Credit Cards

A week or so ago I stood behind a woman in an express checkout line.  She had two bags of groceries and was paying for them with a major credit card.  She was outraged when her card was declined. She said she hadn’t “maxed out” and couldn’t understand why the charge was denied.  Nevertheless, she produced another card and completed her purchase.  From start to finish the transaction took three or four minutes.

I wondered what the cost of the transaction was to the supermarket, to the woman and to me.  I was curious about the credit card company’s share of that transaction.  I wanted to know how some of our local merchants felt about credit cards and what percentage of their business was done with plastic.

First, some history.  An entrepreneur working with merchants and Flatbush Bank in the late 1940’s signed consumers from Long Island communities to a convenience card.  The idea was to give folks the opportunity to purchase at a number of shops and pay Flatbush Bank once a month.  The idea caught on and today more than a trillion dollars a year is charged, more than is spent in cash.  How much is a trillion? One followed by 12 zeros. 

In the beginning these convenience cards had limits of $300 and merchants didn’t have to get approval on purchases below $25.  In 1950, Diner’s Club introduced the first major travel and entertainment card.  In 1958 American Express and Carte Blanche issued cards.  Later that same year Bank of America in California became the first bank to aggressively enter the field. They sent out a mass mailing of 60,000 BankAmericards with pre-approved credit lines to Fresno residents. Within 15 months California had more than two million users. The rest of the country soon followed.

I purchase gas and tires at Cranford Sunoco so I stopped in and talked to Kurt Petchow.  These are business expenses for me so I always use a Sunoco card.  Kurt said he doesn’t pay a fee on purchases charged on the Sunoco card, but the rate for all other cards is 1.5%. Sunoco’s corporate arm has negotiated that rate for all of its dealers. The money charged is in his account within 24 hours.  He has no bad debt or collection cost.  Kurt also likes credit card because he’s happy to have less cash in the register because every gas station is a robbery target.  Once the card is accepted, the issuer of the card bears responsibility for collection and fraud.  Kurt says 60% of his business is done through credit cards.

I asked Kurt if customers willing to pay cash ever asked for any reduction in price.  Kurt said, “Not often.” Ed Force, our former Mayor, was standing nearby and told me that lobbyist for the banks as well as the State Department of Taxation were vehemently opposed to different price structures for cash versus credit purchases. Legislation was passed prohibiting this practice.

Cranford merchants say most of their customers pay with credit.  Stefanie Lalor, owner of The Artist Framer, says she waits 30 days to be reimbursed on her sales charged to American Express but by doing so she brings that fee under 2 percent. Nearly all of her business is done on credit cards and she pays a fee of less than 2%.  I also talked to Jude Zimmerman of Jude’s and Bob O’Sullivan of The Alden Street Clothier and they tell me the same story.  American Express charges them a higher rate for its card than either Visa or Mastercard.  Bob added that the rates have declined over the years as computerized record keeping has improved.  Rates used to be between 4 and 6%.

I also caught up with Bob Venner of Bergen Camera and he confirmed what Jude and Bob had told me.  American Express may charge a higher fee but you’re not going to do high-end business or keep a corporate clientele without it. Again, all of the merchants like the way the system works.  They get paid quickly and there’s no collection hassle.

So, this is what I learned in my very unscientific survey.  The more expensive the average purchase, the more likely it is that a credit card will be used.  The average cost to the consumer at the retailer is between 1.5 and 2%.  This is built in to the cost of the goods or services being sold and that cost is borne both by those who use credit and those who pay with cash.

The woman in front of me at the supermarket suffered some embarrassment when her card was rejected and I waited longer than I wanted, but the store was probably pleased.  Credit transactions are processed almost as quickly as cash purchases and with less likelihood that the cashier will make an error.

Still, I’m uncomfortable.  A large number of the credit purchases in supermarkets are generated because those credit cards are tied into air mileage programs. But, by the time an air ticket has been earned the grocer has had to build in $500 or more in mark-up to pay for it. 

Maybe what bothers me is that while people with limited means may not shop at Jude’s or at The Alden Street Clothier, they must still buy food.  I’m not an ethicist, but I don’t want to be responsible for the higher milk and bread prices they’re required to pay.  I’ll continue to use cash or write a check for my groceries.