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26 April 2006
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The Monopolists In Your Wallet

Not counting your national government, which has a presumably legitimate monopoly on the creation of currency, you are also most likely bearing the avatars of some of the largest and most rapacious monopolies extant.  These monopolies are so powerful that they absorb tens of billions of dollars of money every year without a peep of complaint, either from the government trust busters, or in most cases, the lickspittle cliques of appeasers in the ranks of merchants and consumers.  Yes, that's YOUR money they're absorbing!

I refer, of course to the credit card companies.  And that paragraph you just read is, of course, quite the exaggeration.  You're actually giving your money to them.  Willingly.

What are you babbling about?  I love my credit cards and would be lost without them!  And those year-end rebates - I love spending them at exotic places I fly to with my frequent-flier miles that I also get from the credit cards.

You fool!  Don't you realize they're poisoning your mind and draining your precious bodily fluids?  We have got to stop them!  (Time for my meds??? Already?  OK...)

OK, I'm a little calmer now.  Let me 'splain.  To begin with:  I don't hate credit cards or credit card companies.  They perform a number of valuable services, including facilitating online commerce and eliminating the necessity of carrying that unsightly cash.  Well, at least one important service, anyway.  And, it should be no surprise, they make money doing this.  When you buy something with a credit card, you get billed $100 and the CC company gives the merchant $98*.  They keep the difference, which goes to pay their expenses, which are similar to those of any business.  They include salaries, rent, profit, frequent flier miles, and the $1 rebate to you.  In effect, the merchant is giving you a discount for using your credit card.  The poor guy paying cash gets nothing. 

So what's the problem?

You, Mr. CC fan, just paid $99 for your $100 purchase.  The guy who paid cash just paid $100 for his $100 purchase.  But you both only got $98 worth of stuff!  Why?  Because Mr. Merchant, a fellow who enjoys eating food with real utensils in a home with the normal complement of walls and appurtenances, knows that if he gives $2 to the CC company, he can only give you $98 worth of stuff for your $100.

So what's the problem?

Let's say Mr. Merchant sees an opportunity to make a few extra bucks.  He offers a $1 discount to cash purchasers.  He thinks, not surprisingly, that a cash buyer will buy from him rather than pay $100 elsewhere.  The cash buyer saves a buck, the merchant makes a buck.

So what's the problem?

Mr. Merchant can't do that!  He is forbidden to by the credit card company contract.  Can I make that pellucid?  The CC company is telling an independent merchant how he may conduct business with a third party, business that does not involve the use of a credit card! 

That's the problem, or at least the first half of the problem.

The second half is that you and I can't start a new credit card company with a different business model.  Let's say that we decide there would be a good opportunity for a credit card that would offer immediate rebates.  Instead of giving the user a 1% rebate at the end of the year, we'll give it to him when he makes a purchase.  Is this a good idea?  Will it work?  I would think so; I'd rather have a dollar now than a year from now; perhaps others feel that way too.  Our new credit card will be a roaring success.  Or not.  We're capitalists and entitled to take a risk on starting a business with a different model.  But whoops - we can't do this.  Not because we're unable to, not because the merchant doesn't want to, not because it's illegal, but because a third party - the original credit card companies, have by their actions prevented the merchant from contracting with us.  How so?  The merchant can't discount his goods to someone paying with the new RIKL card.  (It was my idea: I get to name it, you get to supply the startup funds.  We're still capitalists here.)

Well, then, can we offer a card that DOES allow the merchant to offer a discount for cash?  Sure, if you can imagine a counter clerk saying "If you don't pay with the VISA card, it's $100, but if you don't pay with the RIKL card, it's only $98."  In fact, no business model that allows the customer to pay a different amount based on which card he uses, or whether he uses a card at all, is permitted.

If a brief summary will help:

1:  One party tells a merchant how he can deal with his customers, whether or not that party is involved in the transaction.  Monopolistic and in most cases, illegal.

2:  One party prevents contracting with another party since their contract terms preclude different terms with anyone else.  Monopolistic.

3:  The one party, in aggregate, has an overwhelming share of the market, making it impossible for the merchant to cast them aside if he doesn't like their terms, and he has no power or option to negotiate different ones.  Monopolistic, or at least oligopolistic, a distinction without a difference in this case.

If a brief analogy will help:

In most states, when you make a purchase, you get dollar's worth of goods for $1.05 to $1.10.  The difference, of course, is called "sales tax."  And it's collected by the state government, which has passed the tax laws and owns jails.  In effect, the CC companies are also collecting a tax, the 2% difference between the "proper" price of the goods, and the price the customer must pay.  Perhaps you remember voting them into office; I don't.

If you've been following (casually) the recent lawsuit by merchants about credit card fees, I should point out that the discussion above has nothing to do with that.  That lawsuit seems to be more about the amount of the fees than the terms of the contract.  However, if the contract terms were modified to eliminate the monopolistic practices I decry, this lawsuit would lose its relevance.  The CC companies could charge whatever they care to, the merchants could compensate by charging more for CC transactions, and the customers would make the final decision by paying either with their card or with a check, currency, pieces of eight, or goats and chickens.  The point is, everyone gets to choose what's best for them - the decision isn't made by the credit card company.  Many people, myself included, would prefer the benefits and protections of a CC transaction for, say, an online or eBay purchase, and would happily pay the surcharge.  I just don't think that surcharge is warranted, and should not be decreed, for every enterprise that accepts credit cards.

Pegged the rantometer today!


*The numbers and percentages I'm using are for clarity.  They are not the exact amounts which vary all over the place and you can bet are calculated to the penny and small fractions thereof. 

Follow Up 05 August 2007

Guess what? The above rant is not entirely accurate. In fact, you can't surcharge credit card sales, but you can discount sales for cash. Why didn't I know it when I originally wrote this? Because it's a double-secret, that's why!

2006-7
Richard Factor