by Joseph Kenny | 10/22/09

Politicians have been addressing the problem of credit card fee rates charged by banks. Some of those fees are obvious such as late payment fees and over-the-limit fees. But it seems there are layers of fees and hidden costs to using credit cards that most consumers would never know existed because they are buried so deep.

There are private and government analysts though who have put on their mining hats, picked up their shovels and uncovered these fees. Congress has begun to pass bills that lower the fees to consumers but interestingly what the investigators found was a quagmire of credit fees affecting business revenue based on what is seen as an unfair system.

So what does this mean for consumers as legislators begin to remove the inequities in credit card fees charged to retailers? It probably means retailers will begin to get much more selective about the kinds of credit cards or a two-tiered system would slowly emerge. Consumers would pay one amount if paying with cash and a different amount if paying with a credit card.

The complexity of the credit card fees passed on the retailers is wide and deep. In a nutshell this is the problem for retailers: the kind of store where the purchase is being made and the kind of credit or debit card being used determines how much actual revenue the store will receive on the sale. So two people can buy an identical item, one using a credit card and one using a debit card, and the net revenue to the vendor will be different between the two.

In other words, some stores like food stores are charged fewer fees than department stores. Larger stores chains get a graduated revenue benefit and will be charged fewer or smaller fees than the mom-and-pop stores in the community. In addition, most retailers will earn more revenue on a debit sale than they will on a credit sale.

Also, what many people don't realize is that retailers will also earn less money when a shopper uses a credit card that offers a reward versus a credit that that has no rewards attached to it.

This is a quick summary of the deep fee structure banks have managed to impose. Now Congress is looking at these fees and it could affect what consumers will pay for goods and services in the future. Right now retailers earn less on credit card sales then they do on cash sales. So low income shoppers who pay more often with cash are subsidizing the sales made by wealthier customers using credit cards. The reason stores don't charge a surcharge on credit card sales is because many states forbid them by law.

When you go to the gas station have you ever noticed the two-cent discount for cash sale signs? Obviously stores can offer cash discounts but most don't out of fear of violating bank rules or creating a litigious situation. So where does this leave the matter?

Right now there is discussion in Congress spearheaded by Representative Peter Welch concerning the need to remove all restrictions on cash discounts. If that were to happen there are two possible consequences. First, more cash discounts will probably be offered at a larger number of stores. Second, the cost of credit card fees will lead to higher prices. Retailers generating less revenue through cash sales will not be able to sufficiently subsidize the credit card fees as is done now. That means offsetting revenue will be needed.

Consumers and retailers will be hearing much more on the topic in the near future as legislators continue to look at the current bank fee schedules for credit cards. So stay tuned because there is much more to come....