Steve Levitt points to a site, truecostofcredit.com, that allows you to calculate what costs you are imposing on merchants when you use a credit card instead of cash. The site works for Australian cards (I guess when purchasing stuff in the US). So when I buy a $50 book there that costs the bookseller $1.17 if I use my MasterCard and $1.87 if I use my AmEx. This is about double the rate for similar transactions in Australia.
This is Levitt’s description:
This is not to say that there is anything wrong with those fees. I presume that the issuing banks can choose their own fees (within reason), and that there is more or less free entry — which suggests that the industry should be pretty competitive. Merchants accept credit cards, which implies that the benefits of doing so outweigh the costs.
Actually, that isn’t quite right. Card issuers and the banks that set merchant fees are different in most transactions. So the direct cost is set by the merchant acquirers. Card issuers do receive part of that cost through interchange fees paid to them by the acquirers. But individual card issuers don’t get to set those. They are set by the system — MasterCard, Visa, AmEx — and so are the same regardless of which bank’s card you actually hold. It is the whole two-sided thing that leads to them agreeing to interchange fees that continually mean higher charges for merchants. Competition does not constrain this. The only thing that does is merchants choosing not to offer card payments (unlikely) or regulation of the interchange fee (as we have in Australia).
And also, don’t be too sad for the retailers. They built those fees into prices and competition between them means that those credit card costs are spread across all consumers. What that means is that when you choose a credit card purchase you are imposing costs on your fellow consumers that don’t have or use credit cards.
According to many IO analyses (most notably, Rochet and Tirole), the benefits do not likely exceed the costs. And the costs manifest themselves in card issuers sending out more than a billion card solicitations each year. Not a paragon of efficiency.