The Credit Card Paradox

I remember CHARGEX; introduced in the late1970s it revolutionised spending by masses of ordinary people. Sure, credit had existed for years, and there were cards like Diners Club that offered a very special clientele the opportunity to “charge” their dinners, but there was nothing like CHARGEX.

Oddly, given today’s proliferation of personal credit, it had a pretty slow start. There were cards usually reflecting travel aspirations or early attempts by businesses to lure their clients into their own network of allied businesses.

It is an interesting business in many ways, but there is one characteristic that defines individual credit; and this is the card providers’ ability to force the costs of transactions onto the merchants; not the “users” of credit, but the thousands of businesses, large and small, that accept the cards.

The credit card companies have successfully become a 2 - 3% partner in everyone’s company; and take its rake right off the top.

Think about that. As much as 3%, nearly one dollar (or pound or euro) from every thirty that pass through a business is siphoned off to satisfy the avaricious appetites of the credit card companies.

In the beginning, merchants paid this price as the cost of luring the “best” customers to their restaurants, hotels and resorts. It also offered merchants access to almost instant cash, eliminating the requirement to offer credit terms, and the inherent risks that this might bring. This exclusivity, however, has long gone. Mailboxes are stuffed daily with enticements to apply for more and more cards offering an eye popping selection of benefits.

Cash rebates, airline points, access to hard-to-get concert tickets, toasters and more; there is no end to the imagination of the card companies in their quest to attain more card holders, and more valuable debt. There is little limit to the punitive levels of interest charged, and slowly but surely, we are all crushed by the relentless steamroller of credit cards.

As a merchant, I am obliged to accept cards as payment at par with cash; this is written in stone, although I see more and more companies deliberately ignoring this rule. However, they are unlikely to take on Ryanair for charging surcharges to use cards; a contract, as we all know, is an agreement binding on the weaker party.

Things are changing however; I for one and fed up with the brutality of my merchant agreements, and am no longer accepting American Express. The final straw in that relationship was a letter advising that the discount rate for premium cards was to be increased “in order for us to offer our mutual premium clients the best purchasing experience”, or something like that.

The reality was that AMEX wanted to offer their premium cardholders new and exciting benefits, and as always, tossed the cost onto the merchants. When will this nonsense stop? Only when cards are actually priced to reflect the benefits offered; however, there are probably limited folks willing to pay a $500 annual fee. So the cost is shifted in its entirety to the only participant in the transaction with no additional benefit!

The paradox, of course, is that the very plastic that has become the lubricant of global commerce is rushing headlong toward a parapet of rejection.

Imagine, if you will, the costs to a major international airline to accept credit cards. Firstly in the rare firmament of airline profits, an income of 2 - 3% of revenue would be spectacular; VISA, MasterCard and AMEX take this amount from the airlines daily without even a blink. Secondly, the carriers are required to post extraordinary levels of security to “protect” the card companies from a potential default. While one may be sympathetic to this line of thinking, it still means that Air Canada (for example) has in excess of $1.2 billion (yes, billion) tied up in guarantees; working capital that could otherwise be put to work developing their airline.

This are going to change; one possible and logical route for the airlines lies in the resurrection of their own credit card, the Universal Air Travel Plan. Perhaps offering their best clients the option for a cost/revenue split to use the UATP, they will be able to switch billions of dollars of business away from the current brand cards. It would be difficult, of course, but as the primary global users of the processing functions of VISA and MasterCard any revolution would have to start with the airlines.

And how much money do the global hotel brands pay? An extraordinary amount of money is involved, but in this case, the value of the expense has fallen way away from the pipers who should start to call the tune.