Paying in cash has never been more out of style. But with just
about every other way to pay, there's a third party outside the
transaction that's taking a cut -- and all those cuts add up to
serious profits for the companies involved.
Between credit cards, debit cards, electronic funds transfers,
and more recently
mobile-payment systems
, consumers have more choices in how they choose to pay for
things than ever. Each of those payment methods, however, has
consequences not just for the buyer and seller but also the
companies that provide payment services on both ends of the
transaction. In the end, the more money those third-parties get,
the more it costs you to buy what you need.
Debit-card fees entered the limelight last year as the
Durbin Amendment
to the Dodd-Frank financial reform law took effect. The law
addressed complaints from merchants that transaction fees for
accepting debit cards were too high by imposing caps on the
amounts card issuers could charge for transactions.
A recent report from the Federal Reserve shows that the law
has succeeded in cutting what
Visa
(
V
) ,
MasterCard
(
MA
) , and
Discover Financial
(
DFS
) receive in transaction fees. The report shows that average
transaction costs have fallen almost 45% in the past two years,
now weighing in at $0.24.
Unfortunately, some small businesses don't appear to be
getting the benefit of the reform's impact. As CNNMoney
discovered, some stores that sell low-cost items lost some
favorable arrangements they had with card companies, essentially
bringing them
up
to the overall average.
But the trend toward letting payment middlemen make huge
profits goes beyond plastic. Online auctioneer
eBay
(Nasdaq: EBAY) owes its
renaissance not to its namesake business but to
PayPal
, which makes money facilitating payments -- first for eBay
auctions but then expanding throughout the online retail
world.
PayPal works hard to maximize its revenue. Whenever you try to
pay for something, PayPal suggests using a bank-account
electronic funds transfer, only resorting to credit card
transactions if you insist. The reason: PayPal avoids credit card
processing fees on bank transfers. Yet on the receiving end, for
all but the most basic of accounts, sellers pay the same fee of
between 2.2% and 2.9% plus $0.30 per transaction -- fees that
largely go straight to PayPal's bottom line for bank transfers,
taking money out of sellers' pockets.
In some cases, there are even additional layers of middlemen.
Between card companies and merchants, you'll sometimes find
payment processors, which aren't required to pass their Durbin
Amendment savings on to their customers. As a result, merchants
may not see much if any improvement in their net revenue after
accounting for payment fees.
The first step that merchants and consumers have to take to
stop the trend of higher fees to payment-middlemen is to make the
cost clear and up front. The best way to do that is to provide
discounts for cash transactions that reflect the true savings
versus credit and debit cards.
Discounting cash will retrain customers to move away from
other ways to pay. Right now, credit card issuers
Bank of America
(
BAC
) ,
Citigroup
, and
JPMorgan Chase
are just a few of the banks that have done a great job of
giving cardholders massive incentives to use
their cards
, with significant rewards of cash and other perks from card
purchases -- essentially giving you a cut of their cut. If
retailers provide similar or even greater rewards for using cash,
it'll make many customers think twice before pulling out their
plastic. But if they don't, those who pay with cash will end up
paying for the higher costs that card companies impose.
Knowing the cost of spending money through various methods is
important in order to understand how it affects the companies you
do business with, especially smaller ones. With razor-thin
margins in retail, the pennies that go to middlemen can mean the
difference between success and failure.
The retail industry is changing in many different ways. Find
out more in the Fool's special report on how two cash-king
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Fool contributor Dan Caplinger spends way too much time on
credit card rewards. He doesn't own shares of the companies
mentioned in this article. You can follow him on Twitter here.
The Motley Fool owns shares of MasterCard, JPMorgan Chase,
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