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.
Cash is not free for the business. People always assume that businesses are losing out on revenue by accepting cards, and thar cards inflate the price for everyone.
But it's not free to accept cash - you have to manage your float, transport cash between the bank and your premises, and there can be bank charges to account for too. All of which can easily eclipse the cost of card fees, especially in markets like the EU where those are capped.
Usually the main reason some shops prefer cash is because they can put the cash directly in their pocket and do tax fraud on a percentage of their revenue.
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.
I'm not sure I buy "drowning in the same costs". I think there's something more akin to a prisoner's dilemma here.
Not sure were you were. I am from northern Germany, around Hamburg.
But every single store that does accept cards (not every little store can bear the fees, though) has theses signs.
So I would counter your n=1 anecdotal argument with an equally non representative n=1 argument. No one learns anything, except that some shops in Germany ask for the use of cash-alternatives, others don't.
On a recent trip to Germany, I didn't see a single such sign.
Germany is changing gradually, perhaps due to the EU's limits on the fees Visa and MasterCard can change, but Covid-19 doesn't seem to have much effect.
But I asked someone in a popular local store ( Belgium) and consumer behaviour hasn't changed.
Also, you mention Covid would be a stimulator for digital payments and that doesn't seem the case in Belgium. So I wouldn't know why it would be the case for Germany.
Before COVID one of the main banks AIB was to introduce some extra charges but they stopped that charge increase https://www.irishtimes.com/business/retail-and-services/aib-...
Maybe your city has a “safety of crowds” thing going on but when cash only businesses start going scarce, I bet the remaining holdouts start getting more and more scrutiny.
The money industry tends to be heavily regulated, and self-regulated (PCI DSS) for a reason. Crime happens there because that's literally where the money is.
I'm doing my part, though. I pay with cash whenever I can. In Germany that's easy (often the only option e.g. in restaurants). In Sweden, not so much. And then there are countries in between.
It's been accelerated sharply by the pandemic. The few holdouts changed tack. There's accessibility concerns for the unbanked.
Characteristic of hyperinflation, is that nothing keeps up with it. Forget wages keeping up: your very paycheck is worth less at the end of two weeks than it was when you received it.
Sincerely, a guy who survived 313 000 000 % inflation per month.
Does it? In an inflationary environment the status quo is that your wages shrink. I guess it’s better than holding cash because you can renegotiate your wages back, but I don’t think rich people have most of their assets as cash.
The US is a classical inflationary environment and wages have kept pace with inflation forever.
Indeed, inflation only, and intentionally, punishes those who hoard cash.
I would note that chart begins prior to ending the gold standard in 1971, and it has tracked very well since 1995.
I was off-base when I said "forever." I should have said in recent history.
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.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness.”
And for the kinds of goods I buy, in most cases it doesn't hold up. Cheap shoes might be only 25% of the price of good shoes, but in my experience last 50% as long, costing less overall. Compound that with other chances of loss (getting dusty in the back of a cupboard and eventually being thrown out in a declutter), and cheap works out far cheaper
And the point Samuel Vimes is making goes far beyond a simple "If you buy cheap, you buy twice." It extends that basic knowledge by realizing that some people have no other option than to buy cheap, forcing them to spend resources over and over and over again and still get a worse result in the end, and how this is a fundamental and systemic social unfairness.
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.
You pay 2% in transaction fees, you may or may not get almost all of it back as "cash back".
In a world without significant transaction fees, we wouldn't have the grace period either, and the people who get the most cash back would pay lower rates and others higher.
The reason the powers that be like the current system and would lobby against a crackdown on fees is because it feels like they're giving you something with the grace period, and giving you something if you get cash back.
But it's just a play on psychology. If there's an injustice, I think it has to boil down to evaluating credit risk incorrectly.
Guaranteed per-transaction revenue is not fungible with interest revenue. Interest revenue is extremely discounted by both time value and default risk.
> In a world without significant transaction fees, we wouldn't have the grace period either...
At that point, most of the lower-risk customers who use credit cards would switch to debit cards, credit card interest would probably have to go up due to adverse selection and higher default risk, and credit cards would be a much smaller business overall.
Most of us would not extend credit to somebody with low odds of returning it, so why do should we expect companies and organizations to behave differently? I feel like wrapping this up as in the pretty words "systemic inequality" is framing it as some constructed oppressive structure, which I'm loathe to do.
You don't like the term "systemic inequality" yet you're framing the problem in terms of our current system: very impersonal, only-the-numbers-and-ROI matters.
If you phrased it as "most of us would choose to exploit the more desperate because they have very little alternatives instead of willingly helping out" you might trigger different instincts. Instincts that would favor restricting interest rates and favoring a stronger social safety net.
There are more generous and forgiving systems that have existed successfully elsewhere in human history, so they're not incompatible with human nature, so yes, I think it's fair to characterize the American system as iniquitous.
Why should someone else's desparation and need be solely viewed through the lens of economic opportunity for someone else?
In it's simplest form, to make a loan, you have to have the resources to loan out to begin with. Furthermore, dereliction of debt is expected. There is no guarantee that people will repay in a timely manner, and missed payments/discharged debts are not uncommon. As such, interest rates can serve to create a sustainable system by helping to cover these debts.
Discount any consideration of their ability to repay, and what you give is no longer a loan, but a gift. A gift at the cost of others that you loan to.
What would be a more personal approach when figuring out whether or not to loan the money to someone?
And that condition will always benefit those who can return back. It's not about being newcomer or stranger, it's about being able to identify if it's a loan you can do.
Denying a 2% discount to people who are likely to default: ???
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.
I would guess 90% of Europeans have never even seen one of these cards, unless they work in international hotels or tourist places.
And there is a lower % for normal/popular cards (Visa/Mastercard) and higher (even 4%) for Amex, so most stores just ignore it and remove the Amex symbol from their terminal.
And yet, my company provides Amex corporate card for bussiness travel, but we usually go to US, so Amex is more accepted there.
That was one of the deciding factors when I was planning on getting a second credit card (so I'd have a backup while travelling).
I knew here in Australia they are not widely accepted, with only major retailers accepting it typically, but I thought that this was just Australia being backwards.
After spending the first two or three weeks trying to pay for things with it, I gave up except on checking into a new hotel.
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.
Your neighbours (Norway and Denmark) were unwilling to accept it. I forget which supermarkets I tried it in in both of those countries, but three large chains all had their card terminals reject it and the staff looked at it like I'd tried to use a hotel keycard or something.
I'm not surprised supermarkets accept it. Does your local pizza takeaway, kiosk or bar accept it?
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.
The $30 wire fee is what a bank charges you to make money and dependent on the bank. Underlying systems near free to use like ach for domestic wires.
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.
(2) Credit surcharges and minimums used to be forbidden, but they are not anymore ("2% surcharge for paying with credit, minimum $10 for card payments")
(3) It wasn't federal law, it was the merchant agreements that precluded credit card minimums and surcharges as a condition of signing up to accept credit card payments from each of the major issuers.
> 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?
Cash is not free for a store to handle. Stores pay transaction fees on credit cards, sure, but they save on all the costs of cash. A hypothetical store that takes credit cards only would not have any of these costs and their vulnerability to robbery/theft would be limited to merchandise and capital only, saving the cost of insurance against theft of cash. For some types of businesses (services rather than retailers), this makes their office a pretty unattractive target for burglars and eliminates employee theft of cash.
Stores generally try to give extra charges for using credit cards, not the other way around.
It seems like the fair thing to do, should be to allow a store to do whatever it wants, and make these credit card requirements illegal.
So, it would be allowed for stored to charge extra for either cash or credit, whatever they choose, and the credit card companies would be forbidden from stopping this.
It's common for online stores to charge a few percent extra for credit card payment (the base price usually applies for the most common form of online payment, iDEAL, which is cheaper, I guess because the banks cut out Visa/MC).
On the other end of the spectrum, there are some physical stores and restaurants (usually chains) that don't accept cash. They're allowed to do that, given that they state so very clearly upfront.
that's like saying opening the doors everyday to customers is not free. it's true, but misses the point. handling cash, like paying for utilities, is a fundamental cost of doing business, and so it should be, because the right to anonymity and privacy is woven into cash. not so much with electronic transactions, which are optional, alternative costs.
(Especially when the cost between different payment mechanisms differ a lot.)
It just happens that they dont want to do that, because dealing with cash is cheaper
One small cafe near a place I used to work said it usually took 30-60 days for funds to clear into their account after a card transaction. That, for them, was a major problem as it meant that they couldn't then pay their suppliers in a timely manner when cashflow was highly variable.
Then again, a bakery I visited that was in a small town said they'd stopped taking cash, as they got robbed some huge number of times.
I don't think it should be so clear cut like that. The credit card processing fees charged by the processor is a cost of doing business and should just be factored into the pricing without being explicitly passed on to a subset of customers. For example, a shopping centre or convenience store may have toilets that only a subset of customers would use. Should the customers who bought something without using the toilet be "subsidising the cleaning costs"? If a store offers online ordering, should customers who ordered online be "subsidising the rent of the physical store"?
It's a valid business decision to NOT charge extra for the toilets, too. Just like shops usually don't charge people who are a bit slower in the checkout line more for taking up cashier time.
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.
The fraud protection of credit cards mostly comes out of the pockets of the merchant, I think? So the merchant could give people a discount for using means of payment without a chargeback, like cash.
You are right about the actual credit. Though eg in Germany people usually use their overdraft in a same way that American seem to be using their credit cards for short term credit.
(For either convenience is the main selling point. The fees and interest rates for overdraft and credit card debt are usually quite high, I think?)
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!
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.
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)
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.
To build a credit score. When everybody lives in debt, it is expected for you to do the same.
See here for info:
PIN/contactless debit transactions go through VISA/MC here and they definitely cost less, see below.
However, not 100% sure about remote online/web transactions - most of those providers here are "contact for pricing", but e.g. BlueCommerce and Checkout.fi seem to have a single rate for card payments - though it could be the difference is just "averaged out" (like e.g. iZettle does for card-present EMV transactions: 1.95% for all cards).
Couldn't find an up-to-date English price list for Nets Finland, but here is a 2017 one in Finnish: https://ttlsystems.fi/wp-content/uploads/2017/10/SME_Hinnast...
Base rates: VISA Debit 0.41%, VISA Credit 0.91%, MC Debit 0.42%, MC Credit 0.92%. Additionally +0.04€ per transaction.
Remote transaction: +0.30%, foreign EU +0.10%, foreign non-EU +1.30%, corporate card +0.80%.
SumUp Finland: https://sumup.fi/maksupaate-hinta/
0.95% VISA/MC Debit, 2.75% credit cards.
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.)
(For international readers, in Denmark, unlike Germany, the national debit card can be combined with a credit card on one card and then the terminal just chooses automatically)
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%.