National Payment Card has a new idea: People can register and use their driver’s licenses to pay for gas, saving up to 10 cents a gallon. Very clever, but the fact that NPC can offer rebates for consumers who use a different payment system is a reminder of that MasterCard and Visa are currently skimming off $6.6 billion from convenience stores alone — fees that are passed on to everyone who buys gas.
According to Businessweek, MasterCard and Visa charge about 65-85 cents per transaction for everyone who uses a credit card when they pump gas. By comparison, once it is operational, NPC will work like a debit card, bypassing the credit card exchanges and costing the merchants 15 cents. The cost to the merchant if the customer paid cash would be about 10 cents. In an operation like a convenience store, the difference between a cost of 85 cents and 10 cents per transaction is often the difference between profitability and looking for a bankruptcy lawyer.
There’s no problem with Visa and MasterCard charging merchants for their services. The trick is that MasterCard and Visa have network rules, incorporated by reference into merchants agreements with banks, and these rules prohibit merchants from pricing credit card transactions (high cost) differently from cash transactions (low cost) If the merchant takes credit cards at all, then either everyone pays 85 cents, or, more likely, everyone pays something less than 85 cents, but cash and debit card users are paying more than the 10-15 cents in costs they generate.
Ordinarily if the service I use costs most than the service you use, I’ll pay more. But Visa and MasterCard make sure that credit card costs aren’t passed directly to the customer. If they were, some people might stop using credit cards. According to Visa and Mastercard rules, gas stations can’t charge for gas, then charge the credit card users an extra 85 cents and the cash users an extra dime. The merchant doesn’t get to set its own pricing structure.
As a result, people paying by cash or debit card pay more so that credit card users can get frequent flier miles and, ironically, cash-back discounts — and so the Visa and Mastercard can get their fees. And those fees add up. The Nilson Report estimates that the credit card companies skimmed $57 billion off credit transactions.
If the MasterCard and Visa rules that restrict how merchants set their prices look like an antitrust violation to you, you are in good company. Adam Levitin, soon to become a professor at Georgetown, has written two terrific academic articles (here and here) analyzing the economics and law of these transactions. His conclusions: the Visa and Mastercard agreements violate antitrust law.
I’m glad to see NPC’s innovation. Shoot, I’m glad any time a family can save a dime. But I’d rather see a change that cut costs for consumers when they buy groceries, clothes, and every other time they make the decisions whether to use a credit card, debit card or cash. In other words, I’d like to see the laws enforced and see some of that $57 billion back in the pockets of middle class families.
