ÉDITORIAL

The Costs of Paying with Plastic

With prices rising as fast as they have been, we’re all looking for ways to make our budgets go a little bit further.  Our governments could help us by looking at something that impacts us all - the costs of electronic payments.

On the one hand, there are the fees that banks charge merchants when customers pay with credit cards.  Although fees tend to be around 1.5%, they can go up to 2.5% when a customer uses a premium card geared towards high earners.  Since stores can’t charge higher prices to customers with such cards, the end effect is that they raise prices for everyone.  So in the end, it turns into a reverse income transfer, where lower income people without access to premium cards pay more to cover the rewards and cash-back programs that banks offer to their well-off clients.

Some solutions are on the way, as starting in the fall merchants will have the option of charging clients more to pay with credit cards compared to debit and cash.  Yet moving back to the culture of debit cards and cash from the 1990s and 2000s would remove some of the market power now sitting with banks.

The other aspect of our credit card culture hurting consumers is the hugely expanded push for tips.  Originally meant to reward good table service after a waiter spent an hour or more looking after the needs of a customer, we are now asked to tip on any number of services, from take-out to bakeries.  Lately, even mechanics and other tradesmen have been getting in on the trend.  The amounts of these tips have also gone up substantially.  Years ago, it was common to tip 10%, with 15% for exceptional service.  15% is now the starting default, with many payment machines also suggesting 25% or even 30% for someone working behind the cash at a cafe.  With this approach, employees at a café who are serving 2 customers a minute stand to make substantially more than someone working in a restaurant, who may only see a few customers pay per hour.  This will make it ever harder for owners of restaurants to keep employees.

Although this approach to tipping really took off during the pandemic as a way to help retain workers, it had begun years earlier, following the introduction of tap payments and the substantial increase in using credit cards compared to cash.  Payment companies quickly saw how easy it was to put pressure on clients to tip ever more money, and they took full advantage.  Even though the option of paying less than 15% is available, many customers feel cheap by doing so.  It’s a powerful psychological tool being used by many businesses.  Yet if we’re all paying 15% more for coffee and take-out, we find ourselves under ever more financial strain, particularly if those tips are being added to existing credit card debt.  Whether machines suggesting high tips for light service counts as predatory marketing is an open question, but it’s certainly something that regulators should look at.  The distortions that it causes across business lines are very real.

Ian Barrett