Why Dual Pricing Is Actually The Fairest Payments Pricing Model

Imagine a world where you are a responsible adult.

You don’t live beyond your means.

You work hard, save money, and plan for your future.

Yet despite your dogged commitment, someone wants to steal from you.

They want to take your money to pay for people that don’t see work as a virtue, spend more money than they earn, and view themselves as the center of everything.

No, we’re not about the IRS.

We’re talking about the payments kleptocracy.

Let’s look at the data.

Used to be that people worked a solid 70-hour week. And this was real work: farming, building, etc..

Very labor intensive.

And if you didn’t work, you didn’t eat.

Simple.

Then the industrial revolution happens.

The average worker/company can now produce much more output with fewer inputs, and so on average the number of hours people must work to eat (i.e. provide basic sustenance) falls dramatically.

Today, the average “work” week might be nominally 40 hours, but the vast majority of these hours are spent with employees posting on social media or looking up cat videos while on the clock.

Studies have shown that productive people work fewer than 3 hours a day… and these are productive people.

The larger the company, the less output per employee.

At duopolies like Visa and Mastercard?

LOLz, good one.

So you’re talking maybe 15 hours a week of actual work at non-duopolies, irrespective of how long that sack of meat is being paid to sit in an office chair.

What do these people do with the remaining 55 hours a week they should be producing output (never met anyone who built anything of consequence who worked fewer 70 hours a week, and even then more like 80).

They rack up debt.

Gotta have the newest phone.

Biggest TV.

Best concert seats.

So while a mortgage is obviously a huge component of household debt, it doesn’t explain the addiction to credit cards.

Americans, like the government that suppresses them, live fast, loose, and lack all vestiges of fiscal discipline.

And the credit card kleptocracy takes full advantage of it.

Here’s what we mean.

Chris Consumer walks past a store, sees something he absolutely doesn’t need and can’t afford, but decides he has to have it. Of course Chris doesn’t have the money in his bank account to pay for it – hasn’t in a long time – so he uses his credit card.

Chris buys XYZ for $100.

The merchant, of course, is happy to recognize that $100 of revenue, and if Chris didn’t have a credit card there would likely be no revenue for the merchant to realize.

Now comes along Sally Saver. She deliberately goes into the same store after months of research and buys XYZ for $100. She has plenty of money in her bank account as she works 80 hours a week and lives far below her means. She pays cash.

Now, IF the merchant was smart (suspend your disbelief, here) they would recognize that the cost to accept Chris’ credit card was 3%, or ~$3.

More critically, however, the merchant would also recognize that without a credit card Chris would have been unable to purchase XYZ, which means the merchant would have forgone the $100 in gross revenue, or $97 net of card fees.

This smart merchant knows that a large percentage of customers buy with credit cards, so he marks up all his items by 3% to avoiding eating card acceptance costs.

So in reality, every customer who walks into the store is paying a 3% premium (i.e. tax) whether they pay with card or not.

This is fine for Chris, who doesn’t have a dollar to his name and can’t wait to forget about his unnecessary purchase, but it’s harmful and completely unfair to Sally.

And if the purchase price gets large enough, Sally will recognize that the 3% is a pretty material difference, and she’ll instead buy XYZ somewhere else, hurting the merchant.

This is the actual dynamic happening in payments:

People who have money are subsidizing people who don’t.

Now, the easiest solution to this problem is the surcharge: charge a fee to the person paying with credit card.

But it’s not exactly fair to the merchant.

That’s because debit cards – which are essentially an anachronistic version of a bank-to-bank payment method – incur material costs for the merchant.

Not because the debit interchange rates are high per se, but because acquirers mark up debit rates like you wouldn’t believe (thanks Durbin).

Under a surcharge model, debit and prepaid cards cannot incur an additional fee. And we’re not even going to go into the fact that Visa and Mastercard arbitrarily lowered their surcharge limits to less than the cost of card acceptance, spitting in the face of the 2013 surcharge ruling.

Dual pricing (or cash discounting by another name) – which allows the merchant to charge both credit and debit cards – is best for the merchant, as fair as surcharging for spenders, and fair for savers.

The downside?

Avoiding the card premium means you have to pay with non-card tender, and nobody wants to deal with cash.

PIX and UPI in Brazil and India, respectively, have solved this “cash” dilemma by digitizing it: consumers can pay businesses digitally (and instantly) with zero acceptance costs for the merchant.

Such a rail has not manifested in the US thanks to lobbying and banking regulation that prevents innovation and protects incumbent interests.

Classic.

Let’s sum up the pros and cons of the different pricing methods in a table.

You can say whatever you want, but the truth is that eventually merchants mark up their prices to cover the tax of card acceptance.

That’s especially true when their cost of payment acceptance is like, 3x their margins.

The cost of payment acceptance is the most expensive, hidden tax on humanity that we can think of.