By Jason Steele


5 Min. To Read

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When you think about it, credit cards are a beautiful system. Cardholders are assured a secure and convenient transaction, and merchants don't have to worry about their customer's credit. And when customers use a card with no annual fee, and pay each month's statement balance in full, they incur no costs. In fact, many cardholders receive valuable points, miles, and cash back when they use a reward credit card.

Since there is no such thing as a free lunch, and the credit card issuers are not operating as a charity, someone must be paying to keep this system up and running, and to absorb the cost of credit card fraud. Much of this system financed by customers who pay annual fees, late fees, and of course, credit card interest charges. At the same time, a larger portion is paid by merchants in the form of credit card transaction fees, which are often referred to as swipe fees.

When merchants choose to accept payment from credit cards, they enter into agreements with the major payment networks Visa, MasterCard, American Express, and Discover. Merchants become part of the payment network, but they must pay a percentage of their charge receipts in return. In most cases, credit card swipe fees total between 2% and 4% of the amount of the sale.

While merchants voluntarily enter these agreements, which they can cancel at any time, many are upset about the cost of these fees. Certainly 2-4% of credit card sales will add up to a much higher percentage of their profits, especially in industries where the margins are slim. Merchants also complain that the cost of the service delivered is out of line with the price they must pay.

At the same time, there is no doubt that cardholders are benefiting from this system. There is no way that card issuers could offer such generous rewards if it were not for these fees. How do we know? Swipe fees on debit cards have been regulated for several years now, and since then, all of debit cards that offered rewards have disappeared from the market. There are a few hold outs that can still be used, but even those card issuers are no longer accepting new applications. So reward credit card holders can be confident that their cards will quickly disappear if price controls on swipe fees are ever imposed on the credit card industry.

Furthermore, the cries of profiteering ring especially hollow from the merchants that tend to complain the loudest, those in the convenience store industry. Here is an entire industry that justifies its own exorbitant pricing of basic foodstuffs on the principle of convenience. These stores make no apologies for selling a quart of milk for more than the price of a gallon at a grocery store, so they should be the last merchants calling out others for delivering a service at a price that that might not correlate with its cost.

Like convenience stores, the credit card industry also sells convenience to retailers, who are free to reject credit card users and accept only cash, checks, debit cards, or any other form of payment they choose. Yet credit cards remain widely accepted since they offer merchants the same convenience and security that is offered to customers.

It is also important to note that other forms of payments incur costs that retailers must pay. For instance, checks can bounce while cash is extremely vulnerable to theft and expensive to handle. Transactions using cash or checks take much longer to handle and count, and stores must rely on the use of safes and armored cards to transport and deposit payments. In contrast, credit card transactions are swift, secure, and competitively priced when all costs are factored in.

If the price of processing credit card transactions wasn't worthwhile, merchants wouldn't bother to accept them.

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