Merchants are starting to move away from debit and credit cards, as the interchange fees they have to pay banks to get paid are cumbersome and expensive. Photo: MoneyBlogNewz/Flickr.com/CC-BY

There is a huge showdown going on between banks, merchants, regulators and legislators over interchange fees on credit cards and debit cards. Interchange fees are charged to merchants every time a customer uses a card, and the controversy over the fees is leading businesses to rebel against the way things have been done for years.

Card fees becoming less palatable to businesses

Some people may have noticed that coffee shops, gas stations and other businesses have begun imposing a minimum purchase amount a person has to make in order to use a debit card or credit card, and there’s a reason for it. It’s called an interchange fee, and the bank that a person has their credit or debit card through charges a fee to pay the customer’s charge, and it costs, on average, 44 cents according to CNN. Banks are fighting furiously to keep the fees as they are because they make billions for the banking industry. Merchants are championing the legislation because they are fed up with having to pay banks to get money they are owed. Anthem Blue Cross, according to the Los Angeles Times, is going to start charging customers to make automatic payments from their credit or debit card account.

Credit card companies moving into prepaid cards

Some credit card companies are moving into the prepaid card market. For instance, American Express recently announced that it is launching a new prepaid debit card, according to Time. Visa and MasterCard already offer them, along with companies like GreenDot and others. It turns out there’s a good reason. Prepaid debit cards, which have to be reloaded with cash but don’t have overdraft fees and don’t require a bank account to get, aren’t subject to the same regulations. GreenDot, according to Reuters, derived 30 percent of its income in 2010 from interchange fees and, unlike debit card counterparts from Bank of America or JPMorgan Chase, prepaid debit cards are exempted from the interchange fee cap.

It’s chip to be Square

Not everyone has to accept traditional payments systems or opt to only accept cash. Mobile payment system technology is starting to increase its presence in the marketplace. For instance, the Square mobile payment system has a card reader that plugs into a smartphone, and users can download the Square application to begin accepting payments through mobile devices. It’s compatible with Android phones, iPhones and iPads. Square is also working on a payment network in which merchants using the service can deduct payments from a person’s debit or credit account by simply verifying the customer’s identity and don’t have to swipe a card, according to the Washington Post. There are also Near-Field Communication systems being implemented nationwide. NFC technology uses a chip mounted in a card or a cellular phone that a reader registers and charges the appropriate linked account. South Korea, according to Reuters, plans to have 300,000 NFC equipped merchants by the end of the year.

Sources

CNN

Los Angeles Times

Time

Reuters on Green Dot

Washington Post

Reuters on mobile payment systems

New American Express prepaid debit card coming next Tuesday. Image: AMERICANEXPRESSONLINE/Flickr/CC BY

American Express will start issuing a new prepaid debit card June 21. The company, previously known for aiming at higher-end, luxury buyers, is staking new ground by targeting the average consumer. Other card-issuers are expected to follow suit.

Building on the PASS card

Lat year, American Express introduced the PASS prepaid card, designed to help parents to keep their children on a financial leash. However, the company soon realized that prepaid cards had a far greater potential. Last year, According to the industry group Network Branded Prepaid Card Association, U.S. consumers spent about $37 billion on prepaid cards.  That is double the amount from last year and quadruple the figure from 2008.

Reaching a large demographic

Dan Schulman of American Express stated, “this card is for everyone. It could be for a parent who wants to give their kid a card, it could be for someone who doesn’t have access to credit. It’s a very large market that spans demographics.”

No bank is required  for the new cards, and there is a built-in safeguard against debt. A consumers can only spend what is loaded onto the card.

A promise of minimal fees

American Express promises to shave the fees normally associated with prepaid cards. The company will charge a fee of $4.95 when money is loaded onto the card, although no fee is charged if money is transferred from an existing bank account. The only other fee is a $2 charge whenever the card is used at an ATM. Card holders, however, are allowed one free ATM transaction per month.

Other benefits of the new card

The American Express card will come with online history and balance checks. In addition, card users will receive the other benefits associated with American Express cards, such as purchase protection and roadside assistance.

Other card issuers likely to follow

Given the growth in the prepaid card industry, other banks and card-issuers are expected to follow in the footsteps of American Express. Gerri Detweiler, personal finance expert at Credit.com, said, “I can’t imagine that every large issuer isn’t looking hard at prepaid cards right now.”

Not affected by credit card legislation

Consumer groups warn that prepaid cards are not covered by the CARD Act, which Congress passed last year to limit credit card fees. Prepaid cards are also exempt from the Durbin Amendment, a law soon to take effect that limits “swipe fees,” the fees that banks charge retailers when customers use debit cards. Banks may see the prepaid card as a alternative source of revenue lost from other card transactions and take advantage of the loophole.

The American Express prepaid card will be available at no cost online and will later be available in drug stores and other retail locations. The card purchase fee will be about $5.

Sources

Huffington Post
CNN
Chicago Tribune

In America, credit card history isn’t something most people think about. This is because credit and credit cards appear to be a timeless method of payment. However, the use of plastic payments is, for the most part, a twentieth century luxury. At the turn of that century, a well-organized system and practice of credit simply didn’t exist. Today, however, most habitually rely on the convenient use of plastic to secure a variety of services and items. So, how exactly did the phenomenon known as credit spread so rapidly and who is the person responsible for inventing the first credit card?

Early Systems of Credit

During the 1920’s, the use of credit was regularly practiced in both the hotel, as well as the oil industries who commonly extended credit to their fondest customers. This practice then allowed patrons to pay for purchases or services later. Initially, credit was offered directly from merchants to their consumers who, in turn, also directly repaid their debts back to the original merchant.

Mimicking the success of hotels and oil companies, stores eventually began offering credit to attract new customers and as a way of boosting existing customer loyalty. As a new credit concept began to grow in popularity with consumers, merchants formed groups based on agreements to do business with consumers by accepting credit purchases on cards from other stores within their group. This alliance allowed customers the luxury of shopping at a wider number of stores while using the same agreement they enjoyed with the original merchant.

Early Charge Cards

John Briggins later created the charge card when he introduced the “Charge-It” program in the mid-1940s, which permitted merchants to directly deposit sales slips at their bank and, in turn, the bank would then bill that merchant’s credit customers. Just a few short years after that, the Diner’s Club card was introduced, which allowed customers to enjoy dining at their choice of 27 restaurants throughout New York, but pay their bill later. Even though the “Charge-It” arrangement, as well as the Diner’s Club agreement share a role in the history, which laid the foundation for credit cards as we know them today, neither of these is considered to be a true credit program. This is because, at that time, customers were bound to paying the whole amount due at each billing. Of course, this is in contrast to installment payments currently accepted by most credit card companies today. Such affords customers the opportunity to carry balances over several months. Each of these early programs, though, has its place in the invention of true credit cards, as these programs are the conceptual foundations upon which today’s credit system was eventually created.

American Express and Bank of America Take Credit to New Heights

In 1958, American Express offered their premier charge card with Bank of America debuting the Bankamericard later that year. Soon after this the Bankamericard was re-named as the Visa card and is actually the first credit card to be almost universally used by consumers and accepted by merchants across America, as well as other countries.

Credit Cards Then and Now

Recalling the invention of the credit card unveils a perfect illustration of how rapidly strong business ideas will spread and transform how business is done worldwide. In a very short time period, the credit card has grown into a popular and convenient tool routinely used in the marketplace. Understanding their purpose and how they came into being, helps in respecting how they are used today.

After 24 years on the job, Federal Reserve Bank of Minneapolis president Gary Stern retired last month. Today it was announced that Narayana Kocherlakota will  be his replacement, taking over the position immediately. He will become a voting member of the Federal Open Market Committee in 2011.

Narayana Kocherlakota, 45, is an economics professor at the University of Minnesota and has been on the research staff at the Minneapolis Fed. He is currently writing a book on tax policy. Here are some more news tidbits in the world of credit and cash today.

No more gift card fees from AmEx

CNN Money today reports that American Express will terminate its policy of deducting monthly fees from unused gift cards — starting now! Customer complaints pushed the company to make this change. The company previously deducted $2 from a gift card’s value each month that it went unused.

The new policy will apply to all gift cards, including ones purchased before the policy change. Earlier this year, a law was passed prohibiting credit card company’s from deducting dormancy fees from gift cards unless the cards are dormant for more than a year. That law goes into effect August of next year.

Unemployment still higher than last year

Every city in the United States in August 2009 recorded a higher unemployment rate than it did in 2008, according to Reuters. A total o f 16 states reported an unemployment rate higher than 15 percent. The national unemployment rate in August was 9.6 percent. Normal unemployment is about 5 percent.

The labor Department surveys 372 U.S. cities, and though 11 metropolitan areas reported gains in jobs, the unemployment rate in those areas was still higher than last year. Detroit has the highest unemployment rate in the country, 17 percent.

Projections say gas prices will go up

The the government reported a surprising decrease in gasoline stockpiles today, causing oil  prices to jump. Prices went up almost 6 percent, according to CNN Money. That means gas stations will pay more for crude oil in coming months, and gas prices will continue to rise through November.

MF Global energy analyst John Kilduff said the rising price of crude can also be attributed to rising tensions related to Iran.

“The revelation of the Iranian nuclear facility seems to be installing higher and higher floors for oil prices as the situation becomes clearer,” Kilduff said. “If the situation deteriorates and the rhetoric around it becomes more bellicose, prices could reach between $80 and $100 a barrel later this year.”

JP Morgan Chase, after losing $1.59 billion from its credit card operation, is going after more affluent customers with its Chase Sapphire card, which has no credit limit. The card is meant for households with incomes higher than $120,000 per year.

The card offers bonus rewards of one point per dollar spent, and those points can be exchanged for flight miles, credit or cash. The Chase Sapphire card is available in Visa and Master Card versions.

Blue tries to be the new black

As credit card companies continue to try to target richer customers, the color of wealth keeps changing colors — from gold to platinum to black and now blue, er, sapphire. As more middle-class Americans discover they can save money and avoid debt by using low interest loans, credit card companies are focusing more and more on people who don’t mind (or don’t notice) the hefty credit card interest rates and spend a lot of money.
American Express right now has the most wealthy, or highest-spending, customers. Bloomberg.com reports:

The Sapphire card will be available on the Visa Inc. and MasterCard Inc. networks, an advantage for JPMorgan because those cards are accepted in more places than American Express, Smith said. Visa was accepted at 8 million U.S. locations last year compared with 7.9 million for MasterCard and 4.6 million for American Express. American Express CEO Kenneth Chenault told investors Aug. 5 his cardholders on average spend 3.5 times more than Visa cardholders and 4.5 times more than MasterCard users.

Credit cards and the economy

Bloomberg.com also reports on the overall health of the credit card industry and what it says about the national economy:
JPMorgan’s card operation lost $1.59 billion in the past three quarters as consumer spending fell 2 percent since its peak at the end of 2007, the deepest retrenchment since 1980. The division isn’t expected to earn a profit in 2009 or 2010.

The card unit is showing signs of recovery. The default rate in July fell for the second month in a row, to 7.92 percent from 8.04 percent in June, a signal the worst recession since the 1930s may be ending. Charge-offs usually track the U.S. unemployment rate, which fell last month to 9.4 percent, the first decline since the recession began in December 2007.

How to convert customers

Gordon Smith, chief executive officer of the JP Morgan Chase card division, says his job is to convince consumers that the Chase Sapphire card bonus points program is superior to other bonus programs. Chenault of American Express doesn’t appear too feel threatened by the Chase Sapphire card, based on the efforts versus progress of other credit card companies in the past. Chenault said:

“Merchants are looking for customer spending and our cardmembers provide it,” Chenault said. “Despite all the claims by Visa and MasterCard about success in the affluent segment, where it really counts — in the results — they haven’t moved the dial at all.”