Archive for the ‘Psychology’ Category

The Damage of Card Rewards

Saturday, January 9th, 2010

The New York Times looks at some of the social and economic implications of the trend towards using credit cards with reward programs.

On the social implications:

After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.

Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.

So the risk is that we perpetuate a sort of reverse Robin Hood problem, as Prof. Steven Semeraro of Thomas Jefferson School of Law in San Diego puts it. It’s possible that the poor pay subsidies to finance the rewards of the affluent.

And of course, as many merchants know, while the simple act of accepting credit cards tends to lead to higher sales (both per-transaction and gross), the costs of accepting credit cards have been increasing dramatically over the past few years.

Here’s one finding: Rewards-earning credit cards with the Visa and MasterCard logo often cost merchants more than plain-vanilla ones, which hints at the card companies’ laserlike focus on subsidizing rewards for the affluent customers who are still spending, even if they are paying their bills off each month and thus paying no interest.

But cards undoubtedly also benefit retailers. People can use credit to spend more than they have in the bank at the moment, and some may spend more on a card than they would if they had to lay out a pile of money. Merchants who handle less cash, meanwhile, bear fewer costs for counting it, calling the armored car, and theft by employees or armed bandits.

As for the cost to consumers of all the card use, the National Retail Federation figures that the so-called interchange fees that their members pay to accept Visa and MasterCard alone cost an average of $427 an American household in 2008. Add in other fees the stores pay, plus costs for American Express and Discover, and that number could approach $600.

Head on over to the nytimes website and read the full article.

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Posted in Credit Card Processing, Fees, Legislation, Psychology | 1 Comment »

Psychological Benefits of Accepting Credit Cards

Friday, November 13th, 2009

The SmartMoney.com has a great article on the psychological pitfalls New York taxi cabs succumbed to when forced to start accepting credit cards. The author describes the anger over the ‘5% heist’ – referring to the credit card processing fees deducted from the cab fare – and even relays stories of how some taxi cabs would initially claim the processing terminals ‘weren’t working’ yet in an effort to avoid having to accept credit cards.

But as most companies beginning to accept credit cards usually find out – the mere act of accepting credit cards often have a far bigger impact on the bottom line than the credit card processing fees they lose in the trade off.

… one thing is clear two years later: The drivers who complained so vehemently about the credit-card machines are now making more money because of them. New York City’s Taxi and Limousine Commission reports that revenues are up 13% from the end of last year, despite a recession which is hitting the taxi industry hard in other cities. Tips, meanwhile, have risen to an average of 22% on credit-card transactions, up from around 10% under the old, cash-only system.

The author then goes on to describe some of the psychological effects in play here – with our natural inclination to be loss averse while minimizing potential upsides. In simpler terms, taxis focused on the 5% processing fees while ignoring the added benefits that accepting credit cards bring.

So, the drivers — like lab subjects or stock traders — were focused on what they’d be losing. But could they have seen the potential upside? If you assume that an all-cash system and a cash-and-credit-card system are identical (aside from that pesky 5% fee), you’d be right to see no upside. But does anyone still think that people treat paper and plastic the same, when it comes to money?

Aside from practical considerations, such as that people who don’t carry much cash are now more likely to take cabs in New York City, there’s the well-established fact that credit cards encourage people to be looser with their money than when they pay with tactile, sticky bills. In just one study out of MIT, in which NBA tickets were auctioned off to MBA students, researchers found that the students were willing to pay more than twice as much when able to pay with credit card instead of cash.

If you’re currently operating a cash-based business – give head on over to Prestige Payment Systems for great rates on credit card processing and merchant account services.

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Posted in Accept Credit Cards, Psychology | 2 Comments »