Why the credit card industry does better when their customers are doing worse

Since 1990, I have owned and operated a photo imaging business in Irvine called 30 Minute Photos Etc. and now ScanMyPhoto.com.   Times are tough for a lot of retailers just like they are for a lot of our customers.   But it’s not just the economy that make times tough for retailers and our customers.    It’s the credit card industry.  

The credit card business is designed to do better when Americans are doing worse.   Visa, MasterCard and their bank partners are arbitrarily raising interest rates on existing credit and debit card, raising credit card late fees, and even charging interest on credit card debt that is paid on time.  

But what actually cost consumers more is the huge, hidden fees on every credit card transaction known as interchange that is passed through to customers in the form of higher prices.  Two dollars out of every $100 spent in the U.S. in stores and gas stations goes to pay interchange also known as swipe fees whether the customer uses plastic or not.   

But it’s not just credit card hidden fees that are skyrocketing, debit card fees are also rising.  As Andrew Martin wrote in “The Card Game – How Visa, Using Card Fees, Dominates a Market”  in the New York Times on January 5, 2010, Visa pushed signature debit over PIN debit starting in the early 1990s because they could charge 13 times the fee for signature debit than they could for PIN debit – even though PIN debit is the more secure choice for the customer and less prone to ID theft.  

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That’s right.   Visa decided to push signature debit even though it compromises cardholder security compared to PIN debit just to make more money for its member banks.  Visa and MasterCard also have rules that prohibit merchants from telling customers that they are paying inflated fees at point of purchase due to swipe fees.   Visa and MasterCard partner banks won’t disclose on their customer’s monthly card statements how much these fees cost them either.   And merchants are prohibited from discounting the price for customers who pay by cash, checks, or lower cost debit, such as PIN.    

 It’s outrageous behavior like this by Visa, MasterCard, and their partner banks that led me to become the lead plaintiff in what may be the largest class-action antitrust litigation in U.S. history, one designed to help rein in the credit card industry.

Interchange fees were designed 40 years ago to cover the costs for manual credit card imprinting (remember carbon copy receipts?). Today, technology and other efficiencies have made credit card swipe fees all but unnecessary.  There are no interchange fees when using store gift cards or writing checks – but due to unbridled market power of Visa, MasterCard and their partner banks there are still interchange swipe fees.  

Ten years ago, when my company first started using digital scanning, it cost $5 dollars per photo because the process was so expensive.   Today I charge 5 cents because the process has never been cheaper.  Unlike the credit card industry, I operate in a free market.  Even if I tried to charge $5 for digital scanning like ten years ago no one would pay it – they just go down the street to the next guy with a digital scanner.  

It has never been cheaper to swipe a credit or debit card.  But unlike the market for digital scanning – or for that matter gas, groceries, and all other retail goods and services — there is no competition down the street to lower the cost of card transactions.   Visa and MasterCard control 80% of the card market and their respectively card networks set the price.  That’s why credit card swipe fees, unlike retail prices, are the same in all fifty states.   No wonder the cost of swipe to consumers has tripled since 2001 to $427 per average household.     

Every other economically advanced country has either reformed interchange or is in the process of doing so.    But largely because of the power of the credit card industry in Congress, Americans pay the highest credit and debit card swipe fees in the world.   We pay four times what Australians pay for the exact same set of credit card goods and services.  So write your congressperson, write your senator, and tell them that you want them to put out the fire that is burning a hole in your pocket.

Assault on Visa and MasterCard’s Merchant Fees Escalates in the WSJ

The magnifying attention to what we assert is illegal price-fixing by Visa, MasterCard and its member banks is gaining concentrated global attention.

After a recent Wall Street Journal commentary (Credit-Card Wars,” Review & Outlook, March 29) that was favorable to one of the publication’s largest advertising categories – financial services – we anticipated a monstrously loud examination from retailers and the public. Today it happened.

There were four letters published in Thursday’s WSJ “Letters to the Editor” section.  Our guess is that many more did not make the cut either, including ours (see below).  Then again, we already had one published on Jan 10th. See link.  For an overview of today’s response and our letters, see below.

• Merchants Must Submit To MasterCard’s Power
  WSJ, January 10, 2008; Page A13

  The European Union has found, again, that interchange fees charged by MasterCard to merchants are fixed at anticompetitive levels. Instead of recognizing that the nearly $40 billion annual hidden tax on merchants and consumers is based on illegal price-fixing, Joshua Peirez of MasterCard Worldwide hauls out the usual replies (“EU Killing of Interchange Fees Won’t Help Customers,” Letters, Dec. 28).

  The fact is that consumers, the marketplace and technology, not interchange fees, are what force innovations within the electronic-payment network. The actual cost of an electronic payment is a tiny fraction of the total fees collected, yet Mr. Peirez suggests that “interchange fees are necessary to fairly share the cost of an electronic payment system.”

  Merchants are unable to pay a fair price for using MasterCard’s (and Visa’s) payment network; we are all forced to submit to their market power and their member banks’ ability to collectively fix interchange fees at noncompetitive levels. MasterCard’s long history of anticompetitive price-fixing corrupts its understanding of Economics 101, where the marketplace controls competition, not a board of directors who stand accused of illegal price-fixing.

  Mitch Goldstone
  President and Chief Executive
  ScanMyPhotos.com
  Irvine, Calif.

  (Mr. Goldstone is the lead plaintiff in merchant-interchange litigation against Visa, MasterCard and leading member banks.)
  

“Are Credit-Card Fees Fair, to Whom, and How Best to Set Them?”  LETTERS/EXCERPT:

• Interchange fees in the U.S. are far higher than those in other western countries. Unfortunately, a market solution is not currently possible because of the credit-card network rules that insulate interchange fees from market discipline. Some credit cards (those with lots of rewards points) cost merchants twice as much as others.

  In a normal, free market, we would expect to see these cards priced differently. Credit-card networks, however, forbid merchants to charge more for credit cards than for other, cheaper payment methods, to charge different prices for different card brands or cards within a brand, to accept only certain cards within a brand, or to accept cards only at certain locations and for certain transactions.

  Innovation and competition cannot push down interchange rates until the card networks’ artificial constraints on the market are banned.

  Adam J. Levitin
  Associate Professor of Law
  Georgetown University Law Center
  Washington
  ————————————————-

• Your editorial comes to the conclusion that soaring Visa and MasterCard “interchange” fees that cost merchants and consumers more than $35 billion each year are no big deal because “retailers have options to avoid the fees.”

  You say merchants can offer a cash discount. In fact, Visa and MasterCard rules make it almost impossible for anyone but gas stations to post both cash and credit prices. And even if they didn’t, the card companies’ systems don’t tell the merchant how much interchange is being charged at the time of purchase, making it impossible to calculate how much of a discount to offer.

  You also claim that large chains negotiate lower fees. There are lower-rate categories for a few large merchants based on dollar volume, but Visa and MasterCard refuse to negotiate these rates and impose them on a take-it-or-leave-it basis just as they do for smaller merchants.

  Finally, with Visa and MasterCard controlling more than 80% of the market, the question of competition isn’t about other cards or PayPal. The issue is that the thousands of banks issuing Visa and MasterCard cards won’t compete to lower interchange rates. Instead, they have historically come together and agreed to all charge the same high fee for each specific type of card. As we have testified before the House and Senate Judiciary Committees, that is a blatant violation of federal antitrust law.

  Visa/MasterCard rules effectively require that billions of dollars in interchange costs be passed along to consumers — a hidden credit-card fee of more than $350 a year — yet most families don’t even realize their pockets are being picked. During the shaky financial times you note, what better way to help the economy than to bring the greed of the card companies under control?

  Tracy Mullin
  President and CEO
  National Retail Federation
  Washington
  ——————————————–

• One important point to merchants that was not developed in the article: It is not the “basic” set of fees for accepting charge cards that many of us take issue with. What aggravates so many merchants and service providers is the fee surcharges that are unilaterally imposed upon merchants for accepting certain types of credit cards most often associated with the multitude of rewards programs so widely advertised.

  How do the likes of Capital One so generously offer the merchandise, discounts, and cash back without losing money? They attach a surcharge to these cards over and above what the merchant expects to pay for accepting these credit cards. The merchant must pay the extra fee. Merchants have no control over the surcharge amount which they are charged, so the card issuers can be ever more generous to the card holder at the expense of the merchant.

  Bill Gardella, Jr.
  Norwalk, Conn.
  ——————————————-

• Credit-card fees are an ever growing expense for all retailers. Credit-card fraud is rampant. Consumers are now starting to default on their credit-card debt the same way they’ve defaulted on mortgages. Your argument that if it ain’t broke, don’t fix it, doesn’t hold here. Would you have said the same thing about subprime mortgages two years ago? Government should be monitoring this ever expensive and important industry.

  Stuart Burke
  Hopkinton, Mass.

Our prevous letter to the WSJ didn’t make the cut, but, here’s a copy in response to a WSJ article.

Dear Editor (drafted, Feb 29), There’s more to Eric Felten’s “the burden of gratuitous gratuities” (Weekend Journal, Feb 29) than just that flaunty tipping jar at Starbucks.  Most consumers don’t know that when they use a credit or debit card to fund their daily fix of java, it adds to a very hefty tip for Visa, MasterCard and its thousands of member banks that make up their cartel.  As Starbucks attunes away from its financial miscues, a giant cost savings would be to return to cash to save consumers from the merchant interchange fees.  Each year, electronic payment interchange fees – including those micro-payments of a buck or two bestow nearly $40 billion in cash to the banks.  These rich fees were once cost-based and designed for clearing those manual credit card imprinter carbon copy transactions on the Visa and MasterCard network.  Today, the lack of competition (Visa and MasterCard own nearly 80% of the market) and the unbridled collusion forces the question: why are these obsolete fees still in force? 

Technology and innovations enable instant, automated and efficient settlements that no longer warrant these tips to the banks

Mitch Goldstone
Co-Editor – WayTooHigh.com – The Credit Card Interchange Report Excerpts from The Wall Street Journal, April 3, 2008

A Big Fight Even for Activist Mitch Goldstone (Marshall Magazine)

[reposted from Oct. 2005]

Mitch Goldstone Leads A Rebellion, This Time Against Credit Card Fees

By Robert Barnett – University of Southern California “Marshall Magazine“It pays to read your mail, as Mitchell Goldstone knows and Visa and MasterCard are finding out.

Goldstone, a 1985 graduate of USC Marshall School of Business, and his partner, Carl Berman, are the co-founders of 30 Minute Photos Etc. and its online sibling, 30minphotos.com which, as the names suggest, develop photographs from film and digitized files, respectively.

Goldstone has made lots of news over the years, but nothing like this summer when his company became the lead plaintiff in a class action antitrust suit against Visa, MasterCard and major banks. The story made the pages of the Wall Street Journal, Time magazine and the New York Times.
Filed in federal court in Connecticut in June 2005 with four other small and midsize businesses, the suit accuses the credit card companies and the banks that issue their cards of illegally fixing the interchange fees that merchants pay for credit card transactions. The credit card companies have defended their interchange fees, with MasterCard’s general counsel calling them “beneficial, efficient and pro-competitive” in a statement the giant credit card company made during a recent Federal Reserve hearing. Controversy is nothing to new to Goldstone. He’s drawn to social and economic causes the way some people have hobbies, and thinks nothing of spending hours and time and money–and overlaying all that with entrepreneurial inventiveness–on an array of projects. In addition to the class action suit, he organized Operation Photo this year to collect digital cameras for families of soldiers deployed overseas. He promoted tsunami relief for the Red Cross on the company website. He ran for city council in Irvine, CA.But the lawsuit against the giant credit card companies represents the biggest, most formidable opponent that Goldstone has ever faced. If he and the other plaintiffs win, it could cost the credit card companies billions of dollars.As with many of Goldstone’s past crusades, this one started almost by accident. In February, Goldstone and Berman received a notice in the mail that their interchange fees were being raised. “I usually throw them away,” Goldstone explained, ”but Carl brought it to my attention. When we started the business in 1990, there were a handful of interchange fees. Now there are nearly 100 different rates. And they’ve all been going up steadily. For example, the fee for debit cards has gone up 300% since 1999.”Goldstone wrote to the senior management at Visa and MasterCard, asking them to rescind the increase. “Always start at the top,” Goldstone stresses. “It’s one of the greatest lessons I learned at Marshall.”

No answer. He followed up with a phone call to the two companies. Still no response. And that got the ball rolling.

Today, Goldstone and Berman write and edit the blog, “WayTooHigh.com,” posting articles and editorials on the interchange fees and arguing that the fees are a hidden tax on consumers since they become part of the cost of all goods and services purchased. Their retail rebellion appears to be spreading. Kroger and six other national retailers filed their own suit against Visa U.S.A., and charged it with anticompetitive practices.

Creating a national groundswell for a cause he believes in is nothing new to Goldstone. In fact, he enjoys it. “It makes it fun,” Goldstone insists, “knowing we’re doing something that is going to help somebody.” In a sense, he sees it as part of his job. “That’s what being an entrepreneur is all about,” as Goldstone sees it. “It’s not just about making money. It’s about doing something that’s good because that’s the ultimate scorecard.”

Organizing Operation Photo is a perfect example of how social and economic issues just seem to find Goldstone – and how he uses his entrepreneurial skills to identify and promote a solution.

“I got a phone call at 7:00 in the morning right after Christmas of last year from Jennifer Petersen, a former 30 Minute Photos Etc. employee who had left to become a full-time mom,” recalls Goldstone. “She’d had a dream the night before. What if her husband was serving in the military and he wasn’t able to see their daughter? Was there any way we could get people to donate cameras to give to military families? By 8:00, the business plan was already cemented and finalized.”

Within days, they had Operation Homefront onboard to coordinate distribution, secured pledges from Kodak and other digital camera manufacturers for hundreds of new cameras, set up a “Operation Photo” website with a link from the 30 Minute Photos Etc. homepage, the press had jumped on the story, and the first cameras were already flooding in.

By the time Operation Photo wrapped up on July 4, it had collected over $150,000 worth of cameras and distributed them to grateful and appreciative families in and around military bases all over the country. In fact, many of the photos of new babies and birthday parties now being shared overseas are being developed at 30 Minute Photos Etc., thanks to its military family discount.
Goldstone always wanted to be an entrepreneur. A New Yorker by birth, he applied to USC specifically so he could enroll in what is now USC Marshall’s Lloyd Greif Center for Entrepreneurial Studies.

Goldstone and Berman started 30 Minute Photos Etc. in 1990 on the premise that family photos were among our most treasured possessions. They separated themselves from the one-hour and overnight photo competition by beating them in turn-around time, delivering a higher quality photo, staying ahead with new technology, and building a client base that included Hollywood celebrities and California Governor Arnold Schwarzenegger.

In the late 1990s, 30 Minute Photos Etc. was blindsided by the digital revolution in photography. Suddenly customers weren’t bringing in rolls of film. They were printing them off their home computers. Business took a nosedive. Goldstone transformed the company into an online boutique photo service, creating a website for customers to format and edit their digital images, and with the click of their mouse, have high quality prints processed and shipped immediately to wherever they lived in the United States. He even put a 24-hour live support capability right on the website.

Still it was a struggle to rebuild the business. In 1997, Goldstone bought some local cable spots for the MTV Video Music Awards, only to discover that the show would be featuring rap singer Eminem performing live. Offended by the rapper’s lyrics, Goldstone bought up all the local commercial time for the awards program so that organizations including the Family Violence Prevention Fund, the Museum of Tolerance, and the Human Rights Campaign Fund could ran public service announcements educating viewers on violence against women, bigotry, and gay rights.

“That was extremely expensive,” Goldstone recalls. “This was our whole campaign to get younger adults excited about our business and to use it. Instead we ran those spots because we believed it was the right thing to do. As it turned out, we also got a lot of media coverage for the educational campaign and ourselves,” he continues.

So what’s next for Mitch Goldstone? Wait and see. Visa and MasterCard may regret not answering their mail.

[Robert Barnett, a freelance writer in Los Angeles, is a contributing editor ofthe University of Southern California’s Marshall Magazine].

 Want to know more about lead plaintiff ScanMyPhotos.com?  Click hereand read their daily blog: Tales from the World of Photo Scanning

CES: ScanMyPhotos.com CEO Goldstone Speaks at Consumer Electronics Show

Goldstone to speak in Las Vegas at the “Spotlight on Imaging” CES panel on Tuesday, January 8 from 3 – 4 p.m. in the Renaissance Hotel, Ballroom 1

Last update: 8:51 a.m. EST Jan 8, 2008

IRVINE, Calif., Jan 8, 2008 (BUSINESS WIRE) — ScanMyPhotos.com, announced that president and CEO Mitch Goldstone will speak again at the 2008 International Consumer Electronics Show (CES) as part of a panel discussion entitled: “Spotlight on Imaging.” The session is cosponsored by Picture Business Magazine and the Consumer Electronics Association (CEA) which produces the 2008 International CES – the world’s largest consumer technology trade show.

The panel discussion at the 2008 International CES will take place on January 8, at 3:00 p.m. at the Renaissance Hotel, Ballroom 1, in Las Vegas, NV. It will include essential topics about the future of the photo imaging industry and the commercialization of new digital imaging technologies to inspire and enhance the consumer photo imaging experience.

ScanMyPhotos.com, a division of 30 Minute Photos Etc. operates a retail and ecommerce-based photo imaging company that provides super-fast nationwide digital scanning and related photo imaging services. Goldstone and partner, Carl Berman, well-known leaders in the photo imaging industry founded 30 Minute Photos Etc. in 1990 as a retail-based photo center in Irvine, CA.

Today, the company and its ScanMyPhotos.com division provides a variety of photo memory services and products to help picture-takers preserve generations of family memories. These include services using: “Perfectly Clear” photo enhancements by Athentech, professional DVD data discs produced by Microtech’s robotic DVD publishing system, Lucidiom self-service digital photo kiosks, and KODAK’s award-winning i660 document imaging scanners – the engine behind the company’s capacity to digitally scan 1,000 photographs in under ten-minutes.

ScanMyPhotos.com helped commercialize the KODAK document imaging scanners for the photo industry and is profiled on the Kodak.com website. The photo entrepreneurs created a local walk-in and “fill-the-box” scanning service for consumers to order prepaid USPS Priority flat-rate boxes which are mailed out the same day it is ordered. Consumers fill the co-branded USPS and ScanMyPhotos.com prepaid boxes with as many pictures as it can hold (more than 1,600 4×6″ photos). All orders are processed and digitally scanned as jpeg files at 300 dpi and mailed back the same day. The prepaid box costs just $99.95 – consumers also receive a free box when they purchase two prepaid boxes so they can have more than 5,500 photo snapshots scanned for $199.90.

ScanMyPhotos.com, has scanned nearly four million pictures from around the world and was recently profiled or mentioned in The Wall Street Journal, USA Today, The Chicago Sun-Times, The New York Times, Reader’s Digest, Women’s Health Magazine, The Orange County Register, Family Tree Magazine, Popular Photography, Direct Marketing News and scores of other media and Internet / blog coverage.

Click here for complete Special Events CES listing.

News on Merchant Interchange Lead Plantiff, Mitch Goldstone at CES

click here for link.

ScanMyPhotos.com CEO Mitch Goldstone to Speak at the Consumer Electronics Show.   Goldstone to speak in Las Vegas at the “Spotlight on Imaging” CES panel on Tuesday, January 8th.

IRVINE, Calif., Dec 17, 2007 (BUSINESS WIRE) — ScanMyPhotos.com, today announced that president and CEO Mitch Goldstone will speak again at the 2008 International Consumer Electronics Show (CES(R)) as part of a panel discussion entitled: “Spotlight on Imaging.” The session is cosponsored by Picture Business Magazine and the Consumer Electronics Association (CEA(R)) which produces the 2008 International CES – the world’s largest consumer technology trade show.

The panel discussion at the 2008 International CES will take place on January 8, at 3:00 p.m.  It will include essential topics about the future of the photo imaging industry and the commercialization of new digital imaging technologies to inspire and enhance the consumer photo imaging experience.

ScanMyPhotos.com, a division of 30 Minute Photos Etc. operates a retail and ecommerce-based photo imaging company that provides super-fast nationwide digital scanning and related photo imaging services. Goldstone and partner, Carl Berman, well-known leaders in the photo imaging industry founded 30 Minute Photos Etc. in 1990 as a retail-based photo center in Irvine, CA.

Today, the company and its ScanMyPhotos.com division provides a variety of photo memory services and products to help picture-takers preserve generations of family memories. These include services using: “Perfectly Clear” photo enhancements by Athentech, professional DVD data discs produced by Microtech’s robotic DVD publishing system, Lucidiom self-service digital photo kiosks, and KODAK’s award-winning i660 document imaging scanners – the engine behind the company’s capacity to digitally scan 1,000 photographs in under ten-minutes.

ScanMyPhotos.com helped commercialize the KODAK document imaging scanners for the photo industry and is profiled on the Kodak.com website. The photo entrepreneurs created a local walk-in and “fill-the-box” scanning service for consumers to order prepaid USPS Priority flat-rate boxes which are mailed out the same day it is ordered. Consumers fill the co-branded USPS and ScanMyPhotos.com prepaid boxes with as many pictures as it can hold (more than 1,600 4×6″ photos). All orders are processed and digitally scanned as jpeg files at 300 dpi and mailed back the same day. The prepaid box costs just $99.95 – consumers also receive a free box when they purchase two prepaid boxes so they can have more than 5,500 photo snapshots scanned for $199.90.

ScanMyPhotos.com, has scanned nearly four million pictures from around the world and was recently profiled or mentioned in The Wall Street Journal, USA Today, The Chicago Sun-Times, The New York Times, Reader’s Digest, Women’s Health Magazine, The Orange County Register, Family Tree Magazine, Popular Photography, Direct Marketing News and scores of other media and Internet / blog coverage

lead Plantiff, Mitch Goldstone to Address CES

The co-founder of 30 Minute Photos Etc and ScanMyPhotos.com will be announcing in December that he was invited to again address CES: the Consumer Electronics Show in Las Vegas in early January. This is the world’s largest consumer trade show and is the second year that Mitch Goldstone has been invited to present.  As a well-known photo imaging industry speaker, he regularly explains how technology has changed the entire photo imaging industry and created entirely new revenue centers, such as the super-fast nationwide photo scanning service which his company has become famous for.  He expects to again use the example of how credit cards were once cost-based; requiring extensive paper work, thick carbon copy receipts and manual imprinter machines.  Today, just as with his photo imaging and scanning business, everything is lightening fast and much more cost effective.  What he once charged $5.00 for is now low as 2.5 cents.  Conversely, the member banks are accused [by us] of continuing to conspire to illegally fix billion of dollars in fees; fellow retailers are forced to accept whatever charges are demanded.  As a retailer and ecommerce business, 30 Minute Photos Etc. and ScanMyPhotos.com are beholden to Visa and MasterCard and their 80% market power.  Most ecommerce businesses are forced to accept those two leading payment cards to stay in business.

More details on CES in December.

 [Source: WayTooHigh.com]