The card network (Visa, Mastercard, etc) do NOT make money on Interchange.
It’s hard to have a healthy dialogue on this topic if folks don’t understand the basics of how the card networks generate revenue.
Below is a decent primer.
Interchange fee pricing is set based on how much mastercard charges the banks, so while technically true, the interchange fees are basically set by mastercard's pricing.
That’s not true though, or at least is a massive oversimplification. In the US, interchange fees are extremely inflated to allow banks to recuperate the rewards they give out to distinguish their card offerings from one another. The 2% cashback has to come from somewhere.
And that's a bad thing, because it's essentially the poor subsidizing the rich. People who aren't able to get credit cards (or the "good" cash back credit cards) tend to be worse off financially than people who do.
Stores need to accept cash regardless, so there’s still some minimal added costs to using cash, but even with the offered discount it’s less than the credit cards...
however if stores stopped accepting credit cards they would quickly find themselves drowning in the same costs that credit cards were invented to avoid.
Funny you mention that, because that’s yet another case where it’s expensive to be poor. If you’re living paycheck to paycheck, barely making ends meet, you likely don’t have the cash flow to stock up on a sale. So rather than buying 18 months worth of TP when there’s a sale + coupon on the 64 pack, you are buying the 4 pack at regular price that costs twice as much per unit.
Instead of 2% cash back for some, they could just add 20 percentage points or so to the interest rates of everyone else. If you think this is unfair, you're really just saying that interest rates are applied unfairly. But it doesn't sound like that's your actual thought process. Is everyone who pays higher rates subsidizing those who pay lower? How do you know?
*This is not my original idea, but something I read somewhere.
The money for cash back comes from transaction fees. It would have to. People go out of their way to find ways of maximizing their return from these kinds of systems so any cash back scheme that could be too easily gamed would fall prey to these people.
That actually happened once, albeit to a “merchant”. The US mint used to let you buy $1 coins, online, with a credit card, for $1 each and free shipping. You could literally buy your entire credit limit’s worth of $1 coins, deposit those same exact coins at your local bank branch to pay your credit card bill before it came due, and straight up profit from the cash back.
The problem is not that the company is trying to make money, it's that this market has become an oligopoly with too much pricing power. With the prevalence of credit card purchases this is a tax on every transaction in the economy. Even people that don't use a CC pay a price set for those that do.
This has indeed meant that rewards and cashback credit cards have largely disappeared (with the exception of Amex, which operates outside the interchange system?).
Rewards/cashback cards that do still exist are typically tied to specific retailers, with whom the issuing bank has cut their own deals.
With AMEX the merchant does know the exact fee structure and can therefore decide to accept or not to accept AMEX ahead of time. That's essentially the argument why the fees for AMEX were not capped.
Right, but try using Amex in Europe.
Outside of major international hotel chains, or where you can do your purchase online through Paypal, you may as well not bother asking if they accept it.
It's very interesting to hear that.
When I first started traveling to Europe, having an American Express card (or even better, AmEx travelers checks) was the best way for an American to pay for things. It's even written into some classic books and movies.
My how things have changed.
You could probably get by here with just an Amex card and cash, but I keep a backup card for the places that don't accept Amex.
Yes, but in reality, the program comes from an upside down approach to overcoming the obviously anti-competitive practices that VISA/MC use to forbid retailers from offering discounts for not using VISA etc..
You can't say "Get 2% if you use cash instead of VISA". (Notice that nobody ever advertises that?) Because VISA doesn't allow it.
You also can't say "$1.99 + 20 cents processing charge" - no, the price must be listed including charges. (Notice that nobody every does this?)
But you can possibly find ways to give points, or 'cash-back'.
Until now ... 
VISA is now saying that even such 'cash back' rewards programs are a violation of its rules.
Have a look at the press release - it's positively Orwellian:
"In order to maintain a level playing field" -> "In order to avoid all transparency and maintain our hidden monopoly" we require that nobody can take steps which highlight the how our transaction fees are embedded in the price.
These are pretty blatant anti-competitive practices and taking them on is tantamount to taking on the entire banking system. It's not going to happen.
There would need to be an 'outside disruptor' like the Word Processor to the Typewriter kind of thing.
Any payment/money movement system needs a license and you’re still bound by federal rules on AML and KYC. It makes it hard to support the cannabis industry. AML laws will force you to report large cash movements.
I see this all the time. * At more than one bookstore, the dry cleaner, markets, my current and previous landlord, my accountant, and pretty much every gas station since the 1990's.
* Pre-quarantine. Now I don't see anything.
Gas stations I find weird, in general. How did they get that exception?
Some gas stations where I live have a "credit" price and a lower "cash" price.
The above poster was incorrect.
> You also can't say "$1.99 + 20 cents processing charge" - no, the price must be listed including charges. (Notice that nobody every does this?)
We see these a lot in Australia. I wish they'd enforce the same pricing here for cash and card — I don't like to carry cash around, and I hate it that I have to pay a surcharge when paying by card.
A Visa or MC credit or debit card txn go via the Visa or MC networks.
An EFTPOS txn goes via the EFTPOS network, it's much cheaper.
In AU, the fees are regulated and must be disclosed to the user as an extra charge. Most businesses much prefer the EFTPOS network because it's much cheaper.
Until recently, the contactless environment didn't support EFTPOS, so it always used the Visa or MC networks. Same applies to Google and Apple Pay.
If there is no price differentiation, this just means everyone has to share the cost, rather than the people who choose to use it
So you think your use of a credit card should be subsidized by people who pay in cash?
Plus, plenty of gas stations show a cash/credit price on their signs.
The merchants are no longer allowed to block this behavior.
But that's only if you pay by cash, you don't get any point by paying by card.
The place I went to yesterday for lunch did this. This is in Silicon Valley. I believe it was a 3.9% credit card fee.
People will freak about their customary rent/take being threatened. They gotta come out of the woodwork and justify the charge... somehow. A HN proxy battle!
d = dollars
t = transactions count
I(d,t) = Interchange total profit/cost to a bank from fees in and out
F(d) = scaling function for interchange returns based on cash pushed through as an arbitrary function
G(t) = transaction cost function based upon arbitrary scaling.
I(d,t) =F(d) - G(t)
But..... You have the main point here. The whole premise of monopolies is that monopolies dominate bottlenecks, and use them to generate outsize revenue and protection from competition.
Facebook doesn't make money directly from whatsapp. It can be used to generate data for FB's main advertising business. Most importantly, it helps maintain facebook's dominant position in social media. That position is revenue generating.
I agree that understanding the mechanics are important. But, we can't keep treating monopolies as innocent of monopolistic practice until proven guilty. The reason we have antitrust in the first place is that monopoly positions lead to monopolistic practices. We need to assume monopolistic practices exist in the case of a monopoly. When one monopolistic practice (eg amazon marketplace or adwords) has been proven in court, this should be treated as proof of monopoly, not a standalone violation.
Same with the CCs.
EDIT: Warning in some German cities (e.g. Berlin) you will find a lot of cash only restaurants, mostly due to high costs of payment terminals not being worth it due to most people paying with cash anyway. Like the a local restaurant from where I live they bought a payment terminal it broke in some stupid accident no insurance want's to cover so now it's back to cash only.
These cards used to be called EC card, however MasterCard now has all the rights to the EC brand. In fact debit MasterCards with EC branding are starting to pop up now.
You either want to speak of "girocard" which is our own payment network or "debit cards", which includes the likes of Maestro V-Pay, but also some Visa and MasterCards. In the same sense, you don't need a credit card for most online shops, you just need a Visa/MC (some will only take credit, but most will take debit).
And as for PayPal: they don't use your "EC card" either. PayPal offers to process the charge by way of direct debit, which is (now) a SEPA process and totally unrelated to any debit or credit card you may have. It just so happens that girocards list your SEPA account info.
/rant. Sorry, this is just one of those things that gets me.
When I finally understood how that system worked I also finally understood this weird trope in American movies where a character has a half a dozen credit cards in their wallet, and they burn through those as if it were free money for some reason. That never made any sense to me up until that point.
I’m not asking for pity, I knew what I agreed to and I’ll pay it but sometimes high interest revolving credit (credit cards ) only choice you have.
It would be nice if the US had PINs like Europe does for credit cards.
I make around $1500-$2000 a year in cash back from my credit cards and $195 in fees. 6% back for groceries, 3% for gas, 3% on online shopping, and 3% for restaurants. All my household utilities and bills are run through my Delta card to collect miles and a $200 yearly voucher.
Some cards do offer this feature, all issued by credit unions as I recall. Spokane Teachers Credit Union, First Technology Federal Credit Union, and State Department Federal Credit Union are the three I know off the top of my head. Target's MasterCard version of its REDcard also has a PIN but you cannot apply for that card directly.
(I have cards from each of them, except SDFCU, and have considered getting that one simply because it would be a chip-and-PIN Visa card and I don't have that particular combination.)
Care to expand on that?
"International Credit Card" are a small fraction of the total -- under 5%. The vast majority of transactions by number and value are by debit card.
(The national/international distinction is between Dankort, the Danish card payment system only used on most debit cards here, and the foreign companies like Visa and MasterCard.)
I can't get a credit card anyway since my income isn't high enough, and I wouldn't want one because they charge annual fees in Australia.
Banks in Australia run their own payments system, so it's possible to pay by card without going through Visa / Mastercard. Some cards issued by banks don't even have the Visa / Mastercard affiliation, but I think the Visa / Mastercard debit feature is needed it you want to make card-not-present transactions online.
They generally don't have any kind of linked reward points structure, but that's not a huge loss as most of those got nerfed after the ACCC changes a while back (see elsewhere in these comments).
I do have a Visa DC and a MC CC for redundancy if my bank is down, most people I know doesn't even get why.
(Seriously, people, these kind of statistics are extremely easy to find. No need to make them up!)
Very few people even have credit cards.
Places like restaurants and groceries still usual demand something like "minimum 5/10€ to use card", but those signs are disappearing.
same for so many finance and legal topics
you should see the stuff people say in cryptocurrency land, you can even agree with their technology but still be surrounded by the weakest arguments
The number of voices with an accurate understanding is far outweighed by the number of people with some kind of personal and ideological axe to grind about (insert some combination of one or more of: government/regulation/inflation/economics/etc) and from my perspective the whole scene got increasingly wild.
Though I mostly read him for his writings on eg the private mints that solved the British small change shortage during the industrial revolution. https://www.goodreads.com/book/show/3392302-good-money
One way or another every fee must be absorbed by someone that pays.
Interchange goes to issuing banks, not Visa/Mastercard, and that's a big part of why the system is so stable as any competing scheme with a lower interchange will not be offered to customers because it won't be as profitable for the issuers. And, if needed, they can use the whole interchange amount for marketing and cashbacks to make any new scheme uncompetitive, because if it has lower interchange, then it can't match that without losing money.
In particular, it is they that are able to set rates for transactions, and do anti-competitive things like ban e-retailers from offering relative discounts like 'save 2.5% if you use cash' etc..
It's absolutely an ancient cabal banking network, that would be disrupted in any normal, competitive system.
2.5% of a transaction considerably too much, were there efficiency, it would be less than 0.5%.
The fact that banking wasn't a cabal led to the creation of Visa & MC, they provide the function of operating a deliberately independent interchange so competitive banks can work together without having to talk. The fact they havent been replaced isnt due to a lack of "normal competition", its just a system that has built in network effects (but is sticky unlike most social networks).
Dont get me wrong - banks love cabals! Thats why domestic switches (led by central banks) are replacing the scheme networks in most countries for domestic transactions with the domestic switches being linked for international transactions, pushing Visa & MC out.
>> 2.5% of a transaction considerably too much, were there efficiency, it would be less than 0.5%.
I think your wrath is misdirected - that 2.5% may be stated in a Visa/MC press release, but it doesn't actually come from Visa or MC! The banks set interchange through the schemes. You add in 5000 different schemes thats not gonna change the fact that your bank is going to try to get the best bang for their buck if they "acquire" merchants or "issue" cards.
The porn thing is linked too, banking is a heavily regulated space, easy to put pressure on. Acquiring banks get in trouble easily, they rely on schemes to blacklist anything which could land them in hot water. Even if there was no MC/VISA banks would still be paying random service providers to operate blacklists. The only difference would be that it would be cheaper. And typically thats not a good thing.
The evidence that they are an oligarchy lies in their power to set prices. Which points right to the definition of what a monopoly is.
If such systems were truly competitive, and we had say, 5 completely different systems that were truly competitive, the price would not be a total of 2.5%. The price would be set by the market, not the providers of the service and it would be much, much lower than 2.5%.
The article's main point is that such large companies are a cybersecurity risk, and that the government should regulate/nationalize/globalize payment infrastructure.
Unfortunately, experience tends to show that governments would be far worse at providing secure, low-cost payment services. Also, credit cards already are highly regulated when it comes to consumer protections.
So, this article is just not making a lot of sense to me.
If you're a bank who wants their business customers to receive payment via Mastercard, you are not allowed to give a bank account to or otherwise handle payments for anyone on the MATCH list, otherwise Mastercard will shut off your bank's access to their network completely, probably putting you out of business. There is little transparency about how entities end up on this MATCH list. The article does not propose an exact regulation, but the end goal would be that a single company can't arbitrarily shut people out of most of the financial system.
People laugh about bitcoin, and the implementation surely has its drawbacks, but the idea of a decentralized digital payment system is alluring.
Paper from 2010 showing this: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1652260
News article with a good summary: https://www.reuters.com/article/us-usa-fed-wealthtransfer/cr...
>> ...the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year.
Predatory lending generally refers to companies like payday loan companies and cash advance companies which feed off of forcing people to continuously borrow until they can't borrow any more.
Lending should absolutely be accessible to everyone in some way or another, especially in a world where a transmission failure can lead to a lost job if you can't afford to fix it right away.
It is highly restricted in many places.
Such protections should either be scrapped or extended to cover all methods.
You are free to invent a payment method and provide all these protections to your customers. Why would you want to remove protections that CC companies are providing to their users?
Is being able to read and write an "individual responsibility?" How about the ability to communicate in a language at all? What about any other basic core skill that would make a person capable of learning more things to make them "productive?"
"Individual responsibility" as it pertains to these topics is at best a misnomer, if it even names an existent thing at all.
Surely you don't think it's ok for, say, a Company Town to exist? Can you extrapolate from there why it's not ok for credit card companies to bamboozle less educated Americans for money?
I guess we could look at the general fact that education is one of the better investments to increase a nation's GDP, bit I'm more concerned with the ethics than the money.
I could follow your argument if the card issuers weren’t transparent in their pricing and terms like payday loan companies. However, the interest rates are laid out very clearly several times as you apply and are approved as regulations demand. I’m all for education but at some point you have to let people do what they want with their money.
I'm not sure the country has taken the necessary step up in early education to even have the population have a baseline understanding of what interest rate is. I didn't learn that anywhere in elementary, middle, or high school. I had to figure it out on my own.
I don't think that's acceptable. I think that leaves our population vulnerable to predatory companies, who have a disproportionate ability to lobby the government to allow them to stay predatory.
I envision a capitalist hellscape where the population is kept purposefully reapable.
If you've got great credit, you get a high limit, slightly-less-astronomical rates, and all the rewards.
The cost of the rewards is (as I understand it) mainly carried by the transaction fees, spread out over all purchases everywhere. So you have pointless price increases for people who /don't/ use credit cards (like me) or have poor credit, and the benefits of that 'tax' going to users with good credit (ie, rich people). So, yeah, it's a wealth transfer to people with better credit.
There are relatively few businesses in the world that can rip someone off for a year, then allow them to pay a more reasonable fee in exchange for guaranteed business, and still have the consumer claim that the system “doesn’t feel punitive.” The whole thing is kind of brilliant.
Visa/Mastercard charge merchants 1-2% interchange fees for each transaction.
I'd guess that people putting $20k a month on their Visa (I know a few that do) are paying for themselves with the interchange fees.
> "Out of the various fees, interest charges are the primary source of revenue." 
Yes, credit cards charge a large transaction fee, but wind up refunding a large portion of that back to the consumer in the form of rewards, so these days that's not the main source of profit.
I still have to pay the higher transaction costs even without a credit card, because the credit card companies require that vendors have the same prices for card or cash, resulting in higher prices for everyone.
You'll see cash discounts at some gas stations, and the occasional small coffee shop or takeout place will have a $10 minimum, but otherwise it's gonna be the same price most places.
Then it's nothing like taxation and it is optional.
It's a plastic card, it is issued by your bank, it's still using the visa/mastercard network, but instead of credit, it is tied to actual funds in your bank account.
Tell that to the increasing number of shops that no longer accept cash.
Definitely not the case here in the UK, credit cards are very common.
Credit card fees and rebates are such an amazing example of how systems can fool human beings. The entire system clearly could not exist in a frictionless, well-functioning marketplace —- but people seem hard pressed to actually figure out how the whole thing works. It’s kind of brilliant.
Well.. you're paying a 2-5% higher price, but the merchant gets to keep all of that; it's not as if they have to also pay that fraction into their transaction processor.
> I suppose a well-functioning competitive market
You ever see retailers that offer a discount card? Like, spend $50 here get $10 off in the future? Typically they'll only offer those for cash transactions. This is why.
You are also ignoring the cost of cash. Theft and cash handling isn’t a zero cost. Why should I, as a credit card user, be forced to subsidize losses due to cash handling? We could also talk shoplifting as well; policies that don’t punish shoplifters means I get to subsidize that as well. We could go on and on and ultimately it gets absurd. If you don’t like the price, go somewhere else and the market can sort it out.
How about the store gets to decide what to charge?
Most stores seem to believe that credit cards are more expensive, which is why they try to offer discounts for cash.
So the facts do not back you up.
Obviously not everyone does it, but it's certainly not uncommon.
On the other hand, there are also a lot of costs associated with handling cash. The expense of tracking bills and coins and going to the bank every day is not insignificant. So it's pretty easy to argue that there's no reason for cash discounts either, because handling cash can actually be more expensive than handling cards, particularly when you're doing it for only 5 or 10 percent of customers.
The CC companies are only taking 2.5%-3.2%. If they're offering a 5% discount for cash - it's almost certainly tax evasion.
So if you buy a $2 Coke, it's not a $0.054 fee (2.7%), it's $0.354 (or a whopping 17.7%).
Maybe my dentist evades a few taxes, I dunno. But people buy cheap things at the bodega, so it probably is closer to the actual fees.
Also, India came up with RUPAY which is a great answer to VISA/MasterCard monopoly. But somehow it didn't catch up in usage I think.
No one cares about numbers like that. That's way, way below the convenience threshold for a typical consumer. Most of us, me included, would rather pay an extra 3.5% than fiddle with deciding on which card to use.
Which is to say: the market has spoken. We've settled on the duopoly not because it's a trap but because it actually maximizes utility. The uniform convenience of "credit cards just work" has quantifiable economic value. And it turns out to be somewhere around 2-5% of the transaction.
Which leads me to believe that it's generally worth it for businesses, despite the "fees".
"Visa holds a 60% share of the credit and debit card market, followed by Mastercard with 30%, according to Ellis, with American Express far behind at 8.5%."
That puts Discover + AmEx at 10% or so.
In reality an intermediary called “payment processor” handle all CC brands in single system and they are the ones enforcing ideological punishments to merchants.
Like there’s web search and web browser, card networks and payment processors both should be brought up.
Yes, payment processors enforce the rules, but don't typically make the rules.
As I am sure you can imagine, this can result in plausible-deniability-type finger pointing ("we don't make the rules" / "we're not responsible for the rules being misapplied") when an organization is cut off.
Interestingly, even now that many merchants are allowed to offer a discount for using cash, most don't because they've likely figured out (a) if they lose just 1 sale in 30 it's likely a net negative for them, plus (b) people are likely to spend more, especially on impulse purchases, when using a card, and (c) there is just a sense that it can be annoying to customers to have to pay more for using a card, taking away from customer goodwill.
I imagine it's because of lack of enforcement?
So, I still favor the discover (despite now being part of Morgan Stanly?) for most purchases, but when its rejected I fall back on a MC with a cashback program.
That program pays for my computer hardware...
A big part of the reasons credit cards rose to such prominence is that the banking and payment rails are so incredibly stupidly designed. The check system and ACH which is the highest volume way that money is sent between people with different banks requires you to give out the secret key every time you make a payment. Plus it takes at least 1-2 days to clear which makes fraud more difficult to deal with.
Interestingly the credit card system also suffers from the first part, your number is printed right there on your card. But they’ve managed to find and/or strong arm ways to reduce fraud on their network, and as a consumer I’m not liable for paying it which is a huge benefit.
The author really lost me at the end though, I don’t see how regulation magically solves everything and they didn’t explain it at all. There is already a ton of regulation in the payment industry. And this comically flimsy underlying system could easily be improved by existing regulators, how about starting with small steps and seeing how that goes? Instead of advocating for throwing out the entire payment system all at once under the very flimsy assumption that the government will do it better.
However, I still prefer to use a credit card, because of the chargeback — the legal protections with credit cards are still higher.
Edit: about “you’re paying the fees” — maybe, but most of the merchants don’t show different price or don’t charge extra for credit card payment. So why not use the IMHO better option if it costs me the same.
(strangely, in australia, card surcharges became normalised just before cash payments fell off a cliff. credit card transactions have also declined; it's visa/mc debit that have skyrocketed.)
This is basically the situation VPN service providers are in. Yes, in theory, any given provider could be beholden to the state. However, when a new VPN provider can spring up so easily (spin up some DigitalOcean instances, stand up a WordPress/Shopify e-commerce frontend), it's unlikely that any given new player in the space has been gotten to yet by the state (unless, of course, it's a new marque of an existing company, set up specifically to serve as a honeypot for switchers.)
The system that was designed to do bank to bank, without the card systems being involved failed horribly. It was late to market and the launch has horrible mismanaged and covered in unnecessary secrecy. MobilePay had already launched and crabbed a large share of the market, the secrecy was completely pointless and I believe it was partly to blame for the massive failure of the solution.
This is incorrect. MobilePay started out as a layer on top of Dankort (Danish debit card), but after gaining sufficient volume they made a deal with all Danish banks to enable direct bank-to-bank transfers (without using the Dankort infrastructure).
The only difference between Swipp and MobilePay is that Swipp started out only supporting bank-to-bank transfers (thus only supporting a few banks) while MobilePay started out using Dankort (thus supporting all banks). And, as soon as MobilePay had sufficient volume, all banks were interested in circumventing the Dankort network.
It's interesting that it uses card tracks to move the money, but the identification and recipient is not based on card numbers, so the card stays anynomous for the recipient.
Mastercard and visa have recently been very open to this kind of methods, and also issuing virtual one-time-use cards. These new use cases for their network are quite healthy to the payments ecosystem.
Heres to hoping that Apple Pay (and Android) will open up directly to banks or solutions such as Mobile Pay, which bridges to direct bank transfers for member banks and then utilise credit cards as a backup for unsupported banks.
Do you think that the credit card companies having too much power is a big problem in the Nordics?
Our politicians and banks probably don't see it this way, but having a local alternative can help keep MasterCard and VISA in check. If they become to expensive or unreasonable most people already have a competitor in their wallet, one for whom fees are strictly controlled.
Even Amex has an even lower market share than in the rest of the world.
-Direct bank payments use your bank id. You can have bank id stored in the phone, but you can also use a personal keychain authenticator
-Klarna, Collector, etc use your social security number as the primary identification method
-Mobile payments like Swish and mobile pay use your mobile number, so it is linked to your phone
subscription, not your phone.
Of course you still need to have a bank account, but there are a lot of banks out there.
So no batterie, money ? No network, no money ? Phone stolen, no money ? Phone broken, no money ?
What if I don't want to have a spying hardware on me at all time ?
I don't think that is essentially a bad thing. Forcing a digital signature for every transaction makes criminal activity difficult. Modern AML works much better because there is always a digital fingerprint for every transaction.
But I think that these are two distinct issues? Some crypto -things could somewhere in the future solve the privacy issue... But no society wants that, because real privacy makes criminal activity and money laundering possible. But that has nothing to do with credit card duopoly?
But the matter here is card vs phone. Your card do spy on you, but it doesn't have your contact, a microphone, the history of where you have been, etc.
You can easily give your card away to a friend for the day. Your card doesn't need an update. It's not connected to internet all the time. It won't die if it falls, if it rains or of it's too hot. You can have a replacement easily as well.
It's also way more accessible. My grandma can use it. A blind man can. They all work the same way.
A phone is only a good card alternative when every thing goes right. But I value resilience in my paiement system.
Regardless, an acual card and a payment processing network would cost billions to deploy.
Anyway, I was just thinking out loud my idea. I hate interest and mandatory insurance alike.
So in one year i have to pay you 11k.
It is basically 10% interest.
The traditional problem with bank-to-bank transfers in a retail, or point-of-sale, setting has been speed. Cheque was about the fastest that could be mustered.
But with developments like UK Faster Payments (which is mentioned in your link) bank-to-bank transfers are getting faster, in some cases instant. And so usability at the point-of-sale is now on par with cards.
In Holland, iDEAL is used a lot for retail purchases. It's an instant bank-to-bank payment option that competes with the card networks.
The equivalent in Sweden is Swish. It too is moving into point-of-sale payments.
As for the US, I suspect that at some point Zelle will pivot into retail point-of-sale payments. At which point the card networks will have a big competitor.
All of this is good news if you are worried about the card oligopolies!
As a consumer, a credit or debit card gives me a lot of protection. I wouldn't give that up for anything (oh, and the cashback I get too).
You open the MobilePay app, and touch the NFC thing. The amount and payee is shown, and you swipe to confirm the payment. The retailer's POS gets a message.
In a small shop without a fancy POS system, they just print a paper QR code. You can scan that, but you need to type the amount yourself.
They also assume you are involved in the illegal activity and you have to interview at the bank. All this for what can amount to a 20-50 GBP payment, and even if it represents <1% of your transfer volume.
If bank payments are going to become prevalent in e-commerce, this type of primitive reaction to fraud will need to improve drastically.
Apple Pay/Google Pay already offers near-instantaneous, highly-secure transactions in most stores - and with good consumer protection. Contactless cards offer the same up to £45.
I can get cashback/miles/reward points too.
What does a bank to bank transfer offer me as a consumer?
The difference between the Nordic countries and elsewhere may be that 10 years ago, these contactless payment methods weren't widespread.
If you have a basic consumer dispute about something (such as a retailer not giving a repair/refund for a faulty item), you should be able to file a chargeback with the card issuer and get a refund.
In the UK, a credit card is much better though, as for any purchase over £100, the card issuer is joinly liable with the retailer for any issues.
In the US, most PIN debit card transfers occur via either MasterCard's Maestro or Visa's Interlink debit networks. Signature debit payments go through MasterCard/Visa's credit card networks. So you've still got the duopoly problem.
VISA has always struck me as a very nebulous entity, whose structure, governance, is not very well know by the general public.
I wonder how they managed to grow so large while managing to keep such a conspicuously low profile.
edit: and to answer my own question, the wikipedia page is quite informative : https://en.wikipedia.org/wiki/Visa_Inc.
Mastercard so much so that the recently removed their name from their logo as its nolonger needed.
One fintech startup recently sold for $5 billion to VISA. They issused a PR statement that was completely false, but if you didn't work in payments you'd never know they didn't have 11,000+ clients (hint: that's the number of institutions in NACHA.)
Visa / MC remind me a bit of Ticketmaster in that they've got parties on both sides defending them because of kickbacks. You charge the merchant the "interchange fee" plus some amount and that fee goes back to the "card issuing" bank, so they like the system.
The merchant passes on the cost (generally) to the consumer, so they don't really notice, and the ease of moving the money in 99% of cases means everyone is happy.
That's not the case any more, by now all these local companies have stopped accepting bitcoin, because after the first hype, the volume simply was not there to make it worth their while. Some people (often the same people!) bought some stuff initially to try it out, but that was it, there was no sustainable mainstream business. It's still usable for some online services targeting the tech crowd, especially where anonymity might be a feature, but for everyday use of paying for physical goods and in-person services there has been the opposite of "mainstream-ization" in my experience; by now the mainstream businesses have tried crypto and found it not useful. There's enough well developed infrastructure and service providers so that mainstream businesses could easily accept cryptocurrencies if they wanted, but they don't, because there's no significant customer demand outside specific niche markets.
Venmo is the thing in the US, but China has Alipay/Wepay, SE asia has various digital payment apps, Japan has had a huge "cashless" push in the past 12 months....
If I were running a retail shop in the US I definitely would accept payment by Venmo if I could.
It's hard to say whether these apps are actually focused on B2C transactions, so far it's almost entirely C2C (P2P).
For instance, in China WeChat Pay only charges 0.1% above 10,000 RMB (from what various articles say). Square is not even in the same category, charging 2.6% + 10¢. And you don't need to buy any equipment to use WeChat Pay; you just need to pull up a QR code on your phone.
This allows people to on-board to WeChat Pay easily through online banking. They also have way less KYC hurdles, so people can go from signing up to sending money in minutes.
US online banking is eons behind China, and almost any other country. So many online banking systems in the US are prone to unauthorized access, which makes on-boarding and security highly inefficient.
And modern Tendermint/Cosmos SDK-based chains or Solana are basically distributed databases, using consensus models similar to Raft, except with byzantine fault tolerance and Proof of Stake for leader selection.
No mining, no forks, finality within seconds, large throughput. Pretty boring, actually, with little hype surrounding it - it just works, like a regular database, except there's no single entity controlling it.
One of the top five payment gateways in Korea - CHAI - uses the decentralized Terra blockchain as their backend.
When talking to big merchants about any new payment product, the first question you will hear is often "so, how does this lower my interchange cost?"
Of course there are other frauds you are vulnerable to. Which is why it isn't clear what is really best
Merchants take credit cards to avoid losing a purchase. Cards have such a high volume that consumers expect it and some small portion will skip a purchase if its not an option. But merchants would much prefer you pay with a store card, debit card or one of many other payment methods that dont have the same (2-3%) cost that credit cards do.
So far it's been a really long-haul play where Apple has spent a lot of time establishing deals with banks manually, in order to get a tiny fee, which they can due to the increased security of their system. This hard work is necessary in order to create a payment network that can work for everyone.
Eventually, Apple will be in a position to launch their own network, while increasing fees for themselves and lowering fees for merchants.
As someone who's been a merchant I'm very happy to see this happening, although it's like watching a tree grow (paint drying would be exciting in comparison). It's likely Google will follow suit, and depending on Apple's choice of implementation, we could hope that it will be backed by a stable cryptocurrency - but that's just a shot in the dark.
Sure, it could happen somewhere down the line but saying that blockchain is "destroying the moat" today is a big stretch. Blockchain barely just started to realize that the moat is actually much larger than previously thought. And that parts of the moat exist for a reason. It's barely starting to understand the moat, still far from attacking it, let alone destroying it.
Hopefully it will but I'm not holding my breath nor my bitcoins.
It is still a problem in 2020. Gab was recently impacted by Visa blacklisting them (https://news.gab.com/2020/06/19/gab-blacklisted-by-visa/) and also drew parallels to the realities of the "social credit score" system used in China (https://news.gab.com/2020/06/26/social-credit-score-is-in-am...). The vagueness of Visa's allegations stood out to me as problematic, given the lack of viable alternatives.
Ultimately, the lack of a provider who acts neutrally is a threat to freedom of speech and expression for all practical intents and purposes.
I'm not talking about payment processors so much as the degree to which people feel "either" when they could feel "both."
Divisiveness is quite rampant, and I think the language we use (or don't use) has an effect.
ie "Forget Google" -> why not both?
Note that this was a policy decision based on whim and a politician lobbying. No hearing, no evidence, no recourse, no rights and no meaningful alternative. Also a decision not taken by the banks nor, I believe, were they consulted.
The upopular person's (Wikileaks here) rights are your rights and my rights. If you think the've done the wrong thing, you're entitled to that opion and establishing that is literally what courts are for. Much the same way we might want law and courts involved for suspension of a driving license and not simply because a politician doesn't like you and lobbies a bit. "Nobody who drives for UPS can drive on the roads because they love Putin" --not as ridiculous a fabricated politician's quote as it should be.
But going back to it being a data network and standards organisation that describes the classic long-run decreasing average total cost curve of the natural monopoly which makes privatising it for profit a pure "rent-seeking" play.
So we can see how egregious the monopoly is two ways there. Practically with an example and according to classic and relatively uncontroversial micoreconomic theory.
So what about the classic monopolists' defence, which will come up again here. Define the market to be bigger and claim it's a small fraction of that bigger market. Can we just dismiss that as total B.S.? ie "You can also use cash to buy things." Try running a business or calculate the additional cost of buying the things you need without using the visa/mastercard network.
Unless you have multiple networks with very low switching costs it's a disaster. Disclosure: Ajit Pai disagrees with all that totally.
When it comes to advertising online though, you have only 2 choices...Google or Facebook. As a business I can't not go with those two or I'll lose immense business. I can go with a Visa, Mastercard, Discover, Amex...and it really has no effect on me outside of the benefits the card gives me. The fees charged to the banks, etc are essentially the same. So it's really no comparison as to which is worse for the market itself.
Of course it’s endlessly more complicated then that but it’s important to make the distinction.
When customer clicks “Checkout”, they are sent to payment processor website to enter card number like 1234 ...5678... and whichever card it is, it goes through, and shop owner receive the payment later.
Which means payment processor has contracts and connects with every card networks, absorb API differences, and on top of that, obeys and agrees to everything CC network thinks or says, to be able to handle any cards customers may have with them.
So if a Visa or MasterCard exec thinks maybe he don’t like Cheetos and make a call to processor CEOs how they think about it, no later than by Friday no one will be able to order a single bag of Cheetos, especially online, using any credit card because payment processors will have explicitly communicated that Cheetos had never been tolerated from the beginning and any store who let that happen will have accounts frozen.
It happens somewhat softer than that but kind of happening once couple years these days.
Someone is going to say:
Micropayments (it's never worked.)
Pre-auth'd lower amounts retailers can pull from you (might work.)
Crypto-escrow (Any place that used to do it has gone out of business I beleive.)
Too volatile: (Peer to Peer stable coins, or "trusted" stable coins protected by laws instead of code address this.)
Thus, peer to peer open source value transfer is the minimum amount of middlemen possible, but is crippled by regulatory overhead at the end points, giving the incumbents entrenched advantage. Caveat: I founded a cryptocurrency.
No more denying legal pornography businesses, no more denying legal fireworks stores, etc.
Note that it's value, and not number of transactions.
Personally, I have only 4 things pay out of my checking account.
Mortgage, HOA dues, and power are all bills that require checking account transactions for auto-payment to avoid credit card fees. These are very large transactions which will greatly skew any measurement by value.
The final thing paid out of my checking account is interesting: the credit card payment. Since any money I spend with my card necessarily is repaid from my checking account, that also greatly skews measurement by value.
If I spent 50% on housing, and spent all of the rest of my money on things with my credit card, then my personal ACH value percentage would be 66%. (1 unit house payment, 1 unit credit card transactions, 1 unit paying credit card bill)
This isn't even starting with business to business transactions. I'm unsure if the source is counting it in that metric, but it would further skew any value measurement. No factory is going to use credit card when buying $100,000 worth of parts from a supplier.
All those things considered, 82% seems about right, even if you assume something like 90% of consumer transactions use credit card.
I have a business who uses a credit card every month to buy more than $100,000 worth of materials from a supplier.
On the consumption end the card programs are wonderful, great purchase protection negotiated, delay on actual payment for additional working capital, and rewards. We basically never have to use cash for employee travel expenses, all via points.
There is no benefit for me paying my suppliers via ACH, wire, or check.
I think the largest chunk of the volume difference is commercial-use. I don't have the numbers handy but the difference is huge.
It really depends on the types of products and what the consumer experience is like. Google is an interesting beast in that we provide services across a wide variety of billing models.
You have immediate product purchases, where knowing that the transactions is complete immediately can be important (ex: Play store games, or movies). Credit cards are great for that instant guarantee.
For delayed billing or threshold billing (Ads), slower payment methods can work great (eg: ACH, wires, vouchers). Some of these also allow a standing instruction that a company that just keep paying money against to top-up their account (and Google will see it as a bank statement push payment).
So yes, Credit Cards are a small volume of US payments, they enable specific products that don't work great with ACH or wires. If the US ever gets 100% ubiquitous instant bank push payments, maybe that'll change, but our banking system is too disjoint to move at any kind of speed to do this.
The clearing house is also owned by many of the large banks in the US. While this seems nice, I'm sure there's some paranoia from non owners about joining a network owned by their competition.
The UK went and interesting path of forcing all banks to implement faster payments, so it got wide coverage.
Private companies can refuse cash.
"There is, however, no Federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services"
However, if you stole the thing and were ordered by the court to pay restitution, they would have to accept cash for that.
What's worse, if you look at the details, there is a swath of products that are darn near impossible to buy without a credit card.
* receive direct deposits
* pay credit card bills
* pay rent
Which represent a large amount of the value transferred vs number of transactions.
"100 billion transactions during 2014 with a total volume of US$6.8 trillion"
Even worse, the payment processors do not apply their own ToS unilaterally. You'll find some websites will retain processing, while you lose it, even though the reason is that your business model is high risk. PayPal is notorious for this. Their ToS will only be enforced in certain countries, leaving companies in places like China with PayPal processing while your company is permanently banned from the platform.
It becomes impossible to compete if you are banned from Stripe & PayPal while your competitors are not. If their own rules are not applied equally across your industry, they effectively pick the winners. Their platform also favors long-standing merchants in many ways.
First by providing them an account manager, second by essentially grandfathering in certain accounts. You'll find it very difficult to process payments in certain industries on PayPal, likely not even being successful in on-boarding, while sites operating in the exact same business have functioning PayPal accounts.
It's incredibly anti-competitive. These processors run such a large scale monopoly; there are so few comparable alternatives, I've seen so many people go out of business purely by losing their PayPal.
Sidenote: A bunch of the payment gateways began integrating BHIM and charging merchants a cut of the sale for what they pay 0 for. Can't see that lasting if people move off V/M completely.
- Isn't tied to a piece of plastic that expires
- Front loads the fraud prevention by requiring 2FA to make sure up front that the buyer actually wants to pay for this.
- Opt-in, per-transaction chargeback/escrow service (intended for shipment of physical goods) that you don't pay for if you don't activate. Transactions are clearly marked whether they include this during checkout. Otherwise transactions are final
- For subscriptions, allows you to specify the conditions under which future charges should also be accepted, and when they should be held and you get contacted to approve them instead.
- Basically anywhere the current system can fail/reverse a charge, the improved system would verify this up ahead, so the payment processor can be sure the buyer really wants to pay, and the merchant can be sure charges don't fail unless the buyer runs out of money in their account or actively cancels the subscription.
- Charge a much more reasonable processing fee, due to not needing to wade into disputes and fraud recovery all the time.
Why is it that to pay for something you give the seller the keys to your account and they go in and withdraw the money they want instead of the seller sending you a request and you accepting to send the requested money..
Another plus side of your suggestion is it now becomes trivial to cancel any subscriptions since you can simply stop allowing the payment to go through rather than getting the seller to stop taking your money.
This may sound like a slightly obsolete but otherwise well thought out system until you notice that revoking the SEPA mandate requires you to contact the vendor first which is kind of silly.
There is! Nothing forces vendors to collect a paper form and signature. I know some countries still love paper trails (hello Germany) but even there, you'll find some businesses that don't do it. When I lived in Berlin and signed up for my broadband with 1&1, I just had to copy/paste my IBAN into their online form.
> physically mail you a SEPA mandate which you have to sign and mail to your bank.
Nope. The bank is not involved at this stage. Banks authorize direct debits by default, they don't need to know about the mandate beforehand.
> revoking the SEPA mandate requires you to contact the vendor first which is kind of silly.
It's not. It leaves the responsibility with the contracting parties, and keep banks as a neutral medium. That said, as a customer, you can revert a direct debit with a single click, and permanently reject further direct debits. It doesn't have any effect on your contract (and the vendor will send it to debt collection if it believes you're in the wrong), but you keep full control.
By the way, you can build a fully digitized billing system on top of that (there's SEPAmail in France for instance), and more and more banks support instant payments, which I assume can be used to improve the scheme.
It’s an extension of the technology that powers Apple Pay and Google Pay, and basically allows merchants to get a virtual card issued to them.
In the EU that would require 2FA to happen, along with describing to the customer what the billing schedule is (required for SCA but being implemented slowly).
The end result is the merchant gets a non-expiring virtual card to bill the customer, and the customer get the ability to disable certain merchants by asking their bank to destroy the card linked to a specific merchant.
Unfortunately all of this stuff is very new, and there are a bunch of issues that will prevent merchants from using the tech. But it is happening slowly.
At this point, the innovation stream has just about dried up. We're left with a need for micropayments that don't cost more to process than the value of the transaction, and almost all innovation has taken place to one side of card services.
If we fixed international funds transfer we'd probably get some incremental benefit. KYC is only part of the problem here, I recently did some IBAN transactions to the UK government from Australia and the expectations of fixed-field width (send this 15+ char reference string, but the input side has 12 chars for the reference field) were bizarre.
Huge amount of excess profit in TT.
Cheques? dead except for the USA.
Coins are dying of covid.
Remittence processes and the Islamic banking tradition is waiting to be somewhat unlocked. (trust is not transitive, unless you are a migrant worker from S.E.Asia and you have to get money back to mom and dad efficiently, without having any formal ID in the host country because your boss took your passport)
I disagree completely.
There's no technical or business reason why we couldn't have micropayments tomorrow. It's been tried many times already. The thing about micropayments is nobody actually wants them. Each time you make a payment of any magnitude, your brain has to process a 'purchase' which carries a large mental burden, and eventually you get decision fatigue.
Micropayments are one of those ideas that people think we want, but in practice, nobody does.
As a thought exercise, why do you pay Netflix $13/month and deal with sporadic content disappearances, when you could pay Apple $1.99 for a perpetual license to whatever piece of content you could ever want? Nobody wants to make that purchasing decision each and every time they want something. They'd rather pay for an all you can eat buffet even if it's objectively worse and more expensive over time.
> If we fixed international funds transfer we'd probably get some incremental benefit.
Check out TransferWise! They've done a ton to solve this problem. They even have a currency agnostic bank account with local banking details in 6+ regions and supports 50+ currencies.  IMO they've largely solved remittences for the average joe.
If you've got a ton of money to move you can use InteractiveBrokers to exchange currencies at market rates for $20 per million (!!) in commission.
> And it could potentially have been even worse. Had their few competitors also gone down, literally all electronic payments would have broken at once.
This... is not true. As noted by another comment here, a vast majority of the value transferred (82%) is ACH in the US.
Big companies, a rent-like business, no pressure to do things well, own lots of very sensitive personal data, clients giving the data away without realizing it, little regulatory oversight on the data front, etc.
I would expect them to sell or leak poorly anonymised personal data, leading to huge privacy issues.
Why hasn't this happened?
But they are at their core public companies that want to maintain their image. They are reactive to public pressure and political headwinds, and will cover their bases by running away from thorny messy situations. This crosses the aisle in every imaginable way - whether its stifling whistleblowers or stifling supposed hate speech. The reaction to public pressure is not going to be avoidable with any conceivable system, privately owned or otherwise.
The best defense is competition, and despite this post's assertions, there is competition in this space.
Perhaps in the US, but elsewhere around the world Amex is barely ever accepted.
That said this duopoly only really applies to internationally accepted credit cards, lots of countries have alternative payment methods, but these generally don't reach beyond the borders.
Amex takes much more (~4%?), so the problem is even worse there. Of course, they can and do bribe the customer with part of that fee so that it seems attractive, but from the wider perspective it's a huge overhead for no good reason, and if every transaction was like this (i.e. if Visa-MC was replaced by Amex) then that would be a big drain on the economy.
Anything this duopoly can't control is a big no-no to them which is why they detest Bitcoin and the other alternative cryptocurrencies. Some online services are beginning to accept cryptocurrencies, which is a start. Cryptocurrency ATMs are a thing to cash out money, thus one could say that you might have bypassed them.
A side note, for those offended by master/slave terminology perhaps now you can ask Mastercard to change their name. Since, its pretty much has somehow offended somebody out there. /s
Bank transfers within a country are often free of charge, but are quite uncomfortable to make (typing numbers) and usually are not sent immediately (so that you can not pay this way in a grocery store).
Banks have no interest in making bank transfers easier or faster, or opening up to cheaper competitors of Visa/MasterCard. Meanwhile, people happily keep their money in a bank, seeing that all bank services are free and that it "can not get any better".
I think, if anyone is to replace Visa/MasterCard, they should also make their own bank (a place where people keep money in a long-term).
Some payment terminals now can also generate a QR code that you can use to pay, in addition to the normal debit/credit card payments.
> Fry: $30? I can't afford that. Unless... Do you take Visa?
> Salesman: Visa hasn't existed for 500 years.
> Fry: American Express?
> Salesman: 600 years.
> Fry: Discover card?
> Salesman: Sorry we don't take Discover.
the good news is that Amex seems to have stepped up while partnering with Walmart for their BlueBird cards - while not perfect, at least helping to add more options. and with walmart in the mix it seems to help get a 3rd (Amex) option accepted more places.
maybe not the perfect solution, but at least a step in the right direction.
Getting this "duopoly" right is very hard. Payments has a number of actors, and the label is there to ensure fair play between acquirer and card issuer.
While mastercard and visa controls the market, it's not like there isn't competition: Amex, discovery, etc., are all labels that compete with the so-called duopoly.
Is this a result from the community or the algorithm?
HN seems to have changed a lot in the last few years.
Anyone familiar with the intricacies of these operations know how amenable they are to being debundled into discrete components and provided via an Ethereum-like protocol?
So, why? The article doesn't seem to answer that question. What prevents shops from supporting alternative payment systems?
Why? Because monopolies are bad, and we don't like them, no matter if they provide value to people, if they are not built around government regulations that stop competition from happening.
I have pretty much stopped using cash altogether and use cards mainly in those outlets which don't have upi.
Those protocols are substantially more open than Visa/MasterCard, and introducing a competition shouldn't require hardware changes for the POS.
This is addressed in the article but the title doesn't reflect this accurately.
TLDR; Clickbait title :sad face:
It's bad idea to forget "issue 1" and focusing on "issue 2".
Both issues are major.
No, thank you.
In the EU the just use bank cards. And since there's regulations the fees are lows and everyone can use it everywhere.
If everything has to be accepted everywhere, then there's no differentiation
No commentary on the larger picture here or Amex/Discover, just pointing out your other examples don't exactly fit your point fully.
Every medical service requires paying a physician. And it's no trivial amount, its a huge expense. Further, any numbers on physicians salaries are horribly skewed because they don't consider specialists "physicians".
Maybe we are better off with VISA.
How about NO! How about we go after all three of them? Google should not be left off the hook. This is just whataboutism by Google's PR.
Anyway, Google's employees are all over this thread.