The Federal Reserve might be increasing or lowering interest rates for Wall Street, but it's the credit card cartel that structures interest rates for the rest of us.
US banks don't compete for customers on interest rates.. they compete for them with rewards. With the right incentives, consumers are willing to look past the APR line.
The only reason the card networks charge their interchange fees isn't really for the networks themselves.. its so they can pass it to the banks who then decide what to keep and what to kickback to the customer. The European fee caps (and the US regulatory caps on debit card fees) are proof that these payment networks can run on much less. The credit card industry is a payment system that sucks out money through obfuscation. The rewards system creates a moat for the existing networks/banks against a competitive system. Consumers won't go to an alternative system unless the rewards are better. Better rewards means charging higher interchange which the merchants won't sign up for. I think the anti-steering provisions that Matt mentions are highly anti-competitive.
Biden's student loan bailout is a big victory for credit card issuers. The obvious answer to student loan debt is to make it like medical and credit card debt to be dischargeable in bankruptcy. However, this would have millions filing for bankruptcy and they would not only be able to write off student loan debt, but credit card debt as well.
As a family that pays our balances off each month, I long ago realized that
we were not the most desirable credit card customers. And now we’ve started looking for retailers who do discounts for cash. But, you mentioned this before, how much do businesses save in their overall accounting costs by doing “credit card only” sales.
‘’From 2015 to 2019, “the average assessed interest rate on credit cards increased by more than 20% (from 13.7% to 16.9%).”
If loan sharks were legal at least there would be some competition. Not that I advocate for loan sharks but it seems it’s another case where monopolies have lobbied to have the little guy regulated out of existence. If it was legal for VISA, Mastercard and Amex to break your legs they would gladly do it, and the pro-corporate Supreme Court will probably allow that one day. Only the Sicilian mafia had a better grip on the courts and government then the crony capitalists do today.
Why don't merchants pass on the merchant fees to their customers? In New Zealand it's quite common to see a small sign next to the payment terminal saying '1.5% merchant fee for credit cards' so it's transparent to all customers how much extra they have to pay to use a credit card. You see this primarily in small retail businesses. If fees get too high then there's a public outcry and the Commerce Commission will investigate so it's a defacto mechanism keeping the credit card banks in check.
This intersects with the general abuse of the banking sector. On- line banking, legislated by the banking lobby i assume, removes your money from your account while the check is in transit, giving the float to the institution and making it impossible to know if the intended recipient has benefitted. It is appalling, and should be corrected by law.
In other news: Commerce Secretary Raimondo asks NVidia to stop shipping tech to China, seemingly unaware this helps local Chinese upstart/copy-cat Biren Tech, which makes its tech with the same company in Taiwan that NVidia does. #incoherent
"...it’s hard to actually get the price of credit card interest rates. You often have to apply to get that price, and that means you get a credit check, which reduces your credit score."
- this might be a dumb question but could this problem be solved by requiring credit card companies to display interest rates (or a range of rates) relative to credit score?
I'm not what I consider wealthy but I learned 25 years ago how much money I was giving the credit card company so I changed my automatic payment to equal the card balance. Sure it hurt some months but that drove the lesson home and I haven't given those turkeys any interest since. We buy everything from aspirin to zippers using a card that pays 2.5% and last year made more than $2,000 doing that. BTW, they notified me a month ago that they are reducing that to 0.5% later this year (at the same time they are raising fees to stores) so we already have the replacement cards in our wallets. If they all do that, we'll start using cash. Some stores give a discount for using that stuff.
Swipe fees are not anywhere near labor costs in a typical business. 2% for swipe fees would be usual and 10 to 50% for labor would be more typical. And there are many other business costs in between the two. That said, I fully agree that they are taking advantage of a monopoly and leveraging low risk into super high profits.
US banks don't compete for customers on interest rates.. they compete for them with rewards. With the right incentives, consumers are willing to look past the APR line.
The only reason the card networks charge their interchange fees isn't really for the networks themselves.. its so they can pass it to the banks who then decide what to keep and what to kickback to the customer. The European fee caps (and the US regulatory caps on debit card fees) are proof that these payment networks can run on much less. The credit card industry is a payment system that sucks out money through obfuscation. The rewards system creates a moat for the existing networks/banks against a competitive system. Consumers won't go to an alternative system unless the rewards are better. Better rewards means charging higher interchange which the merchants won't sign up for. I think the anti-steering provisions that Matt mentions are highly anti-competitive.
Biden's student loan bailout is a big victory for credit card issuers. The obvious answer to student loan debt is to make it like medical and credit card debt to be dischargeable in bankruptcy. However, this would have millions filing for bankruptcy and they would not only be able to write off student loan debt, but credit card debt as well.
As usual, a great an informative essay Matt.
As a family that pays our balances off each month, I long ago realized that
we were not the most desirable credit card customers. And now we’ve started looking for retailers who do discounts for cash. But, you mentioned this before, how much do businesses save in their overall accounting costs by doing “credit card only” sales.
So why can't a guy like Discover make a dent here.They seem to be spending enough on TV ?
‘’From 2015 to 2019, “the average assessed interest rate on credit cards increased by more than 20% (from 13.7% to 16.9%).”
If loan sharks were legal at least there would be some competition. Not that I advocate for loan sharks but it seems it’s another case where monopolies have lobbied to have the little guy regulated out of existence. If it was legal for VISA, Mastercard and Amex to break your legs they would gladly do it, and the pro-corporate Supreme Court will probably allow that one day. Only the Sicilian mafia had a better grip on the courts and government then the crony capitalists do today.
Why don't merchants pass on the merchant fees to their customers? In New Zealand it's quite common to see a small sign next to the payment terminal saying '1.5% merchant fee for credit cards' so it's transparent to all customers how much extra they have to pay to use a credit card. You see this primarily in small retail businesses. If fees get too high then there's a public outcry and the Commerce Commission will investigate so it's a defacto mechanism keeping the credit card banks in check.
This intersects with the general abuse of the banking sector. On- line banking, legislated by the banking lobby i assume, removes your money from your account while the check is in transit, giving the float to the institution and making it impossible to know if the intended recipient has benefitted. It is appalling, and should be corrected by law.
In other news: Commerce Secretary Raimondo asks NVidia to stop shipping tech to China, seemingly unaware this helps local Chinese upstart/copy-cat Biren Tech, which makes its tech with the same company in Taiwan that NVidia does. #incoherent
Hey Matt, Thanks for the article. The Durbin-Marshall bill would need 60 votes to pass, right? Do you really see that happening?
Another great article! This topic needs more exposure.
"...it’s hard to actually get the price of credit card interest rates. You often have to apply to get that price, and that means you get a credit check, which reduces your credit score."
- this might be a dumb question but could this problem be solved by requiring credit card companies to display interest rates (or a range of rates) relative to credit score?
Published today: https://forkast.news/headlines/fed-faster-payments-system-by-2023/
Matt, how much do you think the Fed's new updated ACH system referenced above, will shift funds into debit cards and bank transfers?
I wonder how much % of the credit card market is used for B2B purchases, where you have businesses buying inventory or CAPEX with credit cards.
I'm not what I consider wealthy but I learned 25 years ago how much money I was giving the credit card company so I changed my automatic payment to equal the card balance. Sure it hurt some months but that drove the lesson home and I haven't given those turkeys any interest since. We buy everything from aspirin to zippers using a card that pays 2.5% and last year made more than $2,000 doing that. BTW, they notified me a month ago that they are reducing that to 0.5% later this year (at the same time they are raising fees to stores) so we already have the replacement cards in our wallets. If they all do that, we'll start using cash. Some stores give a discount for using that stuff.
Swipe fees are not anywhere near labor costs in a typical business. 2% for swipe fees would be usual and 10 to 50% for labor would be more typical. And there are many other business costs in between the two. That said, I fully agree that they are taking advantage of a monopoly and leveraging low risk into super high profits.
What about the Ecash act to make it easy to use digital dollars? https://www.wired.com/story/digital-cash-ecash-act/