Why Retailers Would Benefit If We Stopped Using Our Credit Cards

This is a post courtesy of Adazon.

When people think of credit cards they think of the costs to the consumer – the interest rates, the minimum payments, the fees levied annually and for late payments. However credit cards also represent a cost to the retailer. Everytime we pay for something by credit card, the retailer has to pay an “interchange fee”, which is split between the bank issuing the card and the company that administers the transactions (VISA, Mastercard, American Express).

These fees which average about 2% to 2.75% per transaction, hurt retailers badly, especially the small ones. Throw in a recession where retailers are forced to discount to attract custom, and business margins become waifer thin. Meanwhile credit card companies are using the credit crunch as an excuse to hike interest rates, and increase minimum payments, so that the consumer has such difficulty in servicing their debt that they have little discretionary income left to spend in the shops.

Retailers have put up with the interchange fee as they have long feared that if they refused to accept credit cards they would lose business because the consumer was addicted to plastic. UK retailer Marks and Spencers held out till 1999, refusing to accept credit cards at their stores. But in the end they caved to the plastic kings, because customers used to only using plastic avoided their stores – the move to accepting credit cards cost them about £20 million a year. As more and more people used credit cards, total interchange payments rose from $16 billion in 2001, to $42 billion in 2007.

However, given that consumers can no longer get credit in the post credit-crunch world, it might be beneficial for both consumer and retailer to make the move back to cash. The retailer reduces their costs as a result, which might enable them to stay in business and hence preserve jobs. And a customer using cash is living within their means, not accumulating debt and not paying interest. It’s win-win for everyone, except the banks. But given the banks’ dreadful behaviour in causing the current crisis in the first place, they are the least of our concerns.