Credit card cost: who pays?

Steve Levitt points to a site,, 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.

8 thoughts on “Credit card cost: who pays?”

  1. Another way to limit charges would be competition among card issuers. Perhaps this is more likely than merchants choosing not to accept credit cards. Discover, JCB, or Diners Club, anyone?


  2. Yes, in Australia there’s two things that serve to create competition between card issuers. The first is that many merchants choose not to accept the cards with higher transaction fees – that’s why some shops accept VISA and Mastercard, but not AMEX. The second is that some merchants here choose to directly pass on some or all of the credit card fees to the customers that use cards (for example, JB HiFi charges extra if you use AMEX, and some Caltex service stations directly pass on the fees for all card types).

    It should be noted that some retailers derive significant benefits from their customers paying by card such that they don’t need to build the fees into their prices. The main example I know of is restaurants – when the vast majority of their payments are by credit card, they don’t have to handle much cash, which massively reduces their potential as a robbery target and consequently reduces both their direct losses from robberies and the amount they need to spend on security. Restaurants love credit cards!


  3. Well kme, restaurants may love credit cards, but restaurant staff typically are much less enamoured with them (as tips are harder to acquire, and not in tax-free cash form).

    From personal experience, I can tell you that JB Hifi’s penalties for Amex usage and its non-acceptance at so many retailers proved a sufficient disincentive for us to get rid of said card and retain our VISA instead.


  4. I always pay be credit card, but leave the tip in cash. And I still feel bad when I hit the “no tip” button on the credit card machine!

    Anyways… the real question is how has the move to credit card tips affected take-home pay for different staff. I guess the kitchen staff get MORE money, as they didn’t get anything before, but now get a tip; and the waiter less???


  5. I’ve read the third paragraph 5 times and still don’t understand!  For example, if the “individual card issuers don’t get to set” intechange fees how can the $50 book attract a different fee for different types of cards?  If VISA and Mastercard decide together how much each charges the banks, isn’t this collusion?


  6. Visa and Mastercard are card systems that each have thousands of card issuers (e.g., banks) as members. Visa and Mastercard set their interchange fees. Card issuers vote on the level of that fee. So there are no individual fees.

    It isn’t collusion because Visa and Mastercard are the entities and they do not collude with one another (to my knowledge). AmEx set there own interchange fee and do not have member banks.


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