Letter from Citibank (2 Viewers)

[Malcolm R]

Transaction fees are charged to the retailer every time you use your credit card. So even if you don't carry a balance, the banks are still making money off your credit card use.

 

[Bob_S.]

I forgot about that, yeah your right. I hate it when a business won't allow you to purchase something under $10-$15 with a credit card. I got pissed off one time when I went to a gas station to fill up my gas can ($5 worth) and the Indian started yelling when I pulled out my discover card. That's the last time I'll ever go there again. I read somewhere that a business cannot create a dollar limit like that and you can call the credit card company and complain about it.

 

[Malcolm R]

Originally Posted by Bob_S.

I forgot about that, yeah your right. I hate it when a business won't allow you to purchase something under $10-$15 with a credit card. I got pissed off one time when I went to a gas station to fill up my gas can ($5 worth) and the Indian started yelling when I pulled out my discover card. That's the last time I'll ever go there again. I read somewhere that a business cannot create a dollar limit like that and you can call the credit card company and complain about it.

Correct. Merchant's agreements prevent such minimum purchases, but may try and do it anyway (and I don't really blame them, my parents having owned a small business and seeing the huge credit card processing fees they were charged).

 

[ManW_TheUncool]

If I understand correctly, the CC companies charge somewhere around 3% or so for transaction fees -- maybe less for the lesser names like Discover, but you'll also note that even PayPal charges about that much for instance. For them to make the same $$$ on finance charges (for carrying balances), they'd have to charge some pretty steep *annual* rates (vs the once-per-transaction fee).

Think about it. You have roughly a month (on avg) to pay off each transaction, so they're basically charging ~3% (to the merchant, which in turn gets passed to you and me in one way or another) for just one month of credit use. Apply some simple (non-compounding) math and you're talking a ~36% annualized rate there. Even if we're only talking ~2% per transaction, that's still ~24% simple annualized rate.

Truth is the CC companies don't necessarily want you to carry a balance -- there's some added risks involved for them if you regularly carry a big balance afterall, especially in light of the recent credit crunch/crisis. What they probably really want most is for you to simply use your CC as much as possible (to rack up the essentially hidden transaction fees) and pay it off promptly so they can maintain a strong cashflow w/ available funds to continue extending credit for more transactions (and fees) -- it's called revolving credit business afterall. I'd think the carried balances part of the business is there more to help them maximize use of their available funds rather than as the primary margin business.

For instance, consider all those low rate promo balance transfer offers they give out (even now) where they're basically just earning relatively low rate margins from virtually free $$$ from the Federal Reserve, et al. They charge you (instead of a merchant) a similarly high transaction fee (of 3-4%) and then just earn the low rates for the rest of the promo periods.

This is probably also why American Express did so well for the longest time w/ their charge card business (before they eventually decided to add the regular credit card business). From what I understand, AmEx also traditionally charged the highest transaction fees (more in the 4% range), which was part of the reason why some merchants used to try to pass on the difference to customers (or simply would not take AmEx).

The high transaction fee is probably also largely why many big retailers (like Macy's, Sears, et al) started offering their own CCs so they can save on that for purchases you make w/ them. And of course, there are all sorts of other nuances that have been added to the CC business that are probably related to the high transaction fee, eg. all sorts of rewards programs, etc. Remember. There's no free lunch.

Coming back to the original topic, consider this. The $60 annual fee that Citibank is now pushing is basically 2.5% of the $2400 in minimum transactions they're also asking of their customers (in order to waive the fee). That's not too far off from my ~3% guesstimate. And I'm guessing they probably figured they need to make at least that much off each customer each year to justify extending whatever line of credit to each -- and it's also possible the actual fee may depend on the size of that LoC and whatever perks come w/ the particular account (like it used to a long while back when a "Gold" card was actually a big deal)...

_Man_