Let’s face it: credit and debit cards are a godsend. They’re safe, convenient, and offer you instant access to either cash in your account or what is basically an instant revolving loan. But few people actually know that there is extra money that changes hands several times just because you paid with plastic. For example, Visa may charge your bank every time you swipe, which in turn charges the merchant a little bit more; some vendors even pass that cost on to the customer, charging a small fee for credit transactions. As it turns out, there are now quite a few laws that regulate this activity, some of which went into effect just days ago. If you aren’t careful, however, some stores will ignore the laws and charge you pretty much whatever and whenever they want. Here’s what you need to know.
A Recap of the Basics
First of all, and as mentioned before, there is a difference between a debit and credit card; Debit cards take cash directly out of a bank account, while credit cards front the money and run up a balance that you pay off later with cash. If you input your PIN at the time of the transaction, it is a debit transaction. If sign the receipt, it is credit. Second, credit transactions can still occur with a debit card, although the two types of transactions work basically the same way with that debit card. The difference is that the transaction goes through Visa first, and then the money is taken out of your account the next day. I’ll explain the importance of this later. Third, there is a difference between a credit surcharge (a store charging you a small fee for using credit) and requiring a minimum transaction amount (a bar telling you to order $10 worth of drinks before you can use a card). Remember that also.
The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 made the biggest changes to card transactions since they came into widespread use through a section known as the Durbin Amendment. There are a lot of provisions in there, some of which are more controversial than others, so I’ll try to pick through the more important ones briefly:
– The government now has the ability to regulate transaction minimums; the current maximum that vendors can require is $10. Before this, transaction minimums were prohibited by Visa, Mastercard, and American Express’ agreements with merchants.
– Transaction minimums on debit transactions are completely illegal.
– Debit transaction fees charged to the merchants by the banks are now capped at 21¢ plus .05% of the transaction. This cap used to be controlled by the card companies, and banks were able to charge about twice as much before Dodd-Frank. Now it is regulated by the Federal Reserve
– Credit card companies are still free to charge banks and merchants an initial transaction fee; this averaged 12¢ in 2011, but it depends on the type of transaction. Debit-with-PIN was the lowest, followed by debit-with-signature, followed by credit.
– Some states have passed laws banning card surcharges, transaction minimums, or both; more on that at the end of the article.
The System in Practice
To tie all these concepts together, here are a few scenarios.
First, you go into a convenience store, and get $5 worth of food. If you pay with cash or check, the store will get to keep all of the $5 you give them. If you pay with a Visa debit card, Visa will charge your bank around 12¢, and your bank will charge the store about 20¢, meaning that the store only keeps $4.80. Some stores will increase their prices to cover the fee, but many small shops have to keep their prices low to be able to attract customers and will eventually have to eat the cost of the transaction. If you paid through debit-with-signature or with a credit card, these costs are even higher. This is a situation where the store is getting screwed.
Now, rewind: this time, the store has a sign that says $10 card minimum. You don’t have cash, but you also don’t want to buy $10 worth of stuff. If all you have with you is a credit card, the store can refuse to sell you the $5 worth of goods; if all you have is a debit card, they cannot refuse the transaction. Doing so would violate their agreements with Visa. However, people that do not know this will most of the time just buy another few items that they neither want nor need to get over the $10 mark. This is a situation when the customer gets screwed.
The third scenario is tricky: you are at a bar, and when you go to get a $5 beer, they tell you the transaction minimum is $7. The problem is, if you have a debit card, most bars are not equipped with PIN transaction systems. The result is that even if you give them a debit card, they will still run it as a credit transaction and aren’t prohibited from having a minimum transaction amount. Not having a PIN machine in the sometimes chaotic environment of a bar is a clever way to boost revenues, but let’s face it; after your second drink, you don’t care anyways.
The Bottom Line
I’ve spent a while talking about how transaction fees and minimums can be a pain for both consumers and merchants, but there really are some good things about them. For one, they guarantee that credit card companies will stick around and bring all of their benefits to customers simply for spending money. They also provide extra revenue to the banks, allowing them to offer products like free checking and other convenient services. Unfortunately, most of this revenue comes from the bottom lines of individual stores, but the widespread availability and use of credit and debit cards has also helped facilitate economic activity, bringing a net benefit to the vendor.
That being said, there are still many stores out there that will try to take advantage of their customers who simple don’t know the rules – and you better believe that every business owner knows the rules inside and out. Look at your receipts to make sure there aren’t any mysterious extra charges that they tried to sneak in once you handed them a card. I recently went to a convenience store three times before discovering that the cashier sneakily added 50¢ onto my total every time because I paid with a card. That far exceeded any fees they paid for the transaction, and I told them that it was very dishonest because they didn’t even have the courtesy to warn me so I could maybe pick an alternative form of payment. Besides, may card transaction fees are already built into the price, so charging a separate fee can basically just signal greed.
If a store is trying to screw you on a purchase, call them out on it. If they are trying to charge you minimums on a debit card, remind them that what they are doing violates their contracts with the card company. If they ever try to charge you more than a minimum of $10 for any card transaction, tell them you work for the Federal Reserve and that they are going to be hearing from you soon. Let them know that you probably won’t be shopping there again and hopefully they will rethink their practices. The law is there to protect you – use it!