that you disagree with equal pricing for all types of transactions?

What if there were one day every month when everyone put away credit and paid with debit (which is actually cheaper for merchants than when you pay with cash), would you participate? Want to start a trend?