The True Cost of Credit

My former student Sean Harper has put together a nifty little web site,, that allows you to see how much merchants are charged when you use your credit card.

I was surprised at how high the fees were. For instance, in this example of a Mastercard, when you buy a $1.50 pack of gum at a convenience store, the credit-card company gets 28 cents. Even on big-ticket items like airline tickets, the credit-card company collects nearly 3 percent.

This is not to say that there is anything wrong with those fees. I presume that the issuing banks can choose their own fees (within reason), and that there is more or less free entry — which suggests that the industry should be pretty competitive. Merchants accept credit cards, which implies that the benefits of doing so outweigh the costs.

Nonetheless, credit-card fees turn out to be a big cost of being a retailer. According to the numbers at the web site, if everyone used a credit card when shopping at Best Buy, credit-card companies would collect roughly $1 billion a year in fees from Best Buy.

(See also a nice post on about


How many businesses raise prices to get more business? The Visa/MasterCard companies have such a business model.

A simple (incomplete but complete enough) way to look at this business... There are two kinds of fees charged by V/MC: Interchange which is set by V/MC and transaction fees which are set by the credit card processor. Transaction fees are very competitive for the large retailers.

Interchange is not. Since the banks get interchange, it is in their interest to issue cards with the highest interchange rate. If Visa wants more of their cards issued, they need to raise prices. By raising prices, banks will be incented to issue more Visa cards and the retailer has no choice but to accept those cards. Next year, MC will raise rates and the endless game will continue.

Note: AMEX is different. Or at least is used to be different. More expensive, but different. Discover is different.

Regarding BBY paying $1 billion in credit card fees: I think the number is too high. $40 billion in sales x 85% credit card transactions (a guess) x 60% V/MC/AMEX/DISC (another guess) x 2.3% blended discount rate (a 3rd guess) = $470 billion. My assumptions can be off a lot (they are not), and we're still far from $1 billion.

Best Buy also pays something for most private label credit card transactions, but those costs should be considered marketing expenses based on how BBY uses its PLC program, not credit card fees.

Sean Harper should do better research.



First, the credit card companies tell retailers that they cannot charge a different price (cash discount, credit card surcharge) between cash or credit. But local gov'ts do this. I've tried to turn them in for breaking the rules but Visa wasn't interested. Seems like a double standard.

Second, the US Gov't uses credit cards pretty heavily. This is a huge amount of money that the banks are making off of the taxpayers. When it's easier for the gov't to drop a million on a credit card versus doing some paperwork... something is wrong.


I liev in Spain where you can pay almost everywhere with credit card. I lived in Rotterdam for 4 moths and I was surprised credit card was not allowed in many places which makes sense when you see those fees.


As I have been involved with a system for a Credit Card Company's Business Division, perhaps I can offer some info.
The Credit Card terminals in a shop are supplied by a wholesaler (the business division) who supplies a service for Visa Maestro JCB Amex. The Wholesaler makes a large chunk of their profit out of the difference between what they charge to the shop for a transaction and what they are charged by Visa etc. The margin that the Wholesale / Business division is far less than the charge although the charge is based on the risk involved. As to competition, in the market that I work in, there are 16 separate suppliers of the wholesale service and these may be independent of the card issuers although that independence varies dramatically.


>> If businesses differentially priced based on use of a card vs. cash (as my mechanic does) I would gladly carry more cash with me.

They can't - their agreement prevents them from doing this.


I went to that website and had a look. Note that it is mostly small, individual stores they're showing. These are the businesses with the least amount of negotiating power. Larger retailers don't pay anywhere near what that site is reporting.


Not sure if this has been mentioned, but IKEA gives shoppers a coupon for 3% off their next purchase if they use their debit (bank) card instead of their credit card (or their debit card as a credit card). IKEA saves the transaction fee for not having to process the credit card payment and the shopper saves 3% on their next visit.


I work with MasterCard. We have recently published a brochure that I believe will provide additional context to this discussion.


Years ago, gas stations offered a cash price and a credit card price. I understand this was litigated by the credit card companies because it discriminated against their service. Can merchants offer a cash discount today or must they offer one price, regardless whether it is a credit card or cash?

Bill Lowery

I have learned some of the coolest things from this blog. I love hearing about all of these random resources to do random things.


Yes, gas stations do use differential pricing. Along interstate highways in the US it is a common "bait and switch" tactic to advertise the lowest price at the exit ramp on the giant sign in the sky, but then show that price as "cash only" at the pump.

Whenever I am induced into one of these stations by their false promise of the cheapest price, I simply drive on to the next not-so-deceptive station. In California I encountered one particular brand that consistently had the lowest gas price - until a card was placed in the POS terminal. It then asked me to consent to a "transaction fee" of about $0.45 to be added to the bill. I stopped buying their gas altogether and immediately.

Bottom line, I don't care what the profit margin is, what the cost of using the card is, or whether there is unrestricted entry into the card market (although, if it were possible, I would support that on grounds that it is equally usurious as lack of competition in the cable TV/broadband market). What I care most about is truth about cost or price to the extent that I can make intelligent choices. If the transaction starts as a lie, there is no point in going any further. I'll pay a higher price for a truthful better value every time.


Phil H

Several years ago, the laws governing CC payments here in Australia were changed. Previously, vendors were required by contract with CC suppliers to charge the same amount for CC and non-CC purchases. This effectively concealed the cost of the transactions from the consumer, and meant that all retail prices went up enough to cover the costs of CC transactions, whether a CC was used or not.

During its review, the government worked out that this was about equal to a 1%-1.5% sales tax on all retail purchases, paid to the CC providers. I can't recall how much this came to annually, but I think it was in the low billions.

Since then, retailers have been permitted by law to charge the CC fee to the consumer, if they choose. Many choose not to, so they still collect the 'sales tax'. Other places now have a minimum amount for CC purchases, or just tack on a fee. No doubt the latter means that some people will use cash instead.



One thing to remember as well.... if you as a merchant accept payment from a card that was stolen (not knowing so at the time), you carry 100% of the liability.

Ex. We sold equipment to a customer who paid by credit card, we obtained authorizations and sales approval before shipping equipment to customer. Three days later money deposited into our account by credit card company (10,000 dollars and change). Six weeks later, notified by FBI that we had accepted fraudalent cards and assisted them in making an arrest. Meantime, the credit card company had pulled the money back out of our account ($10,000 I remind you) and informed us it was our liability. Please note: we are a SMALL business and lost all of that equipment (as it was not recovered during the arrests it had been sent to South Africa) and we also lost the money.

Although we still accept credit cards, we try to minimize our exposure as best we can.


Wai L. Chui

The problem is not just the credit card. It is really the cardholders' "I don't care" attitude. It is well known that banks are predatory when it comes to credit card. THey charge rates at the level of loan sharks. They charge fees and then charge you interest on top of it. Why do people still carry so much balance, especially middle class people? The banks may not tell you the interest rate. But they cannot avoid telling you how much is the finance charge of the month. It is part of the bill every month. If a person who makes $50,000 a year does not think about a $300 finance charge per month, that person is asking for the bank to fleece him or her.


In Greece, sensible use of the credit card can lead to respectable savings for a consumer:
- A lot of retailers are willing to offer discounts by up to 7% for a cash payment to any buyer threatening creadit card use. I suspect tax evasion as the major motiv behind this generocity.
- A lot of credit cards are offering discounts in the 3 - 5% region. And all this for very low annual fees. I suppose those consumers going down the drain of interest payments compensate for these generous discounts.

Random thoughts

Assuming Best Buy pays 3% to credit card issuer for all the transactions, then in order to pay $1 bn in fees the actual sales that had to happen in Best buy would have to be $33 bn per year. In the case we do not have any credit cards Best buy would have a tough time reaching that target. Credit has actually made such targets reachable in many cases.

Credit is a double edged sword, if we are not using it responsibly then we may have to pay the price for owning it.


Credit card surcharges are just a cost of mistrust. If you don't worry about getting a refund from the merchant and the merchant doesn't worry about getting paid by you , both can avoid credit card surcharges in addition to many other costs like sales tax and income tax. (wink!wink!)

I buy from a small mom'n'pop grocery store near my house , I've known them for 8 years , I pay them in cash , they give me a 10% discount. Any problem with the merchandise I get a refund no questions asked. And if I'am short of cash I pay them end of the month. The value of the trust that we have built.


Cheers for writing about this. FYI - here's some more info about Gas Cards / Gas Rewards Credit Cards you might like!


Accepting credit cards is costly! In a credit card transaction there are a lot of participants, each will get his own steak. I think the best way to reduce the costs is comparing merchant accounts there are sites (such as )that make it easy to apply with few providers. I applied with 4. Took me a while to understand the fees in the industry. I negotiated and managed to reach, what I see as an affordable fee package.


Here's a new WSJ article about this:

cash, credit, and checks do have a cost, but credit is likely the highest, and has (as the article points out) some pretty perverse incentives.

The major barrier to entry is the requirement to charge the same: any competing card with a lower fee would, like cash, end up bearing the cost of the more expensive credit card fees (spread out in the general price), largely killing any competitive advantage they might have.