There is also a new EU law on the books mandating the provision of instant digital payments across the market. The critical paragraph in the law is that providers are *not allowed* to charge more for instant payments than delayed cleared payments. This will effectively drive the cost of retail instant digital payments to zero.
```
PSUs are very sensitive to the level of charges for substitutable payment methods. The level of charges can therefore
steer them towards or away from a given payment method. In national markets where higher transaction-level
charges for instant credit transfers in euro have been applied, when compared to charges for other credit transfers in
euro, the uptake of instant credit transfers is low. That has prevented the attainment of the critical mass of instant
credit transfers in euro that is necessary to realise the full network effects for both PSPs and PSUs. Therefore, all
types of charges applied to payers and payees for the execution of instant credit transfers in euro, including pertransaction charges or lump-sum charges, should not exceed such charges applied to the same PSU for
corresponding types of other credit transfers in euro. It would be undesirable that PSPs circumvent the aim of that
requirement. When identifying corresponding types of credit transfers, it should be possible to use criteria including
the payment initiation channel or the payment instrument used to initiate the payment, customer status, and
additional features or services.
```
that's also why we don't get any decent credit cards in europe - there's no money to pay for it
i think the US system is probably better for wealthy people who always use cards and actively play the game (and for the credit card processors of course). Euro system is better for everyone else
ps: is there some sort of contract that stops vendors from adding a "credit card processing fee"? maybe banning those clauses would be the best way to let market forces sort the issue out - once people see that they're paying 3.5% more to use a 2% cashback card, they'll start asking for other options
Another way of looking at it is that every credit card in EU is better than in the US because the credit card companies are not taking with one hand and giving back less with the other. The money has to come from somewhere.
It’s a great coup of US credit card companies to convince credit card users that they are getting “free money” when it’s the exact same money they paid in transaction fees.
> It’s a great coup of US credit card companies to convince credit card users that they are getting “free money” when it’s the exact same money they paid in transaction fees.
The transaction fees aren't explicitly added to only credit card transactions - they are baked into the price so people who pay cash and debit are also paying a fee. Credit card rewards therefore reallocate money from people who use cash/debit cards to people who use "reward (credit) cards".
US credit can be indispensable for those taking career risks and those operating small businesses.
In any case, I don't pay transaction fees the merchant does. They're often not allowed to give cash or particular types of cash-in-kind store discounts. This actually just raises the prices for everyone.
The payoff for the merchant is it reduces some of the risk of taking cash money and stabilizes some of their transaction flows through their account. It's all probably worth slightly more than what the EU caps it at, but the solution to improve this discovery is to increase the number of transaction networks, not arbitrarily cut them off at the knees and ensure the market never grows to this point.
It's at least one reason to love bitcoin and other crypto. You don't need permission to conduct a transaction. Which, given the extreme costs of transactions there, was clearly sorely lacking in the current artificially scarce market.
> Sure but what happens in case of fraud, or if I need to initiate a dispute ? What are the fees for that transaction ?
Well, yea, exactly. I'm pointing out two systems that are diametrically opposed and nothing in the middle. It highlights the fact the market is broken. This is one consequence of that.
> Unless you're one of those operating small businesses.
Ironically, I never took credit. Cash or Check only. Handling costs don't apply because the chain of custody is just myself.
To provide another data point, in France you are allowed to refuse credit cards or checks. Cash is the only payment method that you cannot refuse but there are exceptions for that as well.
It does, and it's usually free if you pay in full every month, just like in the US.
Given the interchange cap (0.3%) and current interest rates, this interestingly looks like a losing product at a first glance (the cost of capital for an average due date of 6 weeks after the purchase date is higher than 0.3%).
> is there some sort of contract that stops vendors from adding a "credit card processing fee"?
In EU it is not allowed to charge the customer any kind of extra fee for using a card. Though obviously it only works well together with the 0.3% cap on the actual fees the vendor pays.
> You're not allowed to charge your customers extra for using a credit or debit card. This applies to all card purchases (in shops and online) made throughout the EU.
It’s a bit more complicated: Even in the US, it’s not Visa and Mastercard taking the entire 3.5%. The largest part of that goes to the issuers, who pay a significant fraction back to the cardholder as rewards.
It's also increasingly common to pay without the credit card companies getting involved at all and have the payment completely free. At checkout you're just presented with a QR code which you scan from within your bank's phone app and which populates all of the payment details. Then you just tap pay and because the bank to bank payment is instant the checkout page will update within a few seconds and you're done. The downside is that this kind of payment is not insured and you cannot do charge backs (so smallish amounts only).
Given that people usually tip by card, in a way they do (not sure if businesses usually subtract the processing fee from the amount they pay out their workers).
So much for market forces in the land of the free!
How is this not market forces? Europe is using anti-market forces regulations to artificially lower the price, while the US is letting the market (ignoring some monopoly and collusions arguments of course) find the 'natural' price of a product. "Market price" doesn't necessarily mean lower price.
Even the most pro free market economic theories have the core assumption that the free market only leads to efficient pricing under a set of core assumptions.
These include low barriers to entry, strong competition, perfect elasticity on both the consumer and producer side, and no mono/duo/oligopolies that prevent those from working correctly.
This is a classic oligopoly where the free market does in fact not work to find the "natural" price.
Technology is vastly better today than it was in the era these fees were introduced.
From a technological perspective at least, even the basic per-transaction cost is more than the overhead of processing a transaction and making a basic determination of the risk level of the customer identified, how variant the customer is from past behavior, and maybe even send the customer's known phone number a text to check for transaction authorization if it's even slightly risky. If it's a really large quantity maybe even connect them human to human and record the call. Those extra steps might even warrant a tiny extra charge; for the fraud reduction I suspect most businesses would approve.
Now, insurance and what not? Shouldn't there be competition in that market? That should be some other fee entirely.
Online, you require a second factor and in person, you require a pin or a fingerprint or Face ID.
This, plus reasonable limit that require special checks to be lifted, brings cost of fraud to almost 0.
Oh, and there is no credit risk, you just check the account balance, and only process the payment after blocking the amount on the account. No credit risk.
In the US things are very different than what you're used to in Europe, which I assume you are since you're talking about this and debit.
3D Secure and other technologies are pretty inexistent because people pay with credit cards and not debit cards. Credit cards have a very simple process of disputing transactions, fraud insurance and other things, and by moving the risk to the bank/merchant, they eliminate the friction that comes with using 3D Secure and other multi-factor authentication solutions. Win for the customer.
3D Secure and other technologies are pretty inexistent because people pay with credit cards and not debit cards.
In Europe, 3D Secure (when it is used) is used when you pay with both credit and debit card. From a transactions point of view there is no difference between a credit and debit card.
The article referenced is about how the US system works and I was referring to that. And also, in the US it is very important for your wellbeing to have a good credit score and the only way to build that is to use credit cards.
From a technical perspective you are right - it is a transaction, but from a dispute perspective it matters a whole lot, so it is actually more convenient for Americans to use a credit card with no second factor authentication than go through the hassle of being asked for a code or whatever second factor the bank decides to use.
I fail to see how "there is no security, but once your money does get stolen your bank might give it back" is a win for the consumer. 3DS usually means clicking yes on a popup on your phone or at worst typing a 6-digit code you got via SMS. It adds maybe 15 seconds to your payment, which when totalled over a year of payments doesn't even get close to having to call or go to your bank and deal with chargebacks and/or insurance.
Here's the rub: if you use a debit card, the burden of proof is on you to prove you did not make the transaction. With credit cards, you shift it to the merchant/bank.
Firstly, that's just conceptually stupid, but ok, whatever, it's the US.
More practically: this is still a dispute process. You still have to fill in forms, you still temporarily don't have your money, you still might not get it back. Why take that risk when you could just have a popup on your phone that you click "allow" on? 15 seconds max.
You don't fill out forms or what you imagine. And because it is a credit card, you don't lose your money.
Regarding your last question, about the 15 seconds friction, you should work for a bit in online commerce to see how fast people give up paying if there's even a little inconvenience in the checkout process and go somewhere else they perceive it makes their shopping experience easier. The biggest drop in conversion rates happens at the checkout stage.
I believe only until the bank does some initial plausibility checks at first.
Actual dispute resolution can take quite long and you’re not even directly dependent on the outcome. For example, if you lose a card and it gets used in a physical store fraudulently, your bank will most likely not be able to win a dispute, but they’ll usually still have to reimburse you.
The thing that matters to you as the cardholder is only fraud liability; if and how your bank is made whole by the merchant is their concern. That’s the same across credit and debit.
But it is a burden on the customer to use it. And in the US at least, you want to let people pay you as easy as possible, not have them jump through hoops like it is in the EU with a second factor authentication. Different approaches.
Having to dispute transactions or beg my bank to please let through a given payment, yes it’s really me (because they only have antiquated and often very insecure ways of establishing my identity) isn’t thrilling either.
3DS on every transaction would definitely be frustrating (and not even EU banks/merchants do it); 3DS on no transaction just shifts the friction elsewhere.
I am aware of this. I’m saying it because it’s one of the few things where I believe the US can learn from Europe, just like Europe can learn from the Us.
This is not a win for the customer, btw, because the credit card fees get baked into the prices.
It is a win friction-wise. I am pretty sure Visa/Mastercard have negligible costs when processing a transaction, and that 3% is what I guess they think is the upper boundary of what merchants are willing to pay before there's an incentive for a competitor with lower fees to appear.
The card companies and associated infrastructure providers have created a system that connects basically every bank in the world to basically every other bank in the world, and to any merchant in the world who wants to participate. Imagine how difficult it is to complete one big enterprise integration like that, especially one that involves systems like core banking. Now do that thousands of times over, across hundreds of countries, integrating with millions of merchants, processing tens of thousands of transactions per second, and almost never going down.
The payment card system is a miracle of system design and global commerce. I also want to see processing costs come down over time, but 3% is a bargain for the value you’re getting, and if you wanted to stifle any further innovation out of the industry, then regulating the profit out of it would be a good start.
The amount it costs to run is irrelevant. The marginal cost of adding one user to a SaaS product is incredibly low, the marginal cost of allowing somebody to install your software product is almost $0, but I think we all understand that those factors aren’t what drives the pricing of the products.
But here we do understand more than with the typical SaaS product provided by a single supplier:
The 3.5% get split among issuer (how much they get is public information), network, and acquirer. We also know how much issuers roughly pay out to cardholders as cashback/rewards.
The EU took that information and acted on it by outright capping the issuer portion (i.e. the interchange).
One half of the US approach for debit was similar – Durbin capped debit interchange to an extremely low percentage – but the proposals from this (now rejected) settlement look different and more market-based in that they'd allow merchants to effectively collect back the cardholder cashback in surcharges.
Durbin also has a less-known component of trying to create competition between networks by mandating debit cards to have two independent networks. Extending this to credit cards could possibly help drive down actual network fees, but this has arguably not even worked that well for debit. Also, as many people have mentioned before, the interchange slice of the swipe fee cake is by far the largest and would probably make more sense to tackle first.
That’s not my point, my point is that the cost of goods (which is itself only one factor that influences pricing) is not exclusively determined by the cost of operating the network. Implementing the kind of payment network that the cards brands have is incredibly costly upfront, which requires developing all the IP, implementing all the systems, and establishing business relationships with millions and millions of parties to get the network in place. Now that they’ve committed to all that upfront cost, where does the moral authority to impose price controls on them come from? It costs Adobe close to $0 to allow me to install creative suite, so why should the price to me not also be close to $0?
The outcome of this sort of regulation is that nobody wants to invest in establishing or innovating large networks like this. Which is why all the recent innovation in payments has been centred around terrible, highly fragmented, in-app payments and EMIs, and that’s certainly not a win for consumers.
Oh, that's all things I'd roll into "costs of operating the network". Maybe my usage of network is slightly confusing here; I usually mean it to include the "scheme" and "brand" parts too.
That's certainly much more than just the cost of running the technical network, but also, as we can see from the above calculation, clearly one of the smaller components of the 3.5% (since the lion's share goes to the issuers).
In that sense, the networks really do compete – for the issuers' business! Issuers then compete with each other for cardholders by paying out cashbacks, but what many find missing is competition with these dynamics as a whole.
Making that cost explicit in the form of credit card surcharges might have been a path there (I'm not sure if I'd have been a fan myself), but since this settlement is now off the table, let's see what the next move is.
Putting aside the fact that email is not free, if you think the complexity of a system that sends an email is comparable to the complexity of a system that processes real time payments, then you're kinda showing how little you understand payment systems (but I suspect this was just a flippant comment). Email doesn't require a globally consistent state to be maintained, it doesn't require cross-border settlement, there is no financial liability if an email is lost, it doesn't require a different set of KYC/AML/reporting regulations to be followed in every jurisdiction, or many other things that payment systems do.
And yet, fees are 0.3% in Europe, and VISA, Mastercard and Amex are still happy to do business here. And customers can STILL pay with a single FaceID with Apple Pay.
So maybe all 0.3% of trillions of Euros moved is still enough to do all this.
Of course, the value of the system is that it's a global payment network. If the card brands started cutting out over regulated markets then the system would decrease in value for customers in it's main profit centres. The outcome is just that the rest of the world ends up subsiding European payment networks. The negative impact of policies like this isn't that the payment networks will start exiting markets, it's that they just won't innovate. Which is why most of the innovation in the payment industry recently has been in EMIs and in-app payment systems, which are both more expensive and worse for consumers.
But all of this is secondary to the point, which is your claim that a 3% processing fee is insane. The way the system works is insane, if you said today that you wanted to build the type of system that the card bands have built, nobody would believe that it would be possible. Especially not all for a 3% processing fee. If the payment networks didn't exist, everything you buy would be a lot more than 3% more expensive, and your quality of life would be very notably reduced. The value you're getting from them is a lot more than what you're paying to use them.
That’s largely because the widely-reported 0.3% are the issuer’s takeaway, while the 3.5% are the (average? maximum?) cost to the merchant, so it’s not even an apples to apples comparison.
Out of the latter, three parties are paid: The issuer, the merchant acquirer, and the network.
Merchants pay significantly more than 0.3% to accept card payments even in Europe.
That said, US interchange rates (i.e. what the issuer gets) are much higher than 0.3%, which is why there’s credit card rewards.
Amex get away with it because their customer base is a niche of higher income earners. Merchants would rather not accept Amex, but a lot of them want to attract that demographic as their customers. So they each make their own decision about how to balance those concerns.
Charge backs. Price matching. Product insurance. Consumer credit scores can go down, which reduces the maximum balance, which may be under the current balance, which may become a total loss of the account. There are plenty of risks for an _issuer_. Which are separate entities from the _network_.
> The settlement called for the average swipe fee to fall at least 0.04 percentage point for three years, and stay at least 0.07 percentage point below the current average for five years.
Note: it's 0.04% and 0.07%. Not 0.4% and 0.7%. I had to re-read it twice to make sure.
We used to have that for online transactions, it's called surcharging, EU put a stop to that in 2018 with the PSD2 directive because it wasn't working.
It was only when companies themselves were paying the transaction fees that they started optimizing the cost of transaction fees.
I've often seen cash handling costs listed as around 3%, which is likely why CC fees were so high - it was still not a terrible enough deal for stores to start avoiding it.
It depends whether cash handling costs are mostly banking "costs" from banks ripping off customers or actual costs that exist.
EU banks can only dream of the ways US banks get to freely completely rip off their customers (and commit major banking and trading frauds that crash the world economy without anybody going to jail).
Money gets lost. Either really or because you've experienced shrinkage. Tellers are not perfectly accurate. Customers will try to scam you with fake money, if you notice, that's your loss. If you pass enough of it on, you will at least have to answer some questions. If coins are involved in your change you're going to have a bad time.
Retail in the 80s was not particularly fun. Running register tapes to look for missing money was an effective nightmare.
It's probably that credit cards have filled an effective void for so long we haven't developed cash handling and tracking technologies to the same level. We almost got there. Remember for a few years when almost all grocery stores had automated change dispensers?
We optimized for a particular solution and ignored the other.
choose cheaper options like the Discover card? or to find an ATM to withdraw?
My understanding here is that Mastercard/Visa aren't charging customers, they are charging vendors who take that payment. Some vendors build that into the price of items, some eat the cost, some do indeed pass the cost to the consumer. But the latter is rare except for small businesses (which this case seems focused on).
TBH I'm suprised they even bothered with an anti-steer approach. Visa/Mastecard are about as objective a duopoly as we can get in the world of financial transactions. They can control entire industries because removing the vendors' ability to take their cards is a death kneel.
Banks/card issuer want the fee to be high so Visa/Mastercard compete by increasing it, consumer is unaware of what the fee is but ultimately pays it through increased cost of goods sold by vendors.
In India, credit cards and even debit cards (which have much lower transaction fee) were never a hit. UPI changed everything, it is easy, convenient and has zero cost for either party.
12.20 billion UPI transactions in a month (January 2024).
The article says that the litigation began in 2005 or so, so hasn't reached a settlement after nine years, but this rejected settlement would have limited their behaviour for only five years. That doesn't seem equitable.
If it takes nine or ten years for alleged antitrust behaviour to get to a settlement, then the settlement should restrict future behaviour for at least twenty years. Otherwise this is just a means to allow such behaviour to continue immediately after the settlement agreement shortly expires.
Is there a debit card that has low fees but is meant to be used as a slush fund? e.g. top it up to $100 when it falls below $20. I don't need credit protections for my coffee purchase.
That distinction (i.e. debit having less fraud and bad merchant behavior protections) is largely a myth: You get chargebacks and zero liability on effectively all debit cards these days.
Both credit and debit policies by almost all banks exceed the legal requirements a lot (e.g. no issuer that I know actually charges the deductible allowed by law).
Edit actually answering your question:
Go2Bank.com
Most Americans just call this a checking account.
> According to the Fed’s 2022 Economic Well-Being of U.S. Households survey released Monday, some 37% of Americans lack enough money to cover a $400 emergency expense, up from 32% in 2021. That means nearly one in four consumers would have to use credit, turn to family, sell assets, or get a loan in order to cover any major unexpected cost.
My credit union lets me open up sub accounts. I can set rules for the sub accounts. I can get a card that only draws from a sub account. This is all free.
I've seen this as a basic feature on at least two banking sites: "when the balance gets below $X, move $Y amount to that account." If you have more than one account with that bank then you can also choose the source of that money.
I’ve only ever seen “when a payment can’t be covered on account x, take the exact sum out of account y”, which together with a maximum number of savings withdrawals per month doesn’t really work like the feature GP wants.
In Europe it is capped at 0.3%. So much for market forces in the land of the free!
https://eur-lex.europa.eu/EN/legal-content/summary/fees-for-...
There is also a new EU law on the books mandating the provision of instant digital payments across the market. The critical paragraph in the law is that providers are *not allowed* to charge more for instant payments than delayed cleared payments. This will effectively drive the cost of retail instant digital payments to zero.
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L...
Quote from link:
``` PSUs are very sensitive to the level of charges for substitutable payment methods. The level of charges can therefore steer them towards or away from a given payment method. In national markets where higher transaction-level charges for instant credit transfers in euro have been applied, when compared to charges for other credit transfers in euro, the uptake of instant credit transfers is low. That has prevented the attainment of the critical mass of instant credit transfers in euro that is necessary to realise the full network effects for both PSPs and PSUs. Therefore, all types of charges applied to payers and payees for the execution of instant credit transfers in euro, including pertransaction charges or lump-sum charges, should not exceed such charges applied to the same PSU for corresponding types of other credit transfers in euro. It would be undesirable that PSPs circumvent the aim of that requirement. When identifying corresponding types of credit transfers, it should be possible to use criteria including the payment initiation channel or the payment instrument used to initiate the payment, customer status, and additional features or services. ```