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How Credit Card Companies Make Their Money

November 8, 2010 RSS Feed Print

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Credit card corporations have recently fallen under the scrutiny of the federal government for continuing to amass wealth at the expense of merchants. Following investigations by the Justice Department, spanning a length of over two years, the government brought legal action against American Express, MasterCard and Visa for unfair business practices.

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Forced Fees

The latest battle involves credit card companies and the practice of prohibiting retailers from offering a different price to customers who pay using forms other than the credit cards with which retailers have financial agreements.

Exorbitant Profits

When establishing an association with a particular credit card company, businesses along with consumers receive a processing fee every time a cardholder makes a purchase. Research revealed that credit card corporations profited $35 billion dollars in 2009 alone by implementing these charges. Merchants incurred fees estimated to be around 5 percent of the purchase price each time consumers used the card.

Merchants must either eat that fee, or pass it on to consumers. Rather than take a hit, retailers work the cost of credit card transactions into the price and make everyone pay the same price, credit card or not.

Different Companies, Different Approaches

MasterCard and Visa agreed to change corporate regulations about transaction fees. The U.S. District court must approve final revisions before the new guidelines take effect. However, American Express plans to continue the argument claiming the company is defending the rights of consumers to not be penalized for using credit instead of cash. The Justice Department sees the situation differently. Individuals possess less buying power with increased prices and credit costs.

Cash Discounts May Make Cash King Again

The amended practices should enable retailers to offer cash discounts or assess fees for those who choose to pay with credit. The new rules also offer a chance for competition between credit card corporations. The provision lifts the restriction from businesses and consumers, which mandates use of a particular card, and allocates the choice of providing incentives for using one card over another.

Will Consumer’s Benefit?

Participating businesses assure the courts that by eliminating unfair charges and limitations, consumers will benefit from greater savings. Banks and credit card companies beg to differ as they believe that merchants will engage in pocket padding instead of slashing prices. The Justice Department lawsuit involving credit card corporations is not the first these colossal companies have endured. Many credit card companies have been in courtrooms for class action lawsuits brought about by consumers fighting unfair changes in credit card fees. Many companies discreetly changed billing dates without notifying cardholders in an attempt to collect additional late fees. Some purposely mailed statements late, which automatically caused late payments.

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Discounts Will be Welcome to Holiday Shoppers

It remains to be seen if holiday shoppers will enjoy lower fees as there is nothing forcing retailers to offer cash discounts. But considering the current consumer mentality, any discount may be seen as a good discount and reason to buy. Retailers will likely be quick to capitalize on the new rules, especially if they are in place before the holiday shopping season.

Revealing Credit Cards for What They Are

The best thing about the ruling is that it puts credit cards back into a realistic light. You pay more for convenience and that’s all that credit cards are. They are an easier way to pay, and you pay more for that, just like paying an extra $2 for a gallon of milk if you want to buy it down at the convenience store on the corner.

Chad Fisher spends his time building and promoting websites for people to learn more about cheap apartments and has developed a free site for consumers to access car insurance quotes from providers in their state.

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Well, I am glad that businesses are getting some help. But it doesn't seem to trickle down to the public much. I was informed by my credit card company that if I miss or am late with my payment, they could bring my interest up to 29.99%. And talking to a friend of mine, whose check for $5.00 bounced; they still had to pay a $27.00 fee! So the public needs some more help along with the businesses

Clementina Filosa-Morton of IA 10:37AM November 10, 2010

I am kinda dumb, will somebody give me some advice on this because this is really confusing

mark johnson of UT 10:29AM November 10, 2010

It should be obvious that it costs SOMEBODY something when somebody besides you pays the merchant for your purchase, mails you a bill monthly, processes your monthly payment, and handles all the attendant paper work.
It should be obvious that the company who does that must cover costs, AND make a profit, or it goes out of business.
Since you don't pay a seperate fee for the priviledge of having your purchase paid by somebody else, it must be hidden somewhere. It HAS to be in the only place YOU pay, if you are to get charged.
That's right. It HAS to be included in the price you pay for the product.
And it IS.
The only question is whether cash buyers help pay the cost and profit of the credit companies by merchants having the same price for everybody.
Now it can't possibly be fair to the cash purchaser to pay the same price as the credit purchaser, helping the credit card companies cover their costs AND profits. But the powerful credit companies have gotten it their way for years so that THEY benefit. If the product you bought had a cheaper price for cash than credit, they'd loose business (spelled PROFIT - typically 5% of your purchase).
So why in the world can't people figure out that WE ALL pay 5% MORE for EVERYTHING just to have the option of using credit instead of cash. And if they weren't ALSO paying for all those perks credit companies offer, they'd go out of business.
Think about it - these people vote and reproduce.

W. L. Head of NC 10:06AM November 10, 2010