When I was a poor grad student, I made a lot of use of credit cards. Not having to pay for up to about 40 days after a purchase was awfully helpful when budgeting around lumpy scholarship payments. And I always appreciated offers of zero percent interest on balance transfers.
There’s a bit of a joke about using your Mastercard to pay off your Visa. But paying off the Discover Card, which gave cash-back on every purchase, with balance transfers to cards offering zero-percent teaser rates meant that a cash-poor grad student could effectively borrow at negative interest rates. You just needed to be careful to make the minimum payments and flip the balance over to a new zero-percent offer before the first one expired.
The Ministry of Business, Innovation & Employment seems to see credit card reward programmes differently. MBIE last month released its consultation paper on the retail payments system. As MBIE sees it, these kinds of incentive packages cost the country $45 million relative to consumers using EFTPOS, or 0.13% of the amount spent on cards last year.
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 sho
ps 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.
MBIE recognises that people choose credit over EFTPOS for all kinds of reasons, many of which provide direct benefits to consumers that need counting against the higher costs of processing credit card transactions.
But they assume that the forty percent of card users who pay off their cards in full each month are getting no benefit from the card’s credit facility: consumers who pay in full each month could presumably have paid by EFTPOS. If that were true, any excess costs of credit over EFTPOS would be pure waste.
MBIE estimates the costs for that forty percent of credit card users to be $45 million higher than if they had used EFTPOS.
Unfortunately, the analysis falls apart if customers who pay their bill in full each month do get some value other than the rewards scheme. Those benefits would then have to be counted in the analysis.
What are those benefits?
EFTPOS does not yet work well for online transactions. It is possible to buy things online using bank transfers, and I have done it when buying parts to build computers, but it is a hassle. Visa-linked debit cards can work, but also come under MBIE critique. Credit cards are simply easier for online transactions. Increasing popularity of online sales would predict lower EFTPOS use regardless of what is going on with credit card reward schemes. Even if you pay your card off in full each month, this can matter.
Second, credit cards provide benefits like guarantees, warranties, protection against fraud, and simplicity in transactions when travelling abroad – whether or not you pay off your balance in full each month.
Finally, anyone with a mortgage running on a revolving credit line has to love using their credit card. If you pay your credit card off in full each month, but do all of your monthly spending on the credit card rather than EFTPOS, the balance on your line of credit is rather better than it otherwise would be – and so too are your monthly mortgage interest payments. It really is not that different from the trick I used as a grad student. Some of this would count as a transfer, but it is a transfer that muddies MBIE’s welfare analysis: the poorest will not have mortgages, and the richest may not either.
The method MBIE has used is simply wrong because it starts with a questionable assumption: that credit card users paying off their balances every month would be no worse off using EFTPOS, but for the reward scheme. The existence of people on low-fee, low-reward credit cards who pay their balances off monthly must puzzle the analysts.
It feels like nobody in government is vetting the quality of these kinds of documents before they get out. I will be interested in seeing what advice Treasury provided MBIE on this one. Discussion documents that frame things this badly strongly risk messing up policy, regardless of the outcome of the consultation process.
MBIE seems not to have given credit the credit it’s due.