What does a credit card transaction actually cost?

[alexy23]

Another question I'm interested to understand - how much does a FF point actually cost (at wholesale)? I.e. how much do Banks, Businesses, etc pay VA/QF/SQ per point. AMEX charge $25 to topup 1000 points so it's somewhere between 1c and 2.5c per point.

Given gift cards and toasters are 1c I suppose it'd be higher than this. And I assume banks have a spread of people who buy gift cards and toasters vs those who redeem (which averages out the cost per point).

 

[ComeFlyWithMe]

@comeflywithme I respectfully disagree.

For premium cards, the card issuers charges a) a higher annual fee and b) higher interest rates on balances. Credit card debt is something in the region of $30 billion in Australia at any one time.

The banks make a good margin on their credit card business and can afford to go about their business without slugging small business merchants with the highest transaction fee AND the highest surcharges on premium cards.

As an end user I'd be happy to pay a small additional surcharge to use my premium card as long as it's about the value of its point earn, but it's not me that pays that surcharge under the old or new system.

The asserted problem with the previous regime was that credit card surcharges were blended (i.e. all Visa and MC = x%, all Amex = y%), so in effect the low-cost Visa / MC cardholders paid a higher fee than they should have which was used to supplement the points and benefits of premium cards.

Whether that's an accurate assessment of the market or not, I don't know, but I'd expect that there's more to it than that (annual fee, balance interest, volume and value of transactions, packaged cards with mortgage and banking products, international cards etc).

Big merchants can negotiate bulk / lower rates on transactions, smaller merchants don't have that ability.

Basically, the big banks had their cake and ate it too. The new rules simply reduce the benefit to us, the points collectors. The banks still have their cake and eat it. I'd be interested to see if the fees to small merchants are reduced accordingly. If history is any guide (e.g. ATM fees), I doubt that will happen.

Except the angst here is directed at the poor merchant who pays the fee to the bank either way, and some are suggesting they shouldn't be able to recover it. I agree that the banks overcharge for this but they are effectively buying the points on premium cards.

Having run businesses with margins of 10% and below, a 1.5-3% merchant fee absorbed would make the entire business not viable.

 

[ComeFlyWithMe]

You are only paying a modest surcharge to earn your precious points because those who don't earn points are also paying a surcharge. That is totally wrong.

If you aren't earning points, that's your lost opportunity. Alternatively use EFTPOS without the surcharge.

 

[ComeFlyWithMe]

If there was a simple way the merchant could assess the actual cost of every card presented at POS and apply the relevant surcharge, most probably would. In reality, the machines will never do that as the banks make money on premium cards at the merchant (and sometimes consumer) expense, to pay for the rewards programs.

Debit cards in this case would have a lower surcharge than ultra premium cards for example. That's fair. Unfortunately it won't happen.

 

[Buzzard]

Friends of mine pay 1.7% in merchant fees and that is what they pass on to customers for Visa/MC. They don't accept AMEX.
Their business is wholesale only.

 

[alexy23]

If there was a simple way the merchant could assess the actual cost of every card presented at POS and apply the relevant surcharge, most probably would. In reality, the machines will never do that as the banks make money on premium cards at the merchant (and sometimes consumer) expense, to pay for the rewards programs.

And once again - we are forgetting the cost of cash When will a cash surcharge come in to play?

 

[JohnK]

If you aren't earning points, that's your lost opportunity. Alternatively use EFTPOS without the surcharge.

It's not a lost opportunity. I don't miss the points. I don't have EFTPOS. Don't need EFTPOS. I try to avoid places with any sort of surcharge.

My point is if you want to continue earning points you should be paying surcharge not someone else subsidising that points earn.

 

[Moopere]

I find some of the comments on this thread rather hypocritical. You can't make comments about banning credit card surcharges and then turn around and say "well I want to pay ATO on my Black card to maximise my points earn".
Who do you think is paying for those points? Without a surcharge, the merchant is subsidising your points balance, in some cases up to 3%.

But this concept is true of any business on-cost. As Alexy23 says above, the whole points thing is meant to stimulate spend. Its a form of marketing or advertising if you like. A business doesn't -have- to accept cards, they could choose to be cash only. But, as with any marketing/stimulus spend by the business ... who pays for that?

As I said a few posts above, where does this line of thought logically end? "Recovery" on all business on-cost? Advertising, administration, stock holding, all forms of payment (including cash .. it costs as well), store front ... etc, etc? At some point , to keep things sane, you have to roll up costs of running your business and present them as part of the cost of the product to the consumer.

A far better approach, much less likely to aggravate your customer base would be to offer a discount for cash - if one truly believes that taking cash is cheaper.

At 0.5% or lower, surcharges may be unreasonable and considered a cost of business, but at up to 3% cost to the merchant, surcharges are fair. There should be protections for consumers with gouging merchants, but otherwise let the free market decide.

It is no coincidence that the drying up of points earning opportunities coincides with these changes. They are ruining it for those of use who are happy to pay a modest surcharge to effectively "buy" points for travel, something which may soon be a thing of the past.

But points almost universally have little value/point. At even 1-2% one is probably paying for the actual redeemable value of the point you are going to use - making it valueless in essence to the consumer, one might as well forgo points entirely and just pay BFOD or equivalent. Which again raises points real value as a marketing tool more than anything else.

 

[alexy23]

As Alexy23 says above, the whole points thing is meant to stimulate spend. Its a form of marketing or advertising if you like.

The cardholder's mindset of this is "oh if I buy this thing for $1000 then I'll get 1000 points ($10 worth which seems ludicrous)". For the bank they want you to use that card over any other payment method so they get their cut in the transaction (competition against EFTPOS and Cash). And for AMEX their mindset is "we understand our terminals don't have a good market share, and therefore the more people who ask (do you take AMEX?) might push that merchant across the line and thus creating more market share". Visa/MC have a different proposition because it'd be hard to find a terminal where they don't exist (in Australia) so they just rave about this.

At even 1-2% one is probably paying for the actual redeemable value of the point you are going to use.

I agree with this - but so are people paying with cash as it too has a value, it's just rather then ending up in the banks pocket - it ends up in Armaguard's or the employee swiping a $50. So we conclude that realistically the exchange of any monetary value has a cost. Who's standing up for cash? No-one really because there aren't any companies big enough to lobby it. The banks are happier receiving money via merchant and terminals as they don't want to handle cash.

Woolworths know this for instance - why do you think they allow free cashout? It's essentially removing some of their burden of cash. Money goes into the self serve machine - money comes out.

http://www.smh.com.au/business/retail/the-real-cost-of-carrying-cash-20160414-go60cf.html (cash is estimated at 2.5%)

Most businesses don't have the capacity or want to actually calculate this, but I know just in a small retail shop it cost 1.5% for an amarguard pickup. Oh you want to walk it to the bank yourself? Do you have insurance? How much is that costing you? Do you have a safe? Cameras to monitor till? How long does it take you to count the till? Employee gave back wrong change? Broken/torn notes? Now you need bars to protect you from getting broken in?

 

[esseeeayeenn]

At some point, to keep things sane, you have to roll up costs of running your business and present them as part of the cost of the product to the consumer.

Exactly. This is what banks used to do when they made their profits from the differential between the interest on credit and the interest on deposits.
Service was "free" only in the sense that it wasn't subject to a fee to recover the cost directly.
Now banks charge you a fee everytime you think about them, look at them, or seet foot ina branch, yet the interest rate differential remains, and their profits are soaring.
There should be an appropriate balance between "rolling up" costs and charging particular customers for the services they actually use.
An additional fee for a service which, essentially, all customers must use, is unjustifiable.