Shifting Economics of Credit Cards

I had lunch in a local restaurant yesterday and as the final bill was delivered to the table, the waiter made a point of highlighting something on the printed bill.

4% Processing Fee on All Card Transactions.

The restaurant is now ADDING an explicit percentage fee to any bill payed by credit card.

Despite a huge number of Americans doing almost entirely without cash and splitting purchases between debit and credit cards, most Americans don’t really understand how the entire credit card system actually works – logistically or economically – between cardholders, merchants, card banks and settlement networks. For this discussion, the economics are the critical piece.

Card HOLDERS have the illusion of purchasing a $100.00 item at a merchant, walking out of the merchant with $100.00 in “value”, and not paying the $100.00 until their next statement is both generated (might be 30 days away) and due (typically about 27 days from statement date). At a minimum, the card HOLDER gets the benefit of the “float” on that $100.00 for up to 58 days before actually paying it. Of course, that’s if they pay their balance in full each month. If balances are not paid in full, of course the card HOLDER is paying from 20-28% APR on balances and that $100.00 purchase is costing them much more than $100.00 over time.

Card holders also get extra fraud protection from that “float period.” Card holders can dispute any charges hitting a card and typically not pay for the amount until the dispute is settled one way or the other. If their card is physically stolen or electronically compromised and used in other purchases, the card holder can dispute the charge and the card BANK will chase down the transaction with the offending merchants. If the charge is fraudulent, the BANK eats the loss. (If a debit card is compromised, you are SOL – funds leave the account IMMEDIATELY and are lost if the transaction was fraudulent.)

Let’s ignore the segment carrying balances and just focus on those paying off balances in full each month.

The card HOLDER may also be getting benefits like

  • extended warranties on appliances and electronics
  • “points” back on purchases typically at the rate of 1% redeemable as coupons or cash that can pay off balances
  • additional points back for purchases in segments with business affiliates of the card BANK (maybe dining, airfare, hotels, etc.)

Okay, so for a customer paying nothing in interest, how is the card BANK finding dollars to pay for those discounts and extended warranties? By squeezing the MERCHANT for a share of each purchase. Historically, that processing fee is between 1.5 and 2.0 percent of the transaction. (For some less popular cards like Discover, fees might be 2 to 3 percent.) For a $100.00 purchase, the MERCHANT only collects between $98.00 and $98.50 dollars.

Why would they settle for not collecting the entire amount? Partly because handling cash poses its own risk with errors, employee theft, external theft and extra security logistics onsite to house thousands of dollars required for everyday business. Partly because accepting checks is HIGHLY prone to fraud and a predictable number of check payments will result in write-offs (for small amounts), extra settlement costs to recover from temporary bounced checks or legal fees for attempting to collect large amounts. Those cash/check losses are probably VERY well understood by retail sector so a business owner knows EXACTLY how much it would cost to not accept credit cards.

So why would merchants start adding a specific surcharge for credit card payments? Especially a 4% fee? Apparently, merchant bank fees have actually been as high as 3.5% and may be going up. What could be driving the ever-higher fees and their exposure to customers?

  • opportunism targeting inattentive consumers who have shunned cash?
  • new benefits / “rewards” being given to cardholders?
  • increased losses from transaction fraud?
  • increased costs of AVOIDING transaction fraud through purchase trending, etc.
  • merchants fed up with creeping fee hikes that make them look like the bad guy

Maybe all of the above?

Consumers would be wise to think through their categories of spending and the instrument used for that spending. If more merchants in more sectors start applying surcharges for credit card use, consumers need to think of how that will jack up their cost of living.

Is it worth paying a 4 percent surcharge on a $299.99 television to get a double warranty? Maybe. That would be $12.00 spread over the life of the television which might last 10 years without incident or might break in a month and be completely disposable.

Is it worth continuing to purchase $600 in groceries per month and pay an extra 4 percent? That’s $288 over a year. Sure you might have earned “points” on that extra surcharge worth 1% or $2.88 but that’s a loser financially. Paying via debit in a grocery store might be preferable to avoid such surcharges given that you are typically in physical possession of your debit card and it isn’t taken out of your sight to scan and possibly skim.

Do you want to use your debit card at a restaurant you’ve never visited before where the waiter takes your card back to a counter in the kitchen to run your transaction? Maaaaaaaaaybe not…

The key point here being that as tectonic plates shift in the financial and payment industries, even those who never carry a balance and are used to treating credit cards like a free convenience rather than a loan shark need to think through the particulars now. The point here is also that even if all merchants are NOT explicitly separating out these higher fees so consumers can choose to pay or avoid them, these fees are IN the system and can easily inflate costs by 1-2 percent across huge swaths of the economy in very “sticky” ways.



I was charged a 3% credit card use fee by an auto repair shop last week. If I had known ahead of time I would have brought my checkbook.



I used to always renew my Michigan car registration and driver’s license on the state’s web site. Quick and convenient, and it saved the state money because nearly everything was processed without human hands.

Then, a few years ago, when all branches of the state government were in Shiny hands, the state started charging a processing fee for all credit card transactions. Worst of all, the state did not disclose how much the fee was. Alrighty. I’m retired. I have time to work this system. So now, I head down to the Secretary of State office in person, take up a staffer’s time, and pay by paper check, which a staffer then has to process.

“JCs” cry a river about what a pain it is to handle cash, and, they opine, all transactions should be by credit card. Then, in a resurgence of 1980s customer abuse, they charge a fee for a CC transaction that saves them labor costs. Wish the “JCs” could get their story straight.



AmEx was 6% in the second half of the 1990s. And they were crooks. First hand experience.

The cost savings is to the merchant (or state agency in your story). The fee the credit card company charges is an offset for the reduced costs from not handling cash and checks. There is also an ease of use factor for the consumer. In my youth before my first credit card I always had to make sure I had enough cash when heading out the door or going on a trip. Did you ever try to rent a car without a credit card?


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My state agencies charge a fee for accepting credit card payments, or it is free by ACH. So that’s the method I use. All from the comfort of my home, no paper checks required.

Many merchants are going to debit/credit card only, so I suspect the savings from not handling cash is real.

I don’t want to flog this dead horse too much, but if you use credit cards wisely they are an incredible benefit to the consumer. Besides the usual benefits like ability to dispute charges, extended warranties, and interest free float, rewards cards provide incredible benefits.

For example, the Bank of America Alaska Airlines Visa recently had a sign-up bonus of 72,000 Alaska miles (currently 64,000, IIRC) with a $95 annual fee. That’s good for three round trips between Seattle and Hawaii, roughly a $1500 value. I’m on a free trip to Hawaii right now, as a matter of fact.

Two questions I sometimes get asked: Is this ethical? Answer is yes. Airlines selling points to credit card companies is big, big profit center for the airlines. Basically, they are getting paid in advance to sell a marginal seat they probably wouldn’t sell anyway. It is almost pure profit for them. I’ve signed up and canceled the BofA Alaska credit card probably 12-15 times. They still seem eager to give me new ones.

The other question is does this hurt my credit score? The answer is no. Although an inquiry can have a slight negative impact, the impact is either tiny or zero. And having more available credit is a positive, so your credit score can actually go up when you open a new card.


Many European merchants would take AmEx in the 1990s. First hand experience.

Many businesses wont take checks. People can not be trusted in general with checks. At least not compared to credit cards.

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If a merchant takes a bad check it’s on them. But credit card fraud is handled by the card issuer, not the merchant. Big deal for the merchant!

I carry cash to spend at local restaurants, breweries, wineries, cideries and stores that offer discounts for cash. Beyond that, I accept the fact that the credit card industry will get their pound of flesh.

I had the sign of The Holy Trinity in my office…Visa, Mastercard and Amex. Of the 3 Amex charged the highest fee and were the slowest to put the $$$bucks in the practice account (quicker than the insurance companies, mind)

Over the past decade or so, I’ve noticed fewer merchants accepting Amex and assumed it was because of this. My daughter has recently ceased accepting the card in her hospital because of the increasing frequency of charge backs. Clients whose furry friends had received excellent care had begun this practice…within a short time of leaving the facility, putting in a dispute on previously discussed and agreed to charges. The effort of disputing this plus the bad taste it leaves made it not worth continuing with the card. Apparently has made no difference to discussion of financial arrangements with clients…because, presumably, so many other businesses have found this out the hard way.

One would think that they should be obligated to inform you of this fee prior to ordering. Otherwise, what is to keep them from claiming the fee is 10%?

Yes, this would seem a good policy, otherwise the ‘fury’ of some restaurant goers might be taken out on the waitstaff with lower, or even no tip.



They usually have a sign as you are going into the Restaurant but it isn’t always easy to notice.


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I am pretty confident that, if there was no cash or paper checks, the “fee” would be 10%, or more.


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