I always felt using my zero liability credit card was best option to pay and very frustrated when there is a difference between a cash price and credit price. I wondered why my shop around the corner did not like me paying for a pack of gum with plastic.
So, I did some research and here are a few facts. Let us first look at the companies who generate revenue from our credit card usage.
VISA and Mastercard are leading brands that make a small fee when you swipe a card. They simply broker the transaction between the retailer and the name of the bank on your card. No liability, nothing added in value to you as a customer.
VISA Gross profit in 2013 – $9B
Mastercard Gross profit in 2013 – $8B with $0 in R&D expense
The major banks like Citi, Chase who issue us our credit card are nothing more than a revolving loan provided every 30 days. They make money from the retailer who pays a fee on the customers behalf and if we our payment is late, we pay a late fee and an interest. Banks are in the business of lending money so, this is part of their risk portfolio.
So, who loses money? It is the retailer and the customer.
A retailer pays between 2%-3% on every transaction we do with plastic that comes out of their Gross profit. In addition, the compliance mandates from the credit card industry to protect their losses due to credit card fraud puts additional financial burden on a retailer’s profits.
Let us look at the recent security breaches in past 12 months and the financial impact.
Target loss – $146M
Home depot loss approx. – $100M
Other Retailers approx.. – $50M
Upgrade to new chip and pin technology – $200M by Target and Home Depot alone
Now, the card issuing bank like Citi bear majority of fraud losses but, they pass some of it to the retailers and the loss is insignificant compared to the financial crisis of 2008 “too big to fail”. Banks know how to makeup for their losses. The new chip and pin technology is to protect the bank’s loss from fraud that may occur at a retailer.
So, what does it all mean? If a retailer continues to lose money from paying credit card fees, fraud fees and possible increase in credit card transaction fee, this will increase their cost of goods and services and/or drive out small business. Retailers with razor thin margins cannot survive while offering payment choices to consumers.
I am sure most of what I wrote is common sense but, the next time you pay for anything under $25, please use cash or debit card. Debit cards with a pin are more secure than credit card. Although there is a myth that money can be stolen from you checking account in case of fraud, your liability is $50 if reported within 2 days and in many cases, it is waived if you report it promptly. Again, don’t sign for the debit transaction but, use you pin. It helps the merchant.
So, we as consumers may end up bearing the liability or the fees and so, there is nothing like “zero liability”.