Plastic Cards and Baby Carrots: Paying for Convenience

Plastic Cards and Baby Carrots:
Paying for Convenience
by the BOL Team

Those cute, crunchy orange vegetables sold in bags as baby carrots are, according to Fast Company, merely whittled-down, polished, cleaned pieces of full-sized, old-fashioned carrots. They're wildly popular, however, and consumers are scooping them up in record numbers, despite the fact that their cost is nearly double in babyfied form. Bite-sized and prewashed, they can be consumed directly from the package, and that makes them worth more to some buyers who value time savings more highly than a lower price point.

The simple fact is that in the marketplace -- regardless of which industry is being examined -- there is typically a premium paid for greater convenience. It's all about choices and options. The customer gets to choose between the alternatives of saving time, or saving money, and there is rarely any criticism of the price differential for convenience. Unless the fees are banking fees. Then it's a different matter and a perennial source of debate and disagreement.

The latest criticism comes in the form of a survey and report on plastic card transaction fees released this month by the New York Public Interest Research Group ("NYPIRG"). The report deals with fees charged in connection with ATM transactions, debit cards, prepaid cards, credit cards, payroll cards and gift cards. To prepare you for comments and questions you may receive about the report from local media or customers, we've summarized some of the assertions from the report and assembled some talking points about banking realities that customers are often unaware of.

The Report asserts:

• Financial institutions fail to pass on to customers the cost savings the institutions reap from card transactions;
  
• ATM surcharge fees are "unfair and unnecessary". NYPIRG alleges that banks engage in a "deceptive double dip" under which they collect an ATM surcharge and a foreign ATM withdrawal fee.
  
• Particular dangers stem from unlicensed ATM operators. This is one point most banking industry professionals will certainly agree with: consumers are placed at risk by the fact that the law in most jurisdictions does not require ATM operators to be federally insured financial institutions. Instead, anyone with a few bucks can purchase an automated teller machine, hook it up, and operate it with virtually no oversight or regulation.
  
• Customers unwittingly incur extra costs on debit transactions because they are inadequately informed about the differences between "online" and "offline" transactions.
  
• Many consumers are falling into a "credit card trap" because required minimum payments are not sufficient to amortize the debt within a reasonable length of time.
  
• Employees can suffer when payroll cards entail fees for various types of transactions.
  
• Gift cards can diminish in value if not used within a short period of time and can carry with them fees not anticipated by consumers.
  

The bottom line is that NYPIRG believes the fees in plastic card transactions are unreasonable, excessive, or both. The reality is that these cards represent convenience, and convenience traditionally costs more. Anyone who has ever tried to keep track of a paper gift certificate appreciates the ease of using a stored value card instead. Unbanked employees have ready access to cash through payroll cards. Using a debit card rather than a check allows a consumer to more quickly conclude a purchase transaction. And knowing that an ATM will be waiting at the airport keeps an already stressed traveler from having to add a stop at the bank to a long pre-trip to do list.

Here are some talking points to keep in mind:

• Convenience charges are common in many industries. Examples:
  • Buying a soft drink in a restaurant costs many times more, ounce for ounce, than the same beverage poured at home from a two liter bottle;
  • You pay more at a 7/11 than at the grocery store for virtually any product, but you're in and out in a matter of minutes.
  • Gasoline is higher at the station nearest a highway exit, but choosing the exit-related station saves a driver from spending time going all over town looking for the savings.
  • At a sporting event, a thirsty person will pay $2.00 for water they could get free from their tap at home, but it's cold and handy.
  • Ordering tickets online through Ticketmaster costs more, but allows the purchaser to avoid possibly long lines.
  • There are ?time-sensitive? pricing models; ones in which "I want it NOW" costs more than "I will take it later". That's how FedEx makes money. It's also why customers will choose to download a piece of software they might be able to buy more cheaply at a store.
  • A customer has a choice of whether to take his car into a automotive dealer to have the oil changed and wait several hours and pay less OR go to a quick lube, pay more and be there for 10 - 15 minutes.

  
  With respect to banking transactions, keep in mind the following points about card use:

  • It is a fee for convenience. What price does this cost? Well the bank may lease the space for the ATM or have to share in its revenue with the property/store owner. The bank wants to recoup its cost and make a profit. Aside from the machine's hard costs, there is a connection to the bank's computer system, insurance because many of these ATMs are stolen every year (machine and all the cash inside it), the costs to have the machine replenished regularly and the cost of the cash inside it.
  • Are these costs higher when you use another bank's ATM? Very possibly. More bank systems touch the transactions and some other bank supplied the infrastructure. The customers bank supplied the "demand". It isn't a surcharge on top of a surcharge, it is different parties collecting a fee for the service and product they provide. Instead of a bank offering a "retail" price for transactions, they tell you their price and it may be increased incrementally based on who helps with the transaction processing.
  • What other costs exist? Depending on the number of customers with cards and machines, there are entire departments that not only manage the cash and machines, but handle the claims for unauthorized withdrawals. Many hours may be spent researching transactions, requesting and reviewing film of transactions only to find it was another of the accountholders who made a withdrawal and it was not in fact, unauthorized. Letters are sent and files are retained to comply with the requirements imposed by the Electronic Fund Transfers Act. Or worse yet, the customer lost their card with the PIN number written on it and the customer had $50 or less in liability, often zero liability for a Visa/MasterCard branded card, and the bank lost hundreds or thousands of dollars on that customer. The bank has that cost by law and contract.
  • Prior to putting a machine somewhere, the bank may study who will be served by the ATM, what is the crime record in the area, and what has to be done to put in a machine? High crime areas increase the risk not only of theft and vandalism of the machine, but of the customers using it. This is a liability to the owner. How will it get power and telephone connectivity? Infrastructure. And in some cases you build a building to house the machine. If it is a drive up ATM, you set height markers. And then you pay for the repairs because the guy driving the U-Haul didn't know it wouldn't clear the awning. The bank also pays for annual security checks of the site, required in many states. Are the lights sufficient candlepower, aimed properly and are the bushes and surrounding areas free of obstructions where a criminal may hide?
  • The bank also pays for the plastic cards, the processing and programming as well as the security of these controlled access devices. They may be reissued when the customer loses them. Meaning the old one has to be "turned off" while a new is "turned on". Again, manual programming and accountability. And everything gets double checked because you don't want to err by a digit and have a card debiting the wrong account.
  • The pending regulations on ADA requirements will not lessen the costs of ATM ownership either.

  
  
  

The use of credit cards, debit cards, ATMs, gift cards is optional. The customer has the most important vote of all on the subject. If the charges are viewed as unreasonable or excessive, the customer simply votes with his pocketbook and chooses another method of doing the transaction.



First published on BankersOnline.com 4/20/04