Tag: credit cards

  • European Commission Rules MasterCard’s Interchange Fees Are Illegal

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    Adam Levitin

    In December, the European Commission antitrust authority, the Directorate General Competition, ruled that MasterCard’s interchange fees are illegal. (I realize it is now mid-January, but I wasn’t blogging when it the ruling came out.)  MasterCard is, of course, appealing. 

    Although ruling this made page 4 of the Wall Street Journal, it has gotten very little attention otherwise in the business or general press.  ( The ruling has huge ramifications for consumers and merchants.  The underlying issue is technical, however, but well worth understanding.   

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  • Your Free Lottery Ticket: Credit Card Truncation and Identity Theft

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    Adam Levitin

    You might be holding a litigation lottery ticket without knowing it.
    Take a look at your most recent credit card receipt. The receipt likely
    shows your credit card account number—but with everything except the
    last

    Confused? The explanation lies in a strange little federal statute and
    tells us some very important things about the root causes of a key
    consumer credit problem–identity theft.

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  • Credit Card Charge-Off Rates

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    Adam Levitin

    It’s great to be a permanent addition to Credit Slips. This blog has become a really great forum for discussing credit and debt issues, and I’m looking forward to contributing to the conversation. It’s a nice way to start a new year.

    As it is New Year’s Eve, people are making resolutions, including about their finances, and that puts me in the mood to think about how to measure the effect of the BAPCPA on bankruptcy and credit. (Happy New Year, btw).

    One way to measure the effect of the BAPCPA is to look at credit card charge-off rates. Credit card issuers have to charge off debts that are 180 days delinquent or otherwise uncollectable, such as by a bankruptcy discharge. Below the break are two graphs (my apologies for the HTML layout issues), one showing historical credit card charge-off levels, and the other the percentage of those charge-offs related to bankruptcy.

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  • The Benefits of Accepting Credit Cards

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    Adam Levitin

    In a previous post I wrote about the costs of accepting credit cards. It is important to note that merchants derive lots of benefits from card acceptance, including and lower credit risk (at least compared to checks), easier bookkeeping and currency conversion, lower theft risk (less cash in the till), and improved checkout speed. The most important benefit, though, is increased sales. (See an example of this claim here.) But is that right? Do consumers really purchase more because they are purchasing with credit cards? Put more technically, does price elasticity depend on payment method?

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  • Who’s Paying for Your Rewards Points?

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    Adam Levitin

    The relationship between consumers and credit cards gets a lot of attention. But merchants also have relationships with credit cards, and the dynamics of this relationship have significant effects on consumers’ use of credit cards as well as on the competitive landscape in the credit card industry. A lot of my academic work has related to this (I apologize for the self-promoting links), and this post is meant to provide a short summary of some of the issues that arise in this relationship. There are a lot of twists that I cannot convey in this blog posting, but I am happy to carry on a conversation in the comments and refer readers to my articles on the topic for more detail (the most recent papers are at the bottom of the linked webpage).

    Merchants pay banks a fee on every credit card transaction. The fee is referred to varying as the “merchant discount fee” or the “interchange fee.” Because of these fees, credit card transactions are much more expensive for merchants than transactions on most other consumer payment systems: cash, checks, ACH, PIN debit (but not signature debit). There is also significant cost variation among credit cards. Some cards, such as rewards and corporate cards can cost merchants twice as much as others. These fees (tens of billions of dollars) are vital to credit card networks’ profitability and have led merchants to attempt all sorts of strategies to minimize their payment costs.

    The largest component of the fee merchants pay goes to finance credit card rewards programs, which in turn generate more credit card transactions. Although merchants finance the rewards programs, they derive little or no benefit from them. Rather than generating additional sales, rewards programs merely induce consumers to shift transactions from less expensive payment systems to more expensive rewards credit cards. So why, then, do all consumers pay the same price for purchases, regardless of the means of payment?

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  • (What Determines) What’s in Your Wallet?

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    Adam Levitin

    How do credit card companies make their lending decisions? Or more precisely, how do they decide who to target with which “pre-approved” offer or other solicitation? This is one of the major “known unknowns”. I’d like to give some intentionally provocative musings and hopefully start a discussion in the comments.

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