← WSJ Your Money Briefing
WSJ Your Money Briefing
Credit Card Use Deepens Divide Between Consumer Groups
00:07:12
Small businesses and lower-income consumers often feel more financial pain as people move away from cash when making purchases. Reporter Harriet Torry explains. J.R. Whalen hosts.
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- [00:00]
Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [00:05]
Retail Industry Representative
Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [00:15]
Small Business Owner
See banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [00:20]
Retail Industry Representative
they need while increasing megastore profits. They deserve it, don't they?
- [00:26]
Consumer Advocacy Group Representative
Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.
- [00:37]
J.R. Whalen
Here's your money briefing for Monday, June 22nd. I'm J.R. whalen for the Wall Street Journal. We're not a cashless society yet, but more consumers are making purchases with credit cards and apps and online services instead of cash. Thing is, the rewards that often come with those forms of payment are deepening a divide between affluent and lower income consumers.
- [00:59]
Harriet Tory
If you're a customer who's making $200,000 a year, you're getting this 3% discount. It really adds up over time. And it's almost like it's what one economist calls a giant reverse Robin Hood effect that moves billions of dollars a year around the economy.
- [01:13]
J.R. Whalen
The rise of credit cards is also dividing large and small businesses. Our reporter Harriet Tory will have more after the break. As more consumers switch from cash to credit cards, small businesses and less affluent customers often find themselves facing a financial penalty. Our reporter Harriet Tory is with us to explain. So, Harriet, credit cards and online payment systems make things convenient for consumers and they can move the line along at checkout. But, but how is it putting the squeeze on smaller businesses?
- [01:50]
Harriet Tory
Well, when you buy something with a credit card, the merchant usually remits around 2% of the price to the bank that issued it. And that fee can be higher. And sometimes it's around 3% on reward credit cards. So the bank returns some of these interchange fees. They're also called swipe fees to the cardholder in the form of rewards, including like cashback points or air miles. And these fees can really add up. So for instance, in our story, we spoke to the owner of a coffee shop in Maryland who roasts his own coffee beans, green beans. And the paradox is that last year he spent less on beans, he spent around $12,000 on beans, than he did on these interchange fees, these credit card swipe fees, which cost him around $18,000. So that just gives you an example of the scale of this and the scale of the costs that businesses face. But because retailers profit margins are slim, the way that it works is they usually pass on some of those fees to customers through Higher prices. And you end up paying that higher price no matter how you pay. So for instance, whether you use a credit card or a debit card or cash, and what Econom say is that the result of this whole complex transaction is that there's an implicit transfer from the poor to the rich.
- [02:58]
J.R. Whalen
Why do they say that? What's the cash flow here?
- [03:00]
Harriet Tory
Essentially like if you're using a reward card that gives you 3% cash back, you're paying the same price as somebody who's buying something using cash or using a prepaid credit card. But so you're essentially getting a 3% discount. And that really adds up over time. And usually the types of people who are given these, who can access these rewards cards with very generous cash back and air miles and so on are people with higher credit scores who tend to be higher income households. So if you think about it, you know, if you're a customer who's making $200,000 a year, you're getting this 3% discount. It really adds up over time. And it's almost like it's what one economist calls a giant reverse Robin Hood effect that moves billions of dollars a year around the economy.
- [03:43]
J.R. Whalen
How does the type of credit card used affect the financial strain on a merchant?
- [03:47]
Harriet Tory
For instance, if you buy something with a debit card, debit card fees are capped by the Federal Reserve at $0.21 per transaction. So, you know, let's say you go to a coffee shop, you buy a cup of coffee, you swipe your card, that's a fee of 21 cents. And then if you're paying in cash, you know, the merchant doesn't pay any fee at all. Of course, the downside for that is then the merchant has to sort of secure the cash and put it in the bank and things like that. So that's a different side of the story. But when you use a credit card, that swipe will result in a 3% charge to the merchant. So it very much depends. For merchants, it depends enormously on which type of card you use. That will really alter sort of the spectrum. This is something that's been going on for a long time. But the thing is, the Supreme Court has decided that if you accept Visa cards, for instance, or MasterCards, you have to accept every type of card. You can't, quote, unquote, discriminate against a high rewards card versus a cheaper version of that particular Visa or MasterCard issue card.
- [04:47]
J.R. Whalen
Do merchants often try to make up the losses they suffer in cash versus credit card transactions?
- [04:53]
Harriet Tory
It's very rare for Businesses to offer different prices for different payment instruments. I mean, the one exception to this is sometimes at gas stations, you'll see there's a slight discount if you pay in cash. But it's relatively. Or for instance, there might be like a $5 minimum on using a card or a $10 minimum on using a card in some stores. But it's very rare. You know, if you, if you had a store that said, okay, this item, you know, this sort of grocery, it would cost you 3% more if you paid with a credit card. That's very. Consumers don't like that. It's very confusing. So merchants tend to just charge one price across the board. But there's this whole sort of system that consumers don't really see that's going underneath in terms of swipe fees, which really does alter the price that people pay. Of course, credit card companies disagree with a lot of this. They say that people do receive value from their cards and also some of the swipe fees and so on. They say that that covers things like fraud protection and so on. So it's, you know, it's a complex transaction, but for smaller and bigger merchants, some bigger merchants have negotiated fees directly with the card companies to have the fees be lower. But, you know, small businesses don't tend to have that bargaining power.
- [06:02]
J.R. Whalen
Has this been more pronounced during the pandemic?
- [06:04]
Harriet Tory
I mean, it's a bit too early to say, but one thing that, you know, a lot of small businesses are doing now is not accepting cash because people are freaked out about touching money because of the potential to spread the virus on coins and bills. So, you know, a lot of businesses are now moving to completely cashless transactions now. Now, credit cards are not the only option for that. They're also, you know, you can use a digital wallet, there's PayPal and things like that. But I think definitely one thing that we're seeing early on is that credit cards are being, and debit cards are being used more rather than less because people are just very freaked out about touching money and about when you pay for something with a card, you can often do it, you know, remotely or, or you don't have to sort of touch things that the merchant has already touched and you just limit that person to.
- [06:49]
J.R. Whalen
So this is a real trade off that businesses have to deal with the convenience of credit cards versus the financial strain.
- [06:55]
Harriet Tory
It's definitely true. I mean, credit cards undoubtedly have many benefits for merchants. And I think studies have also shown that people tend to spend more when they're using cards. So it's true that merchants definitely get a lot from being cashless, but at the same time, there are these swipe fees and transaction costs that are largely invisible to consumers but do have a very real effect on, on what we call payment inequality. So for instance, if you're a low, a low income consumer who can't get a credit card because they have a low credit score, you are implicitly, you know, you're paying these higher prices across the board and implicitly subsidizing the cash back and the rewards and the other all the free stuff that goes to tends to flow towards high income spenders.
- [07:36]
J.R. Whalen
All right. That's Wall Street Journal reporter Harriet Tory. Harriet, thanks for coming on the show.
- [07:40]
Harriet Tory
Thanks so much.
- [07:41]
J.R. Whalen
And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.
- [07:45]
Small Business Owner
Access to affordable credit helps me pay my employees, but I don't really need it.
- [07:50]
Retail Industry Representative
Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.
- [07:59]
Small Business Owner
See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources
- [08:04]
Retail Industry Representative
they need while increasing megastore profits. They deserve it, don't they?
- [08:10]
Consumer Advocacy Group Representative
Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.