Interesting study re credit card fees and rewards

[jaybee]

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash.

Do the people who write these laws realize there is no difference? Are they really that dense?

Smoke and mirrors. Have you seen the CC companies response to the new CC regulations? Can't charge fees for non use anymore? --- No problem, just reinstate the still legal annual fee at a higher rate. Most of the new CC regulations have been circumvented via use of clever rewording on charges and fees.

[wintergreen48]

At my College campus, I remember at the beginning of the Fall semester, there were a few stands offering credit cards, now they've practically disappeared.

Among other things, the CARD Act bans credit card companies from setting up 'in close proximity' to a college campus (the Federal Reserve Board's legal staff says that 'close proximity' means 'within 1,000 feet'). Gets really interesting when you have those 'colleges' that are in office buildings, when there is an existing bank branch on the first floor. I expect there will be some litigation about that.

Does an office building qualify as a college "campus"? --Bob

That's where the litigation will be. It will also come up more generally with colleges located in large cities (say, all those schools in NYC, or Boston, or Philadelphia) where the college buildings are scattered about, mixed in with non-college stuff.

[wintergreen48]

quote="jaybee"]

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash.

Do the people who write these laws realize there is no difference? Are they really that dense?

Smoke and mirrors. Have you seen the CC companies response to the new CC regulations? Can't charge fees for non use anymore? --- No problem, just reinstate the still legal annual fee at a higher rate. Most of the new CC regulations have been circumvented via use of clever rewording on charges and fees.[/quote]

When the CARD Act was passed May 2009, I noted that I expected that the banks would respond to the new limits on penalty fees by charging annual membership fees to customers who were not then paying AMF (the credit card business is largely fee driven rather than interest driven-- people may rant about 'usurious interest rates,' but banks do not make very much at all on credit card loan interest: most customers do not carry balances, and thus pay no interest at all; apart from a few horror stories you hear about, most customers who do carry balances do not carry large ones; and the people who do carry really huge balances generally do not pay much interest, either, because they often default on their loans entirely).

A few months ago, after the first phase of the CARD Act, ghostie reported that Citibank was imposing an AMF on her account, which would be waived if she spent $2,400/year. That is of course a back-door inactivity fee. As part of the final stage of implementing the CARD Act (it goes into effect August 22), the Federal Reserve Board revised Regulation Z to provide specifically that banks cannot do this, because... that is a back-door inactivity fee. The Official Staff Commentary notes that 'several industry commenters' had argued that they should be allowed to charge this kind of a fees, because it is not really a penalty fee or an inactivity fee, it is more like a rewards program, where the customer is rewarded for spending $2,400/year. The Fed's response was 'Pooh on that.' The Fed's response missed the point: they noted that the CARD Act geneally requires that 'penalty' fees must be based on a lender's actual 'costs,' and in the Fed's mind, there is no real specific 'cost' when a customer does not use a credit card, which is technically true, but misses the point that there IS a cost to maintaining a credit card account whether or not a customer uses it.

You can imagine how Citi will respond to this (if they have not done so already): they could (1) waive the fee for everyone, or (2) charge the fee to everyone. My money is on Door #2. So, in order to protect a few consumers against 'inactivity fees,' all customers will end up paying more fees.

I am not sure why Congress and the Fed want to protect people from 'inactivity fees.' Whether or not you use your credit card, so long as the account is open, there is a cost to maintain it. Different banks have different cost structures, but you can probably use a ballpark number that the 'typical' cost to maintain an account, for the life of the account, is something on the order of $70/annum. Just to break even, the bank needs to collect $70/annum from you. If you are an active spender, the bank can make this on the (passive) interchange fee, but if you do not use the card, the bank gets nothing at all from interchange, and must (1) charge some active fee (like an AMF) or (2) pass the costs of your account onto someone else who does pay fees or (3) close you out and write off the investment as a loss (as it happens, the CARD Act prohibits banks from closing out an account based solely upon the fact that the account does not incur any 'finance charges,' such as interest or certain fees-- that is, a bank cannot close an account just because the bank does not make any money on it, although a bank can close out an account if it is 'inactive' for three or more consecutive months) (note to self: make at least one charge on each credit card during each calendar quarter). You put all those rules together, and the only way to stay in business is to sock people with AMF... and to avoid having these fees categorized as illegal 'inactivity fees' you pretty much have to impose the AMF across the board.

I just LOVE that consumer protection.

These kinds of rules are very satisfying to the likes of American Express, which already charges an AMF for most of its customers and which maintains its own interchange network (so that it gets the full amount of interchange; banks who issue bank credit cards have to split the interchange with Mastercard and Visa, which own the interchange networks). And as it happens, my own company was very supportive of (and lobbied for) a lot of the real reforms in the CARD Act (the prohibitions on universal default, the prohibitions on hair-trigger repricing-- jacking up a customer's rate just because he/she is a couple days late on one payment, the phoney 0% or very low interest balance transfer offers, the requirements that fees must fairly and openly disclosed, etc.) but the restrictions on penalty-type fees will result in shifting the costs of 'bad things' from the people who actually do those 'bad things' (which is the way it is under the current structure) to the people who play by the rules. Deadbeats who pay late (or not at all), or who do not control their spending, or who go overlimit, or who bounce checks, or who otherwise do not play by the rules, will to a great extent avoid having to pay for the consequence of their actions; instead, the cost of that stuff will now be paid by the people who pay on time, who do not go overlimit, who do not break the rules. Kind of like the way most regulation is done.

[silvercamaro]

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash.

Do the people who write these laws realize there is no difference? Are they really that dense?

Have you paid attention to Congress in the past year? The last 10 years?

[ulysses5019]

You are correct that the rules (and some state laws) generally provide that a merchant cannot charge someone more for using a credit card, however, the rules (and all state laws of which I am aware) do allow merchants to offer a discount for cash.

Do the people who write these laws realize there is no difference? Are they really that dense?

Have you paid attention to Congress in the past year? The last 10 years?

Has anyone?