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Study shows credit card fee inequity Credit card fees and rewards in the United States are transferring wealth from the poor to the rich because stores in general don't try to recoup the associated costs through different prices for card users, a new study suggests. The study by economists Scott Schuh, Oz Shy and Joanna Stavins, released by the Federal Reserve Bank of Boston, says the lowest-income households are paying $23 (U.S.) and the highest-income households receiving $765 each year, after accounting for the rewards paid out by banks.
Trying to sum up a complex 56-page study probably isn't fair to its authors but here it is in a nutshell: U.S. stores accepting credit cards pay banks a fee proportaional to the dollar of a sale, the economists said. The merchants' banks then pay an interchange fee to the credit card bank.
"Merchants may want to recoup the merchant fee only from consumers who pay by credit card. In practice, however, credit card companies impose a 'no surcharge rule' (NSR) that prohibits U.S. merchants from doing so, and most merchants are reluctant to give cash discounts. Instead, merchants mark up their retail prices for all consumers by enough to recoup the merchant fees from credit card sales.
"The retail price markup for all consumers results in credit-card-paying consumers being subsidized by consumers who do not pay with credit cards," they wrote. Those who pay cash, likely those in the lower income brackets, thus subsidize those with more money who use credit cards more often.
"About 83 per cent of banks' revenue from credit card merchant fees is obtained from cash payers, and disproportionately from low-income cash payers," they said, adding that "reducing merchant fees and card rewards would likely increase consumer welfare."
Stress tests fail to impress While European authorities continue to applaud the results of stress tests on 91 banks, investors are showing little enthusiasm overall, though European bank shares rose today. The tests results released Friday showed just seven banks failing, and needing just €3.5-billion, leading to questions about their credibility and whether they were harsh enough.
"With respect to the stress tests, despite just seven banks failing, the tests are far from a clean bill of health for European banks. The macro assumptions could have been harsher, which would erode more of banks' capital buffers," said Elsa Lignos, currency strategist at Royal Bank of Canada Europe.
CMC Markets analyst Michael Hewson was even more critical in his analysis: "If Friday's publication of the European bank stress tests were a Shakespearian play they would have been 'Much Ado About Nothing' as they came out with a mere seven banks out of the 91 banks tested failing, suggesting that the criteria were less than thorough.
"The tests were limited to banks trading book losses, while assuming a four notch downgrade to securitized holdings, and a 20-per-cent drop in stock markets across Europe over the next two years. The evaluations took into account potential losses only on government bonds the banks physically trade, rather than those they intend holding to maturity, according to the Committee of European Banking Supervisors (CEBS). That means the tests are set to ignore the majority of banks' holdings of sovereign debt as they moved the riskier elements of the debt out of their trading books so that it was left out of the scope of the tests.
"Time will tell if this bit of creative accounting or sleight of hand is able to reassure the markets; however what it may do is split the European banking system into a two tier one with the strong banks in one tier, and the weaker ones left to wither on the vine, locked out of the funding markets and dependent on the [European Central Bank]"
Added David Rosenberg, chief economist at Gluskin Sheff + Associates: "The reason for the European stress tests, which are truly a charade, was a way for policymakers to calm down the markets. Just the notion that there was going to be a stress test was enough and then, wonder of wonders, only seven of the 91 banks failed the test. At least in the U.S., in the Geithner-led charade back in early 2009, we had 10 of 19 banks failing the stress test and forced to raise an extra $75-billion of capital. And even though the euro zone banks are in even worse shape, somehow the seven who failed the test only have a capital shortfall of $4.5-billion. What would the Mad Hatter say to that?"
Not all analysts were as downbeat. "Leaving aside the criticisms of the scenarios, on the surface, only seven failing banks needing a mere €3.5-billion in capital is definitely good news," said BMO Nesbitt Burns economist Benjamin Reitzes. "With such a small amount of capital necessary, according to these scenarios, worries were overblown. Moreover, European banks have raised over €200-billion in capital over the past two years, which certainly helped them pass the tests. Europe's banking system is healthy barring an extreme negative shock. The results bring some relief but won't be enough to eliminate worries about Europe's banking system."
- European markets shrug off stress tests
- Taking Stock: Stress tests don't give full picture of Europe's banks
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Europe pushes for access to Canada European free trade negotiators are pushing for access to public works contracts in Canada estimated at $100-billion a year. Environmentalists are worried that a deal could bring European companies more into the oil sands, and some in Europe worry that it could lead to non-Canadian goods flowing into Europe through a back door, but negotiators remain hopeful of a deal as early as the end of this year.
"The stakes here are very high and very significant," said International Trade Minister Peter Van Loan told Reuters. "Even a small gain in trade will be big for Canadians."
To resolve the issue of cheap imports, Europe wants Canada to play by its rules that government what meets the tax-free test, Reuters said. So, for example, Canadian beef exporters would have to prove cattle was born and bred in Canada, and auto makers would have to prove Canadian workers contributed a certain amount to the a final product.
EU probes IBM The European Commission said today it is launching two antitrust probes against IBM Corp. over allegations of abusing its dominant position in Europe's €3-billion market for mainframe computers. In one case, two software sellers complained. The EC launched the second investigation on its own.
"IBM is alleged to have engaged in illegal tying of its mainframe hardware products to its dominant mainframe operating system," the EC said in a statement. "The complaints contend that the tying shuts out providers of emulation-technology which could enable the users to run critical applications on non-IBM hardware.
"In addition, the Commission has concerns that IBM may have engaged in anti-competitive practices with a view to foreclosing the market for maintenance services (i.d. keeping potential competitors out of the market), in particular by restricting or delaying access to spare parts for which IBM is the only source."
Launching a probe "does not imply" it has any proof, the group said.
Saying it would cooperate, IBM added that the allegations by the software companies had no merit, and were sparked by some of its major competitors, according to The Wall Street Journal.
FedEx boosts outlook FedEx Corp. shares rose today after the courier company boosted its outlook for both the quarter and the year. For its quarter ending Aug. 31, FedEx said today it now forecasts earnings per share of $1.05 (U.S.) to $1.25, up from its earlier projection of 85 cents to $1.05. That also tops analysts' estimates of $1.01. For fiscal 2011, it has boosted its projection to between $4.60 and $5.20, up from $4.40 to $5.
"Our revenue and earnings growth are exceeding original expectations, primarily due to better-than-expected growth in FedEx Express and FedEx Ground volumes," chief financial officer Alan B. Graf Jr. said in a statement.
Russia considers huge sale Russia is considering selling minority interests in 10 major companies, partly to raise money as its budget deficit grows, in deals worth up to almost $30-billion (U.S.). The country's finance ministry said today it could sell stakes in its biggest oil company, OAO Rosneft, and well as interests in lenders OAO Sberbank and VTB Group, among others. It's only a proposal, and must be approved by Russia's government.
"Privatization is a measure of last resort for deficit financing, and with state debt at around 7-8 per cent of GDP, we view the sale of state assets as premature," Alfa Bank analysts said in a research note, according to Bloomberg News. "As the government is planning to sell only minority rather than strategic stakes, the ultimate decision will be sensitive to market conditions."
China projected to build own gas reserves China is projected to develop its own gas reserves, particularly shale, potentially cutting out foreign energy companies that export to the country, a study indicates. The report by Wood Mackenzie, an industry consulting group, said foreign players should rush to strike deals for liquefied natural gas in the next few years "or risk seeing China disappear as a potential foundation buyer for their projects."
China, the group said, will require just half as much gas as it normally does by 2020.
"Development of indigenous unconventional gas is currently slow but we forecast significant volumes of coal bed methane, coal-based synthetic gas and shale gas to enter the market," said Gavin Thompson, the China Gas Study DIrector for Wood Mackenzie, according to Platts consultants. "... Shale gas is the major growth story in China. As China's national oil companies increase their unconventional gas activity, they will look for partnership and technology in the initial phase of development, creating a window of opportunity for qualified foreign players."
From today's Report on Business
- BP's CEO Tony Hayward poised to resign
- Canadian banks leap at U.S. rivals' weakness
- Asphalt: The new darling of the oil industry
- At The Top: At the fork where water, energy collide
And, read our Streetwise blog and Your Business section