Wednesday, 9 November 2016

Giving credit the credit it's due

If we assume that people who use credit cards get no benefit from using credit cards instead of using EFTPOS, then it's pretty easy to show that using credit cards is socially costly. It's more expensive to process credit card transactions; these can be real resource costs. Anytime the benefits of something that has real resource costs are assumed equal to zero, it's pretty easy to show it's something pretty costly, on net.

MBIE's consultation document on credit card fees racks up some substantial costs of credit card use, under the assumption that the 40% or so of consumers who pay off their balances in full every month get no benefit from the use of the credit facility.

I pay off my credit card balance in full every month. Among the many benefits I enjoy when using my credit card rather than EFTPOS:

  1. Simplicity in ordering things online. It is a pain to arrange a bank transfer when ordering things online. I've done it for some retailers who didn't take credit when I was last building a computer and needed to buy components. But it adds 15 minutes to a transaction. 
  2. Consumer protection. Credit cards come with protection against fraud that doesn't come with normal EFTPOS.
  3. Ease of use internationally. We had a few issues in using our credit card last time we went back to North America, despite having warned Kiwibank ahead of time that we'd be travelling abroad and that we needed our cards working in North America. But the EFTPOS cards only work at bank machines, not at retailers. Visa and Mastercard work everywhere - barring glitches.
  4. Not having to carry foreign cash when travelling abroad. If you pull cash using EFTPOS rather than just using your credit card, you have to guess how much cash you're going to need. 
  5. Before we had a mortgage with a credit line, the credit facility was useful even if we did pay it off every month - the 40 days' interest-free after purchase before payment gave time for smoothing things out for big lumpy purchases like whiteware. That is helpful. Since having the mortgage with the credit line, the credit facility lets us shave off some of our monthly mortgage interest payment - although that counts as a transfer in the welfare analysis.
I don't know what the monetary value of all of that is. But it sure isn't zero.

I hit some of this in my column in last week's NBR ($). A snippet:
MBIE assumes that 40% of customers choose credit cards over EFTPOS solely because of rewards like cash back or Airpoints dollars. They then go on to calculate the $45 million in costs to the economy on the assumption that those consumers receive no benefit from using credit other than the rewards. That is a huge problem in their analysis, and we will come back to it. Let’s pretend they’re right for now, even though we know better.

On a first cut, it seems that there should be little to worry about. Retailers can choose whether or not to accept credit cards; customers can choose whether to go to places where the prices are slightly higher and credit cards are accepted, or to go to retailers with slightly lower prices that only accept EFTPOS. What’s the issue?

The MBIE report worries that all but the largest retailers are forced by competition to accept credit cards. It also warns that things may get worse, with increasing popularity of credit over EFTPOS and the potential rise of reward-scheme debit cards. And it notes that if merchants increase prices across-the-board to cover the higher fee cards, poorer customers who are less likely to those cards will be adversely affected.

If part of MBIE’s basic model is that retailers cannot afford to forego accepting credit cards because the more valuable customers choose retailers based on whether they can use their reward-laden, high-fee cards, it seems odd that high-end (but low margin) Wellington grocer Moore Wilson has a surcharge for credit card users that dwarfs scheme-based rewards.

Merchant choice really does not seem that weak. I expect that you, like me, have seen plenty of shops and restaurants with a piece of black electrical tape over the credit button and others with a little piece of paper taped underneath the credit button saying “No Credit.” And plenty of small shops and restaurants will put a minimum purchase size on credit card transactions – often $15.

If merchants do have effective choice in whether to accept credit cards, or to accept them only with a surcharge, then the power-based arguments in MBIE’s analysis are less compelling.

But there seems to be a more fundamental problem in MBIE’s cost tallying. Reward schemes are nice, but they are hardly the only reason that a lot of consumers choose credit over EFTPOS. 

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