Merchants who accept credit cards typically have to pay between 2 and 5% of the value of each transaction in fees to Visa, MasterCard and the banks involved, adding up to $600 per household per year. To cover their costs, these merchants increase their prices by at least the same amount.
Dirty little secret
As consumers, we’d be better off if no one ever used credit cards, because merchants could reduce prices by up to 5% throughout, and competition would make sure that they did. The higher prices we pay is a tax on all of us.
Some people, however, pay lower taxes than others: those with very good or excellent credit scores often have cards that reward them for each transaction. Therefore, credit card fees are really a tax on people who don’t get cash back: people with less than stellar credit or the uninformed. A research paper by the Federal Reserve Bank of Boston estimates that “On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year.”
Each person thus faces a dilemma: everyone who qualifies is better off using reward cards, but collectively we all pay more as a result. Hopefully, new entrants such as Square will disrupt the cozy oligopoly in the credit card market and bring down fees significantly, or Congress will allow merchants to levy a surcharge for anyone paying by credit card.
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