More about how credit cards work

More about how credit cards work

Posted Oct 5, 2003 1:04 UTC (Sun) by giraffedata (subscriber, #1954)
In reply to: A Little About Funding LinuxFund.org by torsten
Parent article: Software suspend work funded

A few of corrections about the credit card industry:

First, a clarification: a "credit card company" is a bank. Banks issue credit cards to people and banks make arrangements with merchants to accept credit cards. To provide a cohesive system, banks form associations that set up computer networks and uniform rules and such. Visa and Mastercard are examples of those associations.

I can't believe most people don't know that it costs a merchant a per centage of the purchase amount to do a credit card transaction. How else would credit card processing and risk be paid for?

There isn't a federal law prohibiting the merchant from passing along the cost of the credit card transaction. There are state laws (I don't know how many states) and contracts between the merchants and the banks. And said contracts are usually required by the credit card association.

California has such a law, but it doesn't really prevent the merchant from charging the customer the fee. It explicitly says it's OK to offer cash customers a discount, so it's really just a matter of presentation.

I don't know of any law that prevents a merchant from disclosing the fee he pays. I assume merchants that get really good deals have contracts that prevent them from disclosing how good, though.

I managed a small California store that took credit cards a few years ago. We got just about the highest rate possible for a brick and mortar store, and on MC and Visa it was 3%. Amex, Diner's Club, and Discover were more. Since then, the industry has moved to a more sane pricing structure where the fee is a fixed amount per transaction, plus a per centage of the amount. I heard 30 cents per transaction plus 2% is typical.

By the way, California also has a law, and the banks have contract provisions, preventing the merchant from setting a minimum purchase for credit cards. Neither this nor the credit card fee rule are enforced, even when consumers complain.

The bank does pay part of its fee to the organization named on the card (the "sponsor"). This is not a kickback. A kickback is like a bribe - a payment for betraying a trust. This is simply a commission for providing a legitimate service -- selling the credit card account.

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