In Visa vs. Mastercard, You Lose

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The New York Times has the first in what should be a fascinating exploration of how Visa has come to dominate the debit card market — and why it’s costing us all money.

Each time you use a debit card, you have a choice to make: run it like a “credit card” and sign your signature, or use a PIN number like you do at the ATM. It might seem like it makes little difference, but as the merchants in this story explain, it definitely does.

Visa has waged a years-long — and successful — campaign to pressure banks, merchants and consumers into opting for the “credit card” option. It makes Visa more money — but has a cost for merchants, and likely consumers.

More after the jump.

The Times describes Visa’s business model like this:

Visa provides an electronic network that acts like a tollbooth, processing the transaction between merchants and banks and collecting a fee that averages 5 or 6 cents every time. For the financial year ended in June, Visa handled 40 billion transactions. Banks that issue Visa cards also pay a separate licensing fee, based on payment volume.

Then goes on to explain how debit purchases differ from credit purchases:

While there is little controversy about the fees that Visa collects, some merchants are infuriated by a separate, larger fee, called interchange, that Visa makes them pay each time a debit or credit card is swiped. The fees, roughly 1 to 3 percent of each purchase, are forwarded to the cardholder’s bank to cover costs and promote the issuance of more Visa cards.

As merchants struggle to recoup the fees the person who ultimately pays might be you:

National Retail Federation says the interchange fees cost households an average of $427 in 2008.

I almost always choose to sign — Visa has poured big bucks into convincing us that it’s the way to go — but I might not anymore.