As someone who recently went down a rabbit hole into trying to optimize credit card rewards (and opting for cashback in the end), I'm still kind of perplexed how it all works. Like, who's paying for the flights? Consumers, merchants, airlines, banks?
Is there a good primer on how all the pieces work and what the various incentives are and such? I found patio11's post[0] and this Fed investigation[1], and both were interesting but left me wanting more.
Consumers, especially those paying in cash. Merchants jack prices up to account for credit card fees. The fees pay for things like cashback and flights. Typically CC companies don't allow for merchants to have discounts for stuff like paying in cash (although some businesses may anyways...) so customers paying in cash essentially pay extra.
> Typically CC companies don't allow for merchants to have discounts for stuff like paying in cash (although some businesses may anyways...) so customers paying in cash essentially pay extra.
Cash discounts have always been permitted in merchant agreements.
What was forbidden until a couple of years ago was credit surcharges however that restriction was removed in 2013. Unless forbidden by state law they're allowed everywhere in the US.
I'd argue it's actually the people paying interest covering all those rewards. Credit Card companies know they have a high percent of people that don't pay off every month - especially travel focused cards.
Yeah it is actually pretty insane, the middle class with a barely handle-able debt load are paying for the upper middle/upper class to have free flights, etc...
Not sure about that. Consider that in Europe, credit cards are not as popular, perhaps in part because there's not much in the way of rewards programs. An oft-suggested reason for that is because card fees are legally capped pretty low in Europe.
What's fun, is if you run the math (let's assume $1k card) - the credit card companies make more money if you charge and pay off your $1k each month than if you charge $1k and then pay interest on it.
Let's assume 3% merchant fee, they get 3% of each charge, so $30 a month, for $360 in a year. Most cards max at 30% interest, which would be $300 a year (technically less because you're paying it off each time). Even with the 3% once, that's $330.
The banks aren't dumb. The interest they make is gravy.
Not just cash, also debit cards and credit cards with lower rewards. Basically merchants raise prices to average out these fees, so a person with a cash credit card would pay for someone who uses Amex platinum.
If I pay cash and pay a price that rose because of credit card fees, how does that cash go back to the credit card companies? Wouldn’t it stay with the seller?
If the credit card companies take a dollar from every transaction, then the store raises prices by 80 cents to keep margins the same (because some people pay by cash). Your 80 cents in cash goes to the store, and subsidizes 4 other customers purchases (who would otherwise be paying the full extra dollar).
Note that this complaining over fees is a privileged position, we are trying to slash visas margin, but if it didn't exist we would be BEGGING someone to come and run it this smoothly.
Businesses don't raise prices to "keep margins the same", they raise prices to maximize profit, adding a transaction fee generally has unpredictable effects on price, including possibly lowering your optimum price. I bet this rarely happens in practice, but the theoretical situation is not particularly simple.
> Businesses don't raise prices to "keep margins the same"
It's absolutely common practice. A few luxury businesses can get away with outsized margins, but everyone else in the physical goods business is working at 60-70% gross margins (so MSRP is usually ~3x cost). Grocery stores are outliers with absolutely razor thin margins.
In twenty years in e-commerce, I've never not seen prices updated to keep margins in a narrow band.
The only thing that will happen is if you have multiple competing companies, they affect each other's prices in ways that may make the band wider. You also have the various x.99 prices that companies want to hit (so a grocery store will sell something for $4.99 and not raise the price to $5.17 to keep their margins, but will hold out until they feel they can jump to $5.49 or $5.99 - this right here is the biggest reason for "shrinkflation" - the price wants to move to something that is not a .99 and so they resize it to make it hit one.)
yes. i pay all my CC bills on time and don't incur any fees. So it's no-brainer to pay using card as I get cash-back plus perks like dispute/warranty protections etc if something goes wrong.
I bought my last phone with my amex and literally dropped it on a rock no more than 6 hours after taking it out of the box. Completely shattered and bricked the screen.
Amex has accidental damage coverage for 30 days after purchase, and they fully reimbursed me for the $300 repair. Very happy about that.
The dispute protection is no joke. Once 10 years ago, I bought something from Kroger with a debit card. A few hours later, the merchant charged a whole bunch of random amounts to the card until the total climbed above $1000 and I blocked the card. It took the bank quite some time to get the money back. Thankfully I wasn't living on the edge and didn't have rent due around that time period or else that would have been a much more devastating event. Never have to worry about that nonsense with credit cards.
It wasn’t the merchant someone placed a skimmer on that machine. It happened to me, but only for $100…my bank caught it instantly. I used a debit card at Home Depot, and an hour later my bank contacted me knowing that I did not purchase sneakers at a Steve Madden store an hour away (I was actually impressed with whatever fraud-detection software they were using) After that I was very wary about using debit cards, but felt better once most had chips on them.
About 10 years ago I had a similar situation for $500-1500 with my debit card which was pickpocketed in Chicago. I was lucky, Chase put the money back in my account within a couple hours of me calling. Legally I think they could have waited much longer, but they made me whole the same day.
I was a college student, traveling, and generally carried low balances. I was very thankful that Chase handled it the way they did.
They’ve also likely made far more than that in overdraft and monthly fees from my chronically low-balance accounts which often didn't have direct deposit going into them so I’d have monthly fees for the sin of simply “having less than $5,000 and no direct deposits that month”.
They can give legally discounts for other payment methods, but not for specific cards. Credit is credit.
Meaning if you have a card that charges the merchant high fees and gives their customers lots of rewards, the business has to either eat that cost or not take that card. They can't charge you more for AmEx.
Not a fan of these credit card fees, especially where certain cards have higher merchant fees, but cash handling has its own fees such as bank per-deposit fees, leakage, and additional labor costs. According to Gemini, accepting credit cards has lower total\hidden fees and other benefits...
>Compared to cash, credit card transactions generally come with lower hidden fees for businesses. Here's a breakdown:
>Credit Card Processing Fees: There are fees associated with credit card transactions, typically a percentage of the sale amount paid by the business to the credit card processor. However, these fees are often lower than the cumulative hidden costs of handling cash.
>Faster Transactions: Credit card transactions are quicker than cash transactions, reducing checkout lines and improving customer experience. This translates to lower labor costs for the business.
>Reduced Risk: The risk of theft and loss is significantly lower with credit cards. Chargebacks (when a customer disputes a credit card transaction) can be an issue, but these are typically manageable compared to stolen cash.
>Improved Sales Tracking: Credit card transactions provide a clear digital record of sales, simplifying bookkeeping and reconciliation for the business.
>Potential for Increased Sales: Offering credit cards allows customers to make larger purchases they might not have enough cash for, potentially increasing sales for the business.
Gemini just summarized what I had discovered in the past on this topic, I had read somewhere that cash handling can add up to 17% in total fees but I believe it was an unbiased source.
Of course what is not accounted for is tax avoidance which cash can make easier for a merchant.
In the US, cashback will be likely be wholly or significantly funded by the Interchange Fee that the merchant receives.
The Interchange Fee is the fee the card issuing bank "skims off the top" from the fee the merchant is charged for taking your card.
In the US, interchange typically around the 2% mark. In the rest of the world its more like 0.2%, hence you can only really fund your loyalty programme out of interchange in the US.
Other sources of revenue the card provider can use are any annual fees they charge the customer, any penalties they charge the customer, and of course interest fees charged to cardholders who do not pay off their balance.
If your card company also runs a points scheme, then they can get extra revenue by selling points, either to you directly so you can "top-up" your balance, or in bulk to third-party companies who wish to offer points promotions.
> Like, who's paying for the flights? Consumers, merchants, airlines, banks?
If you are asking specifically about points-accrual card loyalty schemes where the cardholder accrues points which they can then use at a later date for flights, then that is all magical smoke and mirrors.
It boils down to the careful stage management of our old friends supply and demand.
Supply:
The card issuer issues your points. This sits on their balance sheet as a liability (the points are assigned a dollar value).
i.e. at this stage it costs them nothing in terms of hard-cash, just a small technical accounting reduction in profits
When you "buy" your airline ticket on points, the liability crosses the balance sheet (the company raises an invoice to you which is paid with the points).
Demand:
This is where the other half of the magic happens. The company makes sure to limit the ability for you and everyone else to redeem points.
You will have seen this if you have ever tried to book a flight based on 100% points, you'll find very limited availability.
Of course you will have seen companies offer you to pay "part-cash/part-points", but if you look closely, the "exchange rate" on offer is generally very poor value for money.
Does this mean when I use a "rewards card" outside the US (that has no additional currency fiddling fee) that the bank is eating the 1.8% difference? Or do they get me on the currency exchange rate?
I suspect I know the answer, even thought their rate is almost always the best available to me.
I used to think it was the consumer/cash buyer but it's pretty clear now that the merchants do not have the pricing power to pass these costs on. It's why they get upset and try to lower fees. It's why Costco stopped taking Amex. If they could simply pass it on they'd be indifferent.
I don't know what happens in the US, but in Australia we have credit card and debit cards. Credit Cards typically charge a 1%..2% fee, Debit Cards have a 0% fee. Both are issued by Visa or Mastercard. 0% is much closer to what is costs for a computer to record the transaction that 1%..2%.
That's 1%..2% of a huge chunk of consumer expenditure for something that evidently costs close to nothing to run (going by the Debit Card fees). If you earn $100,000 a year, spend 1/2 of it using credit cards, then at 1% that's $500 a year.
It’s appealing to blame everyone but the consumer.
You, the person wielding the credit card, are paying for the flight.
You swipe your card, and when you paid money for something, seemingly, you also get a little bit of a flight with it.
This is kind of like going to a restaurant and swiping your card and enjoying the ketchup. You paid for the ketchup. In few restaurants can you go and eat the ketchup without buying something else. But they still sold you the ketchup.
Why does this have to be a big conspiracy?
It is definitely interesting that it’s this or that merchant bank swipe fee airline spin around turnaround thing. On the other hand who cares.
It is all obscuring the fact that you are buying the flights.
If the flights didn’t exist, 3% merchant fees would still be atrocious!
It doesn’t fucking matter to me if people spend money to buy flights, whether by buying them directly through airlines or via some brain dead savings scheme. You and I will never benefit from high swipe fees. You and I will never be billionaires. Absolutely nothing in the world would be lost or become less meaningful if CC providers charged less for swiping in the US, like they do in the rest of the world.
Consumers pay. One way or another. Sooner or later. And upstream costs flow down hill to the consumer.
As for cash v rewards, the best way I've seen it said is: Rewards don't earn interest. So in general - due to inflation - the longer they sit, the less they're worth.
To your point, cash back gives you the opportunity to invest / earn interest.
If you always pay down your credit card debt every billing period, you're considered a "deadbeat" because you're using the benefits of the credit card's payment processing but not paying in interest.
The best customers of financial institutions aren't those whom are financially responsible or flush with cash, but those regularly incurring 14+% interest on every purchase and paying overdraft fees.
For airlines in particular, the deals they allow through credit cards are more like loss leaders. They need to fill up seats because that's the nature of their business model. If you don't fill up enough seats to make up for the operating cost, the plane doesn't fly, and if the plane doesn't fly then that's one fewer route you'll have paying customers for. Airlines need to keep routes going, so they create incentives to keep people flying, which hopefully gets them into the habit of flying again even when they've used up all their rewards points.
Banks do not treat credit card customers as one uniform group, using the poor to subsidize the rich. They are multiple segments, with different business models in each segment.
High spend full pay customers provide revenue through interchange fees, marketing deals, and other sources other than interest. They are the most valuable customers, And the most obvious customer facing evidence of this is that they get the largest sign on bonuses.
As a proud "deadbeat" in this category, the rebates are great, but I know it comes at the expense of broader society. Effectively, if you're wealthy enough (like many on HN are) you can use cash back rewards to get more money out of the system than you put in via fees, meaning at years end you will net back money over and above pricing to compensate for the transaction fees (IE, the prices of goods tend to be marked up at least 2% more to account for transaction fees). This is why 5% cashback rewards are a huge draw, even though you often have to manage categories, you can seriously come out ahead if you plan your spending accordingly.
This is why the wealthiest consumers - I'd argue to credit card companies they're the most important consumers - actually defend higher fees. Credit card companies know full well there is a subset of folks who will never pay interest, but they are also some of their strongest public defenders for the status quo.
According to the OP's link, the credit card companies made $51 billion in interchange fees in 2020. That's mostly from what you call "deadbeats". That's a lot of money. Deadbeats are super-profitable.
Those paying interest & late fees are even more profitable than deadbeats. But make no mistake, the credit card companies love deadbeats too.
The biggest lie the banks get people to believe is that they're somehow "scamming" the credit card companies by paying off everything in full each month.
No! You're a highly profitable customer! You're the customer they offer $400 to to sign up!
> If you always pay down your credit card debt every billing period, you're considered a "deadbeat" because you're using the benefits of the credit card's payment processing but not paying in interest.
So why do they keep offering me incentives to use their product? Is it the hope that one day, after 20 years, I'll finally overspend and they'll get to collect some interest from me?
Credit cards enable you to buy more products and services earlier, which is good for financial institutions that have investments in the businesses that provide you those products and services. Money that just sits there does nothing for anyone, but money does good things when it keeps moving. Even if they don't make anything off you, you're moving money around so the businesses they have partial ownership of can be seen as valuable and have reason to grow. They can't just give money to these businesses instead of you because then there'd be little guarantee that they'd provide enough value to be worthwhile. By giving you a credit card, you're telling the financial institution behind the credit card what businesses are valuable to you and what they should be invested in.
This isn't to say that they don't still consider you a low value user, since you're not providing them with much in terms of direct revenue. Yes, finance companies love it when you hand money directly to them and won't mind if you forget to make a payment after 20 years and and up paying interest.
My guess is they probably have mountains of data that they use to optimize the probability of overspending across a population.
You may be unlikely to overspend after 20 years because you are financially literate, but if you're paying off your credit card every month, you and I are very much outliers on the bell curve of net worth in the US. If you have an engineer job you almost certainly are an outlier. We aren't the target audience of these ads. There are a lot of people in the middle of the curve who mostly pay off their credit card every month but might slip once or twice, and they want to optimize that probability of slipping.
Because they collect their 3% or whatever, and even after giving you your "cut" for strongarming the merchant for them, they still get 1% or whatever it is.
You've paid off every month on time for 20 years, and they get 1% of that. For basically running some servers and balancing payments.
That's big money - debit cards do the same thing for what, 25 cents a payment? So once the credit card hits about $9 it's all gravy.
incurring 14+% interest on every purchase and paying overdraft fees
Your point is well taken, but even with a high credit score Apple Card is still at 16% (for us). And after a surprisingly/not surprisingly difficult time finding that interest rate, Bank of America is charging us friggin' 20%. We pay both cards off each month, so it doesn't matter to us. But it probably does matter to the less-well-off person paying probably 22-25% on credit card debt that they don't zero at the end of the month.
(EDIT: I see @denimnerd42 ninja'ed me on this point.) Though Goldman-Sachs was losing money on the Apple Card, apparently. How does that happen? From what I've read, Apple wanted a high approval rate, so folks that would be paying those interest rates each month were getting approved but the rate of default was high. Again, so I've read. But it makes me wonder if it isn't more desirable to have customers that pay it off each month, but put everything on the credit card and thus generate the 2% (or whatever) merchant fee on, say, the $8K they spend each month. It might be smaller revenue, but far more reliable with less risk of default.
That merchant fee gets split between the network (e.g. Visa) and the bank, so they net much less than you may think off that. They make far more on interest charged.
That's why some high end cards charge a yearly fee. Its to recoup some of the rewards & perks costs in aggregate.
Yep, seems that 16.24% must be the lowest APR. My credit score is perfect, and that's the best Apple Card will do for me. All of my money (everything, groceries to utility payments, all of it) flows through the card and paid off every month. But that APR is a little nuts, so I keep an old credit union Visa around that has an 8% APR grandfathered in from 15 or 20 years ago. If for some reason I found myself needing to run a balance, even for a short time, that's the card I'd use.
Just have to remind myself to use it occasionally so they don't kill it for inactivity.
Man, I thought that would fall under usury laws or summat.
But I do seem to have some vague recollection that some state like South Dakota knows not of this "usury" you speak of, and therefore the credit card company has a business address there.
not really. goldman sachs found out those customers cost them a lot of money with the apple card. the best customers are the wealthy who have $100k+ in their checking/savings accounts and million+ in their brokerage accounts and clear 10k+ monthly on their credit cards.
That could well be (especially if you look at banks who don't offer competitive interest rates on cash).
That said, Goldman Sachs is sort of infamously bad at consumer banking, so I'd take their words there with a grain of salt. They lose a lot of money on most of their consumer banking endeavors: they lose like a billion per year on Marcus, they're actively trying to drop the Apple credit card, etc.
So at some level, of course GS is gonna say their best customers are the wealthy ones, because they largely haven't figured out how to make a decent business for anyone except the ultra wealthy.
That's just GS overpaying in a business segment they don't have experience in. Companies that know how to run a credit card make a boatload off of high-spending users who pay off the full balance every month.
If you had as much cash in the till as required to do business in the 90s; or took checks; or had employees that had to do regular bank runs; to insure against the loss via employees, robbers, etc it would cost a significant amount of each transaction to insure that, especially the liabilities of it.
The likes of Swipe, Venmo, Revolut, Wise etc. should get together and establish a new online payment standard they control, completely outside the reach of the credit card companies. The fees could be near zero and they would still cover the actual costs of running the infrastructure.
It's incredible this day and age I have a more intuitive, user friendly and secure payment workflow for crypto - just scan a QR code - while for fiat payments I have to jump through hoops, manually copy static numbers and worry that someone else might steal and abuse the static password that secures access to my own money.
MasterCard and Visa do not directly offer any fraud protection, at least not in the 1-3% fee. The cost of fraud and prevention of fraud is born entirely by the merchants, and eventually, through higher prices, by the consumers.
What's even more damning is that the online payment flow is a retrofit over outdated and vulnerable technology. Payment fraud could be eliminated almost entirely by a new payment system design.
The credit card companies are simply massive and slow monopolists begging to be disrupted, that nobody has the capital and courage to attack.
I have been dreaming of it for a while, but the capital requirements are so insane that it could really only be backed by a bank. A bank who probably likes the status quo right now. Paradoxically the more popular your service, the harder it becomes to get it off the ground, as you need to put up potentially tens to hundreds of billions a month to cover the credit issued.
Couple this with the fact that interest rates are so high right now, that you would also likely get impaled on the interest of any loans you took.
Maybe ask for favorable terms from merchants, but then you are reliant on the wolves to bring a better life to the sheep.
They don't offer fraud protection, but still track and deal with fraud on their own network. They have to deal with international laws. They can and will decline transactions or cancel cards. They keep track of how merchants are being used.
A company I've worked for has the letters to prove it. You do not want to get a certified mail envelope from MasterCard (not a merchant or bank, MasterCard) containing a letter with a short deadline.
Perhaps they should... but its not like it hasn't been done before, MasterCard started out as a cooperative owned by financial institutions. Before its IPO, it has over 25,000 members. They still charged high interchange fees.
I think attacking it from a different angle- a payment network owned by the merchants (as a cooperative) themselves, would be a better bet. Merchants used to lend money to their customers on account all the time, it makes sense for them to return to their roots and issue their own cards, that work on their own network (for interoperability).
The reason you have to jump through tons of hoops for fiat payments is that laws and regulations require that payments be traceable and reversible, which requires a whole system of middlemen and arbitraging of credit risk. To the extent that crypto does not require these things yet, it's only because not enough grandmothers are using it to pay for their groceries. But make no mistake: no matter how much crypto people insist that transaction irreversibility is a feature, the general public thinks it's a bug and will demand change when the elderly get scammed out of their retirement savings with no recourse possible. Crypto cannot both a) remain free of these hoops and b) get used for mainstream payments; you have to pick one.
Not to mention most crypto transactions are so ludicrously computationally expensive that they could not scale to the volumes the credit card networks handle.
I don't mean "it would be uneconomical", I mean the level of power required would present national infrastructure challenges if not be outright impossible.
wish there was some way to split it out into non-easily reversible payments and insurance to make you whole for fraud
at least to incentivize people through premiums to make it a little harder for their information to be stolen so that we as a society don’t have to pay higher fees collectively
Yep. Anyone peddling cryptocurrencies as a legitimate replacement for traditional State-controlled fiat currencies WITHOUT a meaty protection layer on top is at this point delusional. You think that you’re selling a technological replacement but you’re actually selling a whole suite of financial deregulation that frankly society hasn’t been begging for, and these people will more often than not take it as a given that the general public agrees with their libertarian view.
Have you tried to read the post you are replying to? It clearly refers to online payments which, in this universe, can't be settled with cash. Also, the "static password" securing the credit card transaction is clearly the 16 digit static number printed on the card and the associated metadata, that's what can be stolen.
That “static number” can also be changed if stolen and my money returned. I dont even need to catch the fraud immediately. Most institutions give you 30 days and some higher end options give you 90 days to contest a charge.
Can’t do that if someone steals your crypto wallet or simply doesn’t deliver the goods/services you payed for.
> I'm not sure what this has to do with fiat currency.
Just read their reply as "traditional payment methods". Nothing really protects credit/debit card transactions, the security of which is basically the emperor isn't wearing clothes.
I'd even say the security to directly access my bank via customer support relies on obvious, basically public, identifiers that to me seem somewhat trivial for a potential attacker to socially engineer.
… parent's "solution" does strike me a bit like "meet the new boss, same as the old boss", though.
It feels like this comment is based on not realizing that debit cards are normal things in many parts of the world, where just because you don't want to use a credit card, you don't need to use cash.
You already have a bank account, and your bank already knows how to talk to literally any other bank, because by law they have to all talk the same protocols, so you can just use your bank card to pay for everything, anywhere. No need for cards from private companies like Visa or Mastercard that saw a failed banking system and went "Let us fill that niche, it'll be so convenient! For a large fee, of course".
And it really is a failed banking system: the fact that Interac in North America was able to go "hey we 'invented' EFT and got your bank to sign onto that, because they refuse to directly talk to other banks so you can't move money from one account to another. It'll only cost you a dollar each time!" is just insane.
Debit cards exist and are very common in the US, more common than credit cards. They also largely use the Visa and Mastercard interchange networks though, but they are also tied directly to your bank account. So I am not sure if I am understanding your comment correctly.
In the US you basically always get a debit card with a bank account but not everyone gets a credit card, either because they are wary of credit or can't get a decent one.
US consumers have credit cards on top of debit cards because they really, really want access to credit. Even overdrafting is really common and a desirable feature for a large chunk of the US population.
You seemingly know much more about the backend than me, so I am still a little confused by your comment, about Interac, for example. The US system allows for consumer-to-merchant debit payments no problem, whatever fees there are are totally invisible to consumers. (I think it's lower than the credit interchange fee?) I can also transfer my money from bank to bank without fees, although sometimes it takes a couple days. Where it really falls down is peer-to-peer instantaneous transfers. There are different things becoming popular but I don't think any of them are particularly good, and reversibility is really important in the US market and systems like Zelle don't seem to appreciate that.
A QR code is nothing more than an encoded string of text.
I would expect that if there was a "scan this QR code to pay" system, that the app you're using to pay would show you the amount about to be charged and that you would have to approve it.
All it does is to take you to a website allowing you to enter payment credentials. If this website is not the website you think it is and is instead some fraudulent website made to impersonate a site you are familiar with, then a large portion of users will not question it.
There's nothing about QR codes that necessitates what you're talking about.
Apple Pay and Google Pay could have easily worked using QR codes rather than NFC. The cash register would just need a QR code that was an encoded JSON payload that included the amount to be charged, a merchant name, and a merchant ID. You'd scan it using your chose payments app and the app would say something like "You're about to pay $13 to Bob's Burgers. Approve?" and you click Yes and you're done.
I think he means his crypto service, which does use URLs in QR codes. If you scanned one and it wanted to add a contact or something then it's obviously fake right?
oh joy, if we're now going to debate all of the uses of a qr code, then count me out. in fact, i'm pretty much done with your account altogether at this point.
You don't trust the QR code, all that is is information (a public key, for example). You are trusting the underlying software. (Which in crypto, isn't always the best idea either).
In addition to what others have said, it’s also a tricky cold start problem to get enough car issuers, users, and merchants on board. As far as I can tell (mostly from Acquired episodes linked in a separate comment), Block with Cash app / cash app pay and Apple with Apple Pay, and maybe PayPal are the main contenders that have a shot at competing with the network effects.
I don’t know why you’re being downvoted. Just look at China for an example where this is working. I think you’re absolutely right, and pull in some major merchants (Amazon?) to move the market.
That said visa/mastercard may have agreements that prevent this. If I were Amazon and interested in the long game I’d try to sue them for anti-competitive/monopoly status and remove that contingency.
What’s crazy is how we have a 2-3% inflation that could go away without these fees, and that’s not part the discussion on larger inflation.
As does for India's state sanctioned network. Processes 400M transactions a day at a meagre operating revenue of 0.5M USD but still at a 40% profit margin! The card industry has been gouging the world for decades now.
Walmart and a few other retailers tried to launch a qr code based payment system to directly challenge ApplePay. It took off like a lead balloon. The ApplePay system was so much more elegant and convenient than having to open an app, scan a qr code, confirm payment. Most of the stores that originally rejected ApplePay in hopes of the Walmart backed system are now happily accepting ApplePay.
The issue here are online payments, where NFC is either not available (payment is initiated on the desktop, while the payment app is mobile) or not necessary (payment is initiated on the same device that handles authorization).
There is no way to disrupt NFC payments and no need to - they are already secure, user friendly and can be used by any other major payment provider which gathers the critical mass.
> gives merchants the ability to impose surcharges on customers who have Mastercard or Visa cards.
I fully support merchants being able to charge more for card or give a discount for cash. The fact they haven't been able to for 3+ decades is one of the reasons cash has died and everyone effectively has an extra 1% credit card tax on everything they buy.
That 1% tax has probably been a pretty massive drag on GDP. Imagine how many new schools we could have had instead.
>I fully support merchants being able to charge more for card or give a discount for cash. The fact they haven't been able to for 3+ decades
This is false. Merchants in the US have been able to give cash/debit card discounts since Oct 2011. I would be surprised if Europe did not have similar rules even before the US.
The reason many merchants do not is because they want to bet that people are able and willing to spend more when people pay with a credit card, as opposed to cash/debit card.
Note that many larger merchants do give discounts for paying with cash/debit, such as ATT/Target/governments/insurance companies/etc.
The old settlement allows giving discounts to cash, to debit cards etc, but it doesn’t allow giving discounts to visa/Mastercard issued by particular banks/businesses.
The new settlement will allows merchants to pass the fees directly to consumers on issuer level thereby disclosing the fee of each card and promoting the transparency. Consumers can understand the cost associated with each card and make their tradeoffs
Interestingly there is a call out on the 2018 American Express SCOTUS judgement. I don’t understand that very well.
> Merchants can charge for using a Visa or Mastercard credit card, regardless of whether they can charge for using American Express, whose rules for merchants were upheld by the Supreme Court in 2018.
It was not an old settlement, it was federal legislation (Dodd Frank 2010).
The 2018 Ohio v Amex ruling is about steering provisions not violating anti trust laws. Basically, Supreme Court ruled that AmEx could prohibit merchants from offering cheaper prices to Visa/Mastercard/Discover credit card users.
This ruling was actually very beneficial for tech companies.
It would be funny if, due to this settlement being only for Visa/Mastercard, merchants can charge different prices for using Visa or Mastercard credit cards, but American Express credit card users still gets to enjoy the lowest credit card price, while American Express gets to enjoy the highest credit card merchant fees.
Idk about Europe in genera, but in France you cannot have different prices for cash/card. There can be (and often used to be) a minimum amount to pay with card, but that's it.
But do note that card fees are capped at 0.3% max for credit cards, so negligible in the grand scheme of things. Banks used to charge an arm and a leg for a terminal though, but a bunch of startups like SumUp broke that oligopoly and even random small stands in fairs propose card payments via them "for free".
Many merchants, especially brick-mortar stores that are not chains, do give discounts for cash if you ask.
Also, look carefully at the T&C for all of your payments. For example, Comcast charges $5 less for paying with a bank account instead of a credit card, which for most plans is worth more than your 2% cashback points.
Merchant definitely needed to be able to adjust price depending on the fees.
Visa and Mastercard are mentionned, but Amex is also egregious to the point some merchant hide the support (bo amex logo or sticker anywhere) to only server customers who insist on using an Amex.
With more latitude, I Think everyone wins: the merchant can set amex prices 4% or more higher, customers get to decide if they really want to pay extra, and everyone else has cheaper prices [0]
And I'd personally still pay for the convenience tax to use a Visa/Mastercard card TBH.
[0] even if prices stays the same, more money going to the merchant would still be a win in my book. It's the actual entity providing me something, and arguably I'm choosing to pay them and am fine with them staying in business.
Cash has died because it is inconvenient, unsanitary, and risky to walk around with large amounts of it.
When I pay cash it's because (a) I'm getting a discount (b) I want to be anonymous and not give any personal information (c) my credit card isn't working on their equipment (d) I'm giving tips and worried that their company will take some of it (e) I buying/selling used items from a stranger and want to use an irreversible method of money transfer. If it weren't for these reasons I wouldn't ever use cash. It's inconvenient.
(e) can be served by cryptocurrency, I suppose, but there are other issues with it, like the stranger being able to see your account balance and then come at you with the $5 wrench.
Across most of the world, Mastercard/Visa has used various threat tactics to basically tell merchants that if they charge a card fee they'll get banned from mastercard/visa.
Obviously for most businesses, thats a death knell, so most capitulate.
And the few places with competing payment methods (eg. Kaspi in Kazakhstan), Mastercard/Visa have ~zero fees, and sometimes even negative fees (eg. "special offer, you get half price use of the subway if you have a mastercard")
I was going to summarize the background to the EU's regulation limiting fees, but it's too long.
A couple of snippets relevant to points being discussed:
> (10) ... Competition between payment card schemes to convince payment service providers to issue their cards leads to higher rather than lower interchange fees on the market, in contrast with the usual price-disciplining effect of competition in a market economy. In addition to a consistent application of the competition rules to interchange fees, regulating such fees would improve the functioning of the internal market and contribute to reducing transaction costs for consumers.
> (11) The existing wide variety of interchange fees and their level prevent the emergence of new pan-Union players on the basis of business models with lower or no interchange fees, to the detriment of potential economies of scale and scope and their resulting efficiencies. This has a negative impact on merchants and consumers and prevents innovation.
This should apply to online transactions, which my employer does. My employer is pursuing this and are expecting to get a lot of money back as a result.
Highly recommend the Acquired Visa episode and the follow up on ACQ2 for those looking to learn more about the inner workings of these networks and economics and history of interchange fees and Cashback programs. These transactions can involve up to 5 (!) parties. This comment won’t do it justice, listen to the podcasts!
He he they know EU is going after Apple and that they'll be ripe to be targeted.
The fees they charge are ridiculous, doesn't cost that much to keep a payment network up. I did work for visa one time and it was clear they had not just money, but m o n e y.
More and more stores in my region are simply dropping credit cards and accept cash or debit cards. Simple efficient and judging by repetition - seems to work out fine for them and the customer.
The litigation began in 2005, and the settlement might not be approved (if it is approved) until 2025.
20 years to get "justice" in our system.
By the way, I think Mastercard-Visa shows that the question of whether Apple is a "monopoly" is largely irrelevant, as far as consumers and developers are concerned. Any way you slice it, in the US or worldwide, Apple and Google are a duopoly, and that's not healthy competition.
Similarly, Mastercard and Visa should probably be subject to an antitrust investigation themselves for the same reason. Something as important as payment processing shouldn't be left up to a duopoly of large corporations that seem to be able to block people from their services for dubious reasons.
>Something as important as payment processing shouldn't be left up to a duopoly of large corporations that seem to be able to block people from their services for dubious reasons.
Or the most powerful and capable government in the world could get off its ass and operate electronic money accounts and transfer as infrastructure, with a constitutional amendment on an individual not being able to lose their ability to send and receive money to their electronic money account.
> The pact would lower the rates by 0.04 percentage point and keep them there for five years.
Seriously?
I'm no expert and I know the numbers have to be small given costs and such, but… 0.04%?
That said, this part looks more important in the long run:
> The proposed settlement would create some changes to give merchants more choice on accepting cards, allowing them to guide consumers to cards that have lower fees. It would also give small businesses the ability to form groups to negotiate swipe fees, similar to what large retailers already do today.
It's interesting that operating a massive financial network and charging a 3% fee is too much, but app marketplaces with much less cap ex charge a 30% fee and they're just now being challenged. App market places where you have no option but to use, when you can always pay cash in person.
>There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law that says otherwise.
What do you mean "of course". It's not legal in unincorporated Kings County outside Seattle. It's also not legal in NYC. I wouldn't be surprised in Seattle bans card-only retail in the near future.
I'm seeing more cashless stores in my area and it disturbs me. Hopefully my state can adopt a similar law. I am also increasingly seeing cash prices versus card prices. I'm more inclined to pay cash for smaller shops where 3% matters to their bottom line. Plus it's always good to have a dollar on hand for buskers.
This is a no brainer. Who the hell carries around coins and bills in small denominations for vending machines that will refuse bills that are too wrinkled or might be falling apart? A simple tap is so much more practical.
Not to mention the reduced risk of miscounting/counterfeit currency, or robbery.
Likely due to crimes against businesses that hold cash at the retail location? And that if you pay cash, it’s harder to ask for tips. Plus, cash is just slower to transact and you have to spend resources to count and manage.
The only advantage is if you want to scam the irs.
Legally no one has to accept cash except for "debts, public and private". If a business is selling you something, they can stipulate any form of payment since it isn't a "debt".
What is a sales contract but the admittance of debts on both sides? The seller owes the buyer the good, and the buyer owes the seller the money. Everything is debt in contracts-land and it is quite fascinating. If you'd like, I can stipulate on how "no cash accepted" signs work even though you can force people to accept cash to settle debts.
I'm sure you could but it would involve setting up an in-person appointment at a specific location of their choosing. Also, expect to fill out a bunch of extra paperwork to show where the cash came from.
Countless times I've been at the Airport and overhear people complaining about not being able to use their Debit Card with a rental car, or that they don't have enough money in their account to cover would just be a pre-authorization on a credit card.
Many (most?) car rental companies don't accept debit cards, only credit cards. When they do they have special requirements for people who pay with debit. I was behind a guy at Enterprise who didn't have a credit card so they required something else (don't remember what) and he couldn't provide it and he argued for 10 minutes and then left. When I told a friend who works at another car rental place this she said "oh we don't even accept debit cards at all."
Rental car companies loathe debit cards, for reasons so sane person can fathom. Last time we rented, they (Hertz, as it was) outright refused our debit card.
It’s quite fathomable: they can charge the arbitrary amount of damage you do to the car to your credit card and then it’s your problem. They can’t do that with a debit card if you don’t have enough in the account, it will reject.
Also debit cards are typically used by poorer people who are riskier for them.
Debit cards save them on processing so they would prefer it if all else were equal. They’re not all stupid so the reasons must be sound.
> they can charge the arbitrary amount of damage you do to the car to your credit card and then it’s your problem.
Credit cards have limits, too, just the same as debit cards.
Again, let's look at the last time I rented: you can't do what you're suggesting, as such a charge would be (instantly) declined.
> They can’t do that with a debit card if you don’t have enough in the account, it will reject.
Ironically, it is more likely to decline on the credit card we gave them, than on the debit card we were trying to give them; the limit on the debit card is higher (since it's backed by cash, and not credit…)
> they can charge the arbitrary amount of damage you do to the car
(This would have been a specific violation of the contract we had with them, as the car was insured with them. But I do understand some people insure through their personal auto, but even there, the matter is going to need to be settled via the insurance.)
Well, you may be perhaps an edge case, but most people have much higher limits on their credit card than money in their checking. I’ve probably got an extra zero.
Your contract with them probably gives them the right to do this.
I don’t know what to tell you, these are the reasons. They don’t just want to pay an extra 2.5% processing.
As a general rule, you can assume if all the players in a large and competitive field do the same thing, and it doesn’t make sense to you, and the alternative you think is better is both obvious and easy to implement, then it’s because they know something you don’t. I assure you, major car rental cos know everything they need to about the difference between debit and credit cards.
> Credit cards have limits, too, just the same as debit cards.
The way car rental works is that they put a "hold" on some credit amount. So they would know at rental time if your card is too limited and will decline to loan you anything.
You do if there are potential further charges like damages.
“Has credit card” is obviously a coarse filter, just as creditworthiness is a coarse filter for “won’t wreck my car” but I’d bet you anything you’d see at least a 150 pt FICO spread between people who pay for things with debit vs credit. There’s only one reason to use a debit card and not get the rewards of credit (assuming the price of either is the same) and that’s that you cannot be trusted by a bank and/or yourself to not spend money you don’t have. This is particularly exacerbated with car rentals in particular since so many credit cards include car rental insurance, making it significantly more expensive (either in immediate cash or expected value of risk) to use debit.
It’s not about payment of the $250 in rental fees. It’s about them giving you possession of their $25,000 asset.
And, “doesn’t have a credit card” is actually a pretty good proxy for either “not creditworthy” or “some kind of weirdo”, with neither of these being the people you want to let use your $25,000 car for $250”.
Just want to mention, these fees are ~3% plus some fixed cost between 5 and 30 cents. This does push the effective percentage up when looking at small transactions like those commonly made in an app store. Stripe is the highest I’ve seen with a 30 cents fixed charge, but this means for a $5 purchase, they’re effectively charging 8.9%.
I mean you can say the inverse about merchant fees and large purchases.
I think Stripe's way of doing things is better because it's inline with the actual expenses they incurr. To their servers, there's no difference between a $1000 purchase and a $1 purchase. The cost to them remains the same so the transaction fee should account for that cost. Let the customer figure out how to eliminate that cost without hiding it from them.
Scaling by purchase amount subsidizes smaller purchases, but it allows merchants to take way more money than needed to process the transaction from larger transactions and most people don't even know that it's there and that they are paying significantly more money for an item than they need to.
All these card rewards just waste people's time and in the end, the house always wins. This whole reward game is a direct result of this percentage merchant system and I'd rather not have it.
App stores provide, among other things, the CDN for app downloads and updates.
I don't know about you, but damn near every app on my phone is getting updates multiple times a week. That bandwidth, and the architecture to provide it at scale up to "hundreds of millions of devices", is not free.
Google, for example, provides a massive toolkit of functions and services as part of the Play Store that's not built-in to Android itself. Both companies provide an entire development environment for free. Etc.
Also not free is the infrastructure to run the stores, nor provide security and quality review services. Apple does a lot of automated and human inspection of apps, and while it's not perfect in many ways (and perfect is an impossible standard anyway) it's still an important, valuable service that costs a fuckton of money to run.
Credit card networks mostly just pass transactions around, with some fraud stuff. Almost everything is handled by the processors and banks.
Really, the problem here is that credit cards don't have competition from wire transfer services that are common in the EU, for example. For decades it's been possible to instantly pay another person or a merchant for a product or service and them to see the transfer happened. Zelle is the only thing that comes close in the US, and it was started by a couple of large banks who were fed up with the lack of modernization of the US wire transfer system. We're the laughing stock of the world, taking days for a wire transfer to go through...
In the U.S. credit cards would still be superior to direct transfer services like they have in Europe.
If someone gets my Card and Pin I don’t get back that money; at least not easily. But if someone steals my credit card I get that money back immediately.
I travel quite a bit so I am aware that credit cards don’t work like that everywhere. But, for US issued credit cards the fraud protection alone make them hard to beat.
I agree 100%,
but to be fair I buy at most $10/year in Android apps, and almost every single thing bought online & usually in person too, goes through a credit card.
Is there a good primer on how all the pieces work and what the various incentives are and such? I found patio11's post[0] and this Fed investigation[1], and both were interesting but left me wanting more.
[0] https://www.bitsaboutmoney.com/archive/how-credit-cards-make... [1] https://www.federalreserve.gov/econres/notes/feds-notes/cred...