
Apple is propping up a fundamentally broken payments industry - tomblomfield
http://tomblomfield.com/post/97304410500/apple-is-propping-up-a-fundamentally-broken-payments
======
pbreit
The article is not compelling. Visa and Mastercard only take a very small cut
of txns (15-30 BPs). The bulk of fees go to the card issuers with the bulk of
that revenue supporting loyalty/rewards programs. You could try to get rid of
V/MC but they have provided quite valuable organization.

The only argument that you can really make is that the issuer cut needs to be
trimmed in which case rewards/loyalty cards would mostly go away. Good for
merchants, bad for issuers and terrible for cardholders.

A payments network on the scale of V/MC that has worked near perfectly for
over 50 years is far from "fundamentally broken".

~~~
pktgen
Not necessarily terrible for cardholders, in competitive markets. Comcast
won't lower their rates to account for the lower credit card fees but all the
grocery store chains probably will, since they have to compete with each
other.

I've thought the ideal (from a fairness point of view, not "let's keep the
banks' profit intact" point of view) model would be to have cut fees
significantly (in the 0.5% area), eliminate rewards (again, merchants in
competitive markets will lower prices accordingly), and eliminate the grace
period on credit cards. This will mean debit cards would be used day-to-day by
most people, and credit cards only when the financing is actually required
(not as it is now where many, including myself, use credit cards for
everything due to the rewards and pay in full). I prefer this to the current
system of merchants paying inflated fees, which are passed onto us in higher
prices, and rebated back to us by credit card companies (after taking their
cut of course).

------
iamwithnail
I don't think tom is advocating for DD, in this instance. Particularly since
direct debit isn't really suitable for POS transactions.

Credit cards are fundamentally a 1970s business model, based on tech that paid
off their sunk costs decades ago, but the barriers to entry are so high
they're impossible to overcome right now.

Given you can check balances and make payments in (near)real time, at least in
Europe, there's no reason to continue to use Visa/MC, other than barriers to
entry. You could check balance at POS over the internet and pay from your
merchant account, recovering payment within an hour or so via faster payment.
Frictionless credit isn't the same as unrestricted or unregulated credit -
it's about removing the tether between one bank and one cRd -
disintermediation of the bank. Why can't I have a credit card linked to zopa?
Or someone else, or even, within an overall limit agreed by an umbrella
provider, a number of different providers. That'd be cool, and would drive
channel providers to compete on costs of service delivery (the 2-3% per
transaction), as well as on cost of credit. Visa and MasterCard are an
absolute racket, and one of my biggest grumps is that PayPal became just like
them, if not more expensive.

~~~
gsnedders
You've missed another big advantage of credit cards in most places — they
almost always come with more legal protection. If they're stolen, there are
limits as to how much the card owner is liable.

~~~
iamwithnail
That wouldn't particularly change under the system that I'm proposing, idt.
(on the back of a fag packet admittedly)- legal protection and the payments
mechanism aren't intrinsically linked - most of the consumer protection with
cc came long after the cards had been introduced. If you had an overall limit
then the thief couldn't go over that, and a similar mechanism could/would
exist - it'd probably be a product differentiation, in fact.

~~~
seanflyon
My understanding is that the protections that come with credit cards are a
natural result of contract law. When you buy something with a credit card Visa
pays for it and you agree to pay them back. When someone buys something with
your stolen card Visa pays for it but you did not agree to pay them back, so
there is no contract and no debt. Someone stole Visa's money, not yours.

------
mkaziz
Isn't one incentive for using a credit card that it has better protections
from fraud, etc? If my credit card # is stolen, I have a 30 day window to
report fraud instead of paying, whereas with a debit card, the money is gone
straight from my account.

~~~
alwaysdoit
No reason a competitor couldn't offer the same level of protection.

------
ddebernardy
The article makes very little sense.

First, not every payment requires credit cards or a need for financing.

Second, advocating the idea of cheap and frictionless credit is dubious at
best; subprime loans didn't exactly end well.

Last but not least, it's unclear what you're advocating for instead of what
Apple did.

Paypal, which you mention towards the end, does everything through cards and
bank accounts, with the additional twist of you carrying a balance with
Paypal. But they're a bank for all intents and purposes. And regulated as
such, at least in Europe. Apple isn't in that business, and that's a good
thing. Remember how GE or US car businesses ended up in the wake of the
subprime crisis.

~~~
tomblomfield
To be clear - I'm arguing for frictionless payments, without the Visa or
Mastercard tax.

I'm separately arguing for a competitive credit market, freed from the banks.

People are confusing the issue of multiple "virtualised credit cards" leading
to more competition in the consumer credit product markets. It seems like a
backwards way of thinking.

~~~
logicalmind
If you think about this in minimal terms, you have a merchant(pos), a
purchaser/consumer, and an intermediary (though this would not be necessary
for direct non-credit payments, like non-escrowed bitcoin for example). In an
ideal world, a pos could publish a message like "transaction #N initiated for
$X" to some "payment bus". Then the consumer would have to then publish a
message like "User $Me agrees to pay $X for transaction #N".

If this were something like bitcoin, the payment could be wallet to wallet. If
it were credit, some processor would have to know that they process
transaction for "$Me" and find transaction #N to settle it back with the POS.

So the question really comes down to how you would implement this "payment
bus". It seems like it could theoretically be something like the stock market.
In fact, credit companies could be market makers and offering to settle
transactions for consumers at different rates. This would have to be fast
enough to be usable, but it seems like that issue is solvable with HFT
solutions. But how would you get existing companies who make their own custom
and profitable buses to all agree to use one generic bus and move the money
making to the credit side?

------
ctdonath
Doesn't use of Apple Pay give banks the option of routing the money/debt thru
other means? Chase just announced Pay support, and has been pushing "direct
pay" (Chase account to Chase account) for a few years - might they observe
that an Apple Pay event is in fact going from (say) Chase account to Chase
account via debit "card", so just make the transaction internally and manage
to cut Visa et al out of the transaction entirely? And, as such, increasingly
avoid the "fundamentally broken payments system"?

~~~
JimmaDaRustla
I'm not aware of this, but if I were to guess - Chase has a Chase card which
they use on a Chase terminal? The terminal would be able to acknowledge this
and make the payment without going through any payment network. Most likely,
on credit cards, visa/mc/amex would not agree to this on new smart cards. They
could be doign it automatically on the terminals without any real interact
with the card (mag stripe only?), but with a contactless EMV transaction, I
believe it wouldn't be possible since the terminal needs to interact with an
app on the virtual card.

Think about a smart card like a phone - you can install multiple apps on it.
Credit Card companies most likely won't allow a financial institute to have
their own app which will supersede the credit card app when used at the
financial institutes terminals. It's possible, in Canada we have Interac and
Visa on one card, but not quite the same thing.

------
JimmaDaRustla
I doubt Apple will make any money off of transactions, can someone prove me
wrong? They aren't part of the exchange, so they wouldn't have any way to
collect fees. I don't know where the author thinks there would be "extra
costs" \- payment technology has always been something the financial
institutes absorbed. In this case, I imagine Apple incurred the cost of
developing the app and the payment networks will have an ongoing cost to
maintain their Token Service Provider.

Apple Pay is really just an implementation of the contactless schemes (I say
schemes because mastercard, visa and amex have their own flavours which
preceded EMV's specs) using EMV tokenization, as the author mentions.

I agree that the payment system and requiring a third and fourth party can
eventually be eliminated, but how can we expect the financial institutes to
replace credit cards when they have no control over the payment networks?

Edit: I know a few years ago there was a new group created by merchants to
develop a "payment card" which would be free of charges. Seeing how big
merchants are, it would only make sense that they collaborate to develop a
free payment technology which works with the financial institutes.

~~~
mcphage
> I doubt Apple will make any money off of transactions, can someone prove me
> wrong?

It was reported by Bloomberg: [http://www.bloomberg.com/news/2014-09-10/apple-
said-to-reap-...](http://www.bloomberg.com/news/2014-09-10/apple-said-to-reap-
fees-from-banks-in-new-payment-system.html) (basically, in exchange for
assuming some of the fraud risk).

~~~
JimmaDaRustla
Very interesting! I wonder how they will record a transaction - they said they
weren't going to keep any information, but they'll need to keep a ledger
somewhere of all transactions that occur on their phones.

------
serve_yay
Just Apple. Not anybody else trying to integrate with payments companies.
Apple only is responsible for this.

~~~
JimmaDaRustla
Apple is responsible for this entire solution, is that what you're saying?

If so, that is a straight up lie. Apple worked with Clover/First Data to
develop their payment app. The rest of the back-end technology has been years
in progress, especially with the likes of Google and other failed attempts of
mobile payment endeavors, mainly due to the lack of a secure element that they
could freely open to customers to facilitate the EMV transaction. However,
Google developed HCE to get over this hurdle and keep the telecommunications
companies out of it completely. Apple has some impeccable timing with the
release of Apple Pay, but also should be given some credit to tie all the
loose ends and bring it to fruition.

------
nostromo
Embrace, extend, and extinguish.

Step one requires working with the industry.

------
mnglkhn2
I thought that the big issue with the current system is that every transaction
uses the whole set of identifiable info (name, cc number, exp date, etc).
Credit cards with chips solve the issue, but in US it would take costly
upgrades across the whole ecosystem.

Apple Pay comes as a layer on top the existing system, bringing primarily the
same level of security as the chip-based cards.

Of course, it is a solution that assumes you have an iPhone 6, which is not a
cheap and accessible thing for everybody, and that the merchant has the
reader. The large/high-end merchants will have no issues moving to NFC
payments and it will make Apple Pay a viable solution.

~~~
esturk
> and that the merchant has the reader.

Starting next October (2015), the liability of fraud will shift from the
issuing bank to the merchant/card issuer. So Apple is ripe to take advantage
of this because most (I assume) merchants will want customers to use
Credit+chip or Mobile NFC because they will lessen the risk of someone
committing fraud with a stolen CC. This will mean upgrades across the nation.
Even card issuers like Walmart will want all its stores to upgrade.

------
antidaily
"merchants are paying around 2-3% of every transaction as a tax levied by
those incumbents, who add little value in return."

How about fraud protection (on both ends)? I'm old enough to remember people
being afraid to use credit cards online. It would be great if things like
Dwolla were more ubiquitous, but until then...

~~~
dmayle
This is the key issue. I often hear people outside of the payments industry
suggesting that interchange is broken, and I explain time and again that the
amount of money they think is in play is not correct. Take a look at
[http://www.cardfellow.com/blog/credit-card-processing-
fees/](http://www.cardfellow.com/blog/credit-card-processing-fees/)

If you look through that, you'll see that the typical fees assessed by Visa
and Mastercard are on the order of 25 basis points (a quarter of a percent).
The rest of that 2-3% is going to price transaction risk (in both directions).
No matter what you do in technology, if you're not talking about a better risk
management system, the most you're going to be able to reduce interchange is
about a quarter of a percent. It may not be obvious if you don't understand
finances, but Apple is actually targeting the risk issue.

~~~
pbreit
You're correct that Visa/MC take a very small portion but wrong that most of
the rest goes to txn risk. In fact, much of it goes to support loyalty/rewards
programs (which can easily cost issuers more than 1%).

~~~
dmayle
I didn't go into rewards programs because that's an entirely more complex
issue. In fact, rewards programs are a business hack upon the risk model.

At some point, someone noticed that they were accepting all of this risk money
per transaction, and that they could make a tidy profit if they took only the
low risk users, so that they could make profit on the risk model. Well, how do
you attract the low risk users? You offer them a cut of the transaction.

Over time, as you pull more and more low risk users into the rewards pool
[edit for clarity: there are only high risk users in the default pool], the
cost of doing business as usual goes up, and you have to start raising your
risk charges. Well, higher risk charges means more money available for
rewards... and so on and so forth. Durbin should help to restore balance, but
it will take some time.

------
LukeWalsh
I think another perspective is that credit card support is a good back
compatible solution. If people are using their devices to store payment
information then it's not very far fetched to imagine other types of
wallets/credit replacing visa/mastercard/etc.

------
eridal
Using an iPhone makes me pay for apps that are free in the android ecosystem..
What's the inventive for me to start paying using an known expensive
ecosystem?

------
volandovengo
At some point the credit card industry is going to get disrupted. It's so
broken + they take on so little risk that it's just a matter of time.

My belief is that bitcoin coupled with the right payment experience will
disrupt the industry at some point. I would highly suggest reading Marc
Andreessen view on the subject: [http://blog.pmarca.com/2014/01/22/why-
bitcoin-matters/](http://blog.pmarca.com/2014/01/22/why-bitcoin-matters/)

------
higherpurpose
Speaking of which, is there still any doubt in anyone's mind that Apple Pay is
the reason Apple started banning Bitcoin apps? At the time I don't think the
Apple payments rumor existed, at least not in the "almost-official" sense, and
I think many were skeptical that was the reason Apple was banning those apps.

~~~
coldtea
> _Speaking of which, is there still any doubt in anyone 's mind that Apple
> Pay is the reason Apple started banning Bitcoin apps?_

Yeah, I totally have a doubt.

For one, Apple Pay will transport more money in its first 1-2 weeks than the
whole international BitCoin system will all year.

Just consider that BitCoin's total estimated market cap is 6 billion usd --
something Apple (a single company) makes in revenues in about 8 days.

BitCoin, at the moment at least, is insignificant and fringe, size wise. The
99.9% of the 800 million users Apple has credit cards of don't use BitCoin.
And all those companies Apple wants to work with, and users want to buy stuff
from, don't accept it anyway.

Second, Apple rejects all kinds of apps from time to time, and given the
immaturity and lack of regulation and quality control of most BitCoin
exchanges (think MtGox and co), it's something they would consider kicking out
of the store, or at least watching very carefully which apps they allow.

And here's the kicker. Apple has allowed those BitCoin apps back in the App
Store, a few months ago:

[http://appleinsider.com/articles/14/06/16/apple-begins-
allow...](http://appleinsider.com/articles/14/06/16/apple-begins-allowing-
bitcoin-currency-apps-back-into-the-app-store)

------
etchalon
I do not understand what this article is actually advocating for.

~~~
mapleoin
Direct Debit, he's one of the founders of:
[https://gocardless.com/](https://gocardless.com/)

~~~
cylinder
Is he forgetting that these are _credit_ cards? People need/want credit.

~~~
mapleoin
You can do Direct Debit transfers from credit/overdraft accounts.

