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Was there some law saying that the retailers had to allow payment with these cards? It seems like a "free market" as you put it should allow retailers to no lon

Was there some law saying that the retailers had to allow payment with these cards? It seems like a "free market" as you put it should allow retailers to no longer accept payment via certain cards if it doesn't make business sense to do so.

jacknews 13y ago
Of course, but then they are turning away custom. Why shouldn't they be allowed to charge customers different prices depending on which payment method they use, given different methods have different costs to them. Now they can.
dminor 13y ago
It was part of the merchant services agreement - e.g. if you want to accept Visa, you have to accept all Visa.
mgkimsal 13y ago
As dminor said, it was part of the agreement, but more to the point, you don't always necessarily know when you're taking the card. You'd only see the fee after running the purchase. IIRC, there was some way to decipher some 'types' of cards (airmiles reward card vs free gas vs cash back cards, etc) by some of the prefix numbers, but I don't think that was reliable, nor feasible. It's been a couple years since I discussed this with my bank's merchant account person, but in a nutshell it was "you don't now until after you take the card how much it'll cost you". There was a base fee, and most cards would fall in to that - 2.1% in my case, IIRC. But, if someone used some 'get 2% cash back on all purchases!' card, I'd be charged 4.1% (again, IIRC, might have been a bit more or less). When you don't know what the price is going to be, you end up needing to err on the high side, and factor in higher overall fees to every price, raising the price for everyone along the way. And the banks make more money because the whole 'free air miles!!!!' mentality gets people to use their card more. The banks get their fees on a per transaction cost (and interest on balances that carry on month to month) - the merchants effectively paid for all your 'free air miles'.
tikhonj 13y ago
The payment processors have a disproportionate amount of power over merchants because they form an oligopoly. The barrier to entry is extremely high, which significantly distorts the markets. The payment processors used this asymmetry to force merchants to hide their costs from the market at large. The market can't affect something when it isn't allowed to set different prices for using the service or not! Yes, merchants could stop using the payment processors. But, crucially, consumers can't: if a merchant used a payment processor under the old scheme, even customers paying in cash had to pay a higher price to subsidize this! Couple this with the fact that the payment processor market is entirely dominated by a bare handful of large companies, and you get something really far from a "free" market.

jacknews 13y ago

Of course, but then they are turning away custom. Why shouldn't they be allowed to charge customers different prices depending on which payment method they use, given different methods have different costs to them. Now they can.

dminor 13y ago

It was part of the merchant services agreement - e.g. if you want to accept Visa, you have to accept all Visa.

mgkimsal 13y ago

As dminor said, it was part of the agreement, but more to the point, you don't always necessarily know when you're taking the card. You'd only see the fee after running the purchase. IIRC, there was some way to decipher some 'types' of cards (airmiles reward card vs free gas vs cash back cards, etc) by some of the prefix numbers, but I don't think that was reliable, nor feasible. It's been a couple years since I discussed this with my bank's merchant account person, but in a nutshell it was "you don't now until after you take the card how much it'll cost you". There was a base fee, and most cards would fall in to that - 2.1% in my case, IIRC. But, if someone used some 'get 2% cash back on all purchases!' card, I'd be charged 4.1% (again, IIRC, might have been a bit more or less). When you don't know what the price is going to be, you end up needing to err on the high side, and factor in higher overall fees to every price, raising the price for everyone along the way. And the banks make more money because the whole 'free air miles!!!!' mentality gets people to use their card more. The banks get their fees on a per transaction cost (and interest on balances that carry on month to month) - the merchants effectively paid for all your 'free air miles'.

tikhonj 13y ago

The payment processors have a disproportionate amount of power over merchants because they form an oligopoly. The barrier to entry is extremely high, which significantly distorts the markets. The payment processors used this asymmetry to force merchants to hide their costs from the market at large. The market can't affect something when it isn't allowed to set different prices for using the service or not! Yes, merchants could stop using the payment processors. But, crucially, consumers can't: if a merchant used a payment processor under the old scheme, even customers paying in cash had to pay a higher price to subsidize this! Couple this with the fact that the payment processor market is entirely dominated by a bare handful of large companies, and you get something really far from a "free" market.