Why Don’t Cash Payers Get Credit They’re Due?
The trouble with knowing how charge cards work--what the credit costs consumers, what the processing costs merchants--is that one senses what such systems must add to the price of goods. “Credit card services obviously cost something,” complains one California shopper, “and it’s obviously built into everybody’s price. If I don’t use that service, I should pay less than people who do.”
As it happens, people have been urging two-tiered pricing for years. Most retailers, however, see no advantage in making the change, and “third party” card issuers--banks, MasterCard, American Express, among others--actively lobby against it, given the possible decrease in card use. Unfortunately, both sides approach the issue mostly with rhetoric, with no definitive accounting of the costs of charge sales or the likely effect of changing the system.
It seems generally agreed that charge sales cost more, given both handling costs and the processing fees merchants pay banks or card companies. Checks, too, involve both handling and risk, of course, and even “taking cash is not free,” says American Express vice president Adrienne Cleere at its Western headquarters in Torrance, what with higher security, pilferage, bookkeeping. But all things considered, says Joanna Logsdon, general credit manager for Bullock’s stores in California, “the cash customer is less expensive.”
Fed Offers Cost Estimate
How much less is another question. A 1983 report from the Federal Reserve System’s Board of Governors gave the added cost of credit card use as 2% or 3% of the purchase--an estimate seemingly confirmed by gasoline dealers, who alone have widely adopted two-tiered pricing: Many give people who pay cash a few cents off the posted price of a gallon because distributors like Chevron charge them a 3% “service fee” on all credit card sales. While not claiming to be a definitive or in-depth survey, the Fed study estimated that if a third of all retail sales are charged, and the added cost of charge sales is 3%, one could say cash customers are subsidizing 2 cents of the extra 3 cents, or that everyone is paying 1% more for retail goods.
Some argue with the specific cost estimate but offer no better accounting. More argue that, whatever the cost, it is not subsidized by cash customers. The finance charges levied on a merchant’s own credit-card customers mostly offset the cost of carrying house accounts, they say, and the fees given outside card-issuers are probably (but not provably) covered by the increased sales volume from card holders.
Actually, the greater debate is over how to correct the putative imbalance. Discounts for cash have been encouraged since a 1974 amendment permitting them was added to the federal truth-in-lending laws. (“Obviously, Congress bought the subsidy idea,” says a government lawyer.) Another possibility is surcharges for card customers, but Congress banned surcharges in another amendment--a ban renewed twice before it expired last February.
The basic problem with surcharges is legal. “If one person buys something with cash for $10,” says a staff attorney at the Federal Reserve, “and someone else buys it with a credit card for $12, the latter is paying $2 for credit, and that’s a finance charge.” As such, it’s subject to federal and state laws on disclosure and state usury laws. (A surcharge could put the total finance charge over state limits.)
Both Options Pose Problems
Both discounts and surcharges pose practical problems, including the question of how to advertise prices at all when some people would be asked to pay more at the counter. Some say discounts could be inflationary, because merchants could raise prices in advance to diminish the effect of subsequent discounts. So could surcharges, says Meredith Fernstrom, senior vice president at American Express, because “some retailers . . . might simply add to the price for card customers without lowering that for cash customers.”
Still, except for the psychological effect on consumers of paying “more than something” or paying “less,” the ultimate problem is semantic. There’s no real difference between adding a surcharge and offering a discount: the result is two prices, whichever is defined as “regular price,” so that one can say “ X cents off for cash” or “ X cents more for credit.”
It may be that even if there is an imbalance in cost per customer, the imbalance doesn’t really warrant righting. The cost of attracting any particular group of customers is built into prices. Doesn’t everyone pay for advertising even if they don’t buy the advertised goods? “Should a customer who comes to the store by bus or on foot,” asked Fernstrom, “be charged a different price than one who drives and uses parking facilities maintained by the stores?”
What’s more, the whole debate is almost academic, although it keeps surfacing. In the year since the surcharge ban expired, virtually nobody has started the practice. And apart from gas stations, fewer than 6% of retailers (one estimate says 0.2%) offer discounts. And why should they, since it’s entirely their choice?
