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Perspective

Fortnightly Magazine - November 1 1997

The bank account of the merchant who accepts the credit card is credited cash for receivables within 48 hours. In exchange for this conversion of receivables into cash, the merchant pays a discount fee (known as the interchange fee) (em typically 2 percent of the transaction's dollar value.

The cardholder's bank and the merchant's bank share this 2-percent fee. The cardholder's bank assumes more of the risk so is compensated more, usually 80 percent of the interchange fee. The merchant's bank usually receives 20 percent of the interchange fee (see Figure 1).

Utilities & Plastic (em Like Oil and Water

Public utilities are regulated monopolies and very few of them (only 2 percent) offer the credit card as a payment option. Why? In most states the public utility commissions are strict about what is allowed as a "reasonable and necessary" expense of providing service, and the cost associated with credit card acceptance is usually not included. For example, in Texas the Substantive Rules of the Public Utility Commission of Texas (effective July 29,1996) define allowable expenses as:

Only those expenses which are reasonable and necessary to provide service to the public shall be included in allowable expenses. In computing a utility's allowable expenses, only the utility's historic test year expenses as adjusted for known and measurable changes will be considered, except as provided for in any section of these rules dealing with fuel expenses.

From restaurants to department stores, a merchant can adjust prices of all the goods and services to all customers to compensate for the discount fees on credit card transactions that will be included in a customer's cost of doing business. A minority or majority of the merchant's clientele might use credit cards depending on the business, location and region of the country. But public utilities cannot control prices in this way. Even the lure of converting the receivable into cash within 48 hours is not enough incentive to accept credit cards.

For example, a $100 sale of electricity on a credit card would cost a public utility approximately $2 in discount fees. But the $100 invested for 30 days at 5 percent would yield only 42 cents.

Most fast food companies, for example, do not accept credit cards. They had to decide between the option of increasing the price of goods to all customers to satisfy a few credit card customers or keeping prices competitive and not accept credit cards.

Besides the cost factor, volume is another consideration. When a customer is shopping for shirts or ties, he may purchase only one if he planned to pay cash for it. But the same customer may purchase four shirts and four ties if given the option of paying with his credit card. In the case of public utilities, there is no anticipated increase in sales for accepting credit cards since electricity, gas and water are not normally stored for future use.

In most states, public utilities, which are regulated monopolies, operate within defined geographical areas and are prohibited by law from serving outside these territories. Hence accepting the credit