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How Square moves Cash (jonbwhite.tumblr.com)
86 points by jonbwhite on Nov 19, 2013 | hide | past | favorite | 42 comments

This is what x.com (aka payPal) did in the earliest days. You could submit a credit transaction to a credit card without an initial charge.

It worked, but it was strictly against Visa/MC policy, and they had to stop. By that time they had some critical mass and got ACH going quickly.

I don't know if it's the same thing with debit cards, but I suspect it is -- the transaction goes through Visa/MC, but settles via ACH once it's known that it's a debit card.

But Square might be big enough to change the policy. Especially since Visa is an investor?

The debit networks don't universally allow for refunds, even for legitimate transactions. Additionally it is generally against their terms of use.

Either Square is flying under the radar or has gotten special permission to do this.

We've been looking at the payments infrastructure in New Zealand recently and have discovered that, unless you find whoever wrote something 30 years ago, most of the senior payments people have limited and ofter contradictory understanding of the capabilities of the underlying systems.

Definately the US banking systems also still have the feeling that there's been an accretion of layers of technology over ancient systems. APIs that look like XML files wrapping fixed-field-length VAX-style data. It made me wonder - are there still mainframes under there? Or mainframe software being run in emulation? Or are the systems just patchworks maintaining the 1970s interchange formats because no one can stand to making breaking changes?

Well... that is horrifying.

By the way, Planet Money (a public radio show in the US) had a great episode on how ACH works, and the history behind it.

Excerpt from summary: "On today's show: Why the invisible pipes that move money around America are so slow. (And why the ones in England are so much faster.)"


The most interesting part was at the end when they talked about a proposal & vote to upgrade the payment network (and not even real-time like England's) which failed to pass. A later survey found that the prime reason was cannibalisation of existing revenue streams - aka wire transfers.

Having lived in the US, Ireland and Australia, I find the US banking system to be archaic compared to Ireland or Australia's. I can pay anyone up to around 1000 EUR/AUD in a few clicks. No fees or waiting days for money to show. It's brilliant!

I keep seeing this radio program referenced every time a thread comes up related to (blah blah ACH...).

So I listened to it. It wasn't that interesting. If you had never heard of ACH before, it would perhaps be illuminating, but if you already have a decent grasp of the existence of this system and it's shortcomings, there's not a lot more meat in that program...


Why listen to it when it's a layman's finance podcast if you already have a decent grasp of ACH and it's shortcomings? Did you really expect them to be giving an in-depth look at ACH for their 3million+ audience?

Well they have 22 minutes to fill and the situation with ACH is pretty simple. Antiquated system, no motivation to change, done.

Planet Money's original charter was to explain what was happening, literally day-by-day, as the 2007-2008 financial meltdown was happening. And those were pretty informative and well-written shows.

What I find interesting about the program is that I have an emotional reaction like they are talking down to me.

I mean, yeah, it's a podcast targeted at the average person, sure, I'm not expecting them to really go deep. But I don't know very much about that sort of thing, so sometimes they really are giving me information I don't have.

But the tone? Well, it really does feel like I'm being talked down to. I do not know why. I find my own reaction odd, and I've listened to the podcast several times in an effort to try to figure out what, exactly, I found condescending.

It's especially odd because I'll listen to other podcasts targeted at the average person, and I'll be entertained or informed, and I won't feel like they are talking down to me. There's something about the planet money folks that sets me off.

Wow, and this podcast was done by Bloomberg and Kestenbaum, two of their better reporters.

I mean, yeah, it's NPR. You're not going to get amazing voice talent reading the stories. I don't feel talked-down-to as much as I feel like I'm hearing a work done by second-year broadcasting students trying to finish a project. Listen to Chana Joffe-Walt or Zoe Chase sometime.

But if you think this podcast is annoying, best you skip the rest of them...

nah, the voice acting is fine. And certainly, I'm not claiming that they are objectively arrogant, or that a 'reasonable person' would feel talked down to, and when you get down to it, I'm the last person to call someone else out on arrogance.

It's odd, too, as the non-financial stories on, say, this American life usually doesn't trigger the same response. (I mean, I'm not a huge fan of this American life, but not because I feel talked down to.)

I was commenting mostly because I find my own reaction... unexpected. And I think the question "what is arrogance?" is an interesting one. Different people will perceive vastly different levels of arrogance in the same document or reading.

These have colloquially been referred to as blind credits, and are seriously frowned upon by the card networks. We told a Visa exec that we were planning on doing these and he said that at any substantial volume, we'd get shut down.

Square has a totally different cachet than GiftRocket does, so they may actually be in a position to bend the rules. Seemingly, other smaller payments providers have been able to implement APIs around this.

To be fair, it's not some amazing flash of brilliance that led to square realizing you can "refund" a card without a charge first.

About 4 years ago I was building a payment processing solution for an ad network (something along the lines of an adsense clone) and for new users we needed to support micro-deposit verification. Usually this involves ACH deposits but to cut down the time it took, I implemented this using the Cybersource API against debit and credit cards. Obviously sending somebody money only reliably works with debit cards, because many people don't use a credit card often, but I just want to downplay the rhetoric in this post about squares unique brilliance in this regard.

It's not a flash of brilliance for thinking about it, it's a flash of guts for building a product around it.

Yeah, I second this. When I was at Square (a year ago), we knew the banks' APIs would allow "refunds" of arbitrary amounts, but it was a sort of "gee, isn't that odd" piece of information - it certainly didn't occur to me that it would be reliable enough to replace ACH. I'm super-curious about who made the call to use it this way.

The reason why it wasn't done to any great degree is that banks generally frown on this, and when I was last dealing with them a few years ago, Visa and MC would see a rise in refunds sort of like a chargeback. It wouldn't cost you a penalty, but do too many and you'd be at risk to get shut down.

I personally liked this explanation better: http://www.quora.com/Square-Cash/How-does-Square-Cash-work-t...

Are there any API's out there currently that allow you to issue a debit card refund like this?

After some googling I found this: http://www.fuzenetwork.com/contact-us/ linked to from here https://github.com/balanced/balanced-api/issues/32

I tried to use their contact form but was redirected to what looks like a version of their site that isn't supposed (or expected) to be public yet. From there I find a link to this page: http://info.fuzenetwork.com/developer-center-fuze-network and I was able to submit the form.

Edit: I received an email after signing up but it seemed a little half-baked. I would guess that they are still working on their product and aren't ready to launch just yet.

Debit-card only is something you'd need to determine yourself. But any merchant account API lets you issue refunds in this way. I've used Cybersource for it myself.

And of course, has anybody verified w/ Square that it MUST be a debit card. It could also just be a marketing distinction. For me, I NEVER use a debit card -- i abhor them -- and put everything on a credit card. So I wonder if it would let me provide a credit card number. For a friend sending me $20, it's no difference to me whether it goes directly to my Amex or makes a brief stop in in my bank account first.

Another reason they probably have the debit card restriction is due to the fact that the fees on debit card transactions are much cheaper than credit card processing fees.

I thought that was only true when processed over the debit network? That is, when using pin transacations. In my experience debit cards processed over Visa or MC network have identical fees to the merchant.

On the money-sender side, debit cards have far fewer consumer protections so will result in fewer successful chargebacks. Whether that had anything to do with it, I have no idea.

"Original credits" have been around forever but they are typically watched pretty closely by the acquirers, processors and associations (V, MC) since they are ripe for enabling fraud. But I could imagine someone with Square's clout could work out a deal with Paymentech/First Data and/or Visa/MC (Visa is an investor).

As someone mentioned, we did this at PayPal a long time ago but it was frowned upon. We even looked at refunding prior credit card charges that were unrelated to the new payout. We'd even make money on those txns!

I'm not sure where you got this from. But Visa already supports P2P payments for its acquirers: https://developer.visa.com/vpp/.

Venmo uses it. Square probably does it as well. Mastercard has an equivalent.

Transactions via Square Cash show up as "transaction adjustments" in my bank account. It is possible that Square is using VPP and that is simply how Visa distributes the payments, but it seemed to be different to me.

Using the debit card system is not innovative and it's not "cash" either. But don't mind me, I just hate the credit card industry and wish it would roll over and die already.

Point taken, but given ACH as the alternative, I still think this is a step in the right direction.

I think the right direction would be to have a system of inter-bank transfers that was instantaneous, and didn't suck. The banking system in, say, the UK isn't perfect by a long shot, but at least I can move money from one bank account to another (across banks) a) instantaneously, and b) for free.

The fact that the US insists on operating on such a terrible system where it takes five business days reflects really badly on the infrastructure in place.

So on the one hand, I really like Square Cash as a concept. On the other, I wish banks would actually stop sitting on their hands and make a transfer system that works. Of course, there's no incentive for banks to do that, because they can keep charging money for 'instant' wire transfers right now.

You've described Dwolla's FiSync [1]. And you're right; in every case where the industry has gotten together to make ACH faster or agree on a new standard, the potential impact on wire transfer revenue was cited as the reason not to move forward. Building a new standard from the bottom-up, as Dwolla is trying to do, is nigh impossible when most credit unions and banks actively profit from limiting the liquidity of money.

[1] https://fisync.dwolla.com/

Payment delay has only a little bit to do with infrastructure and a lot with competition and incentives.

If you're required to do, say, next-business-day payments but your infrastructure gets them done in 5 minutes, you could still want to delay all those payments to the next day since there it makes a significant addition to your revenue (float of the money held, interest on overdue customers, payment fees for 'more-urgent' payments) - unless competition forces you to do so.

Banks aren't sitting on their hands - you should expect a "transfer system that works" from banks as soon as someone actually threatens to outcompete them. Square Cash doesn't seem to be that thing - it relies on banks allowing the debit-card-refunds (AFAIK they are allowed to kill this ability as soon as they wish to), and I'm sure the banks make sure they earn 'their due' in fees on every such payment anyway.

Square is taking advantage of the existing terrible system to give users an experience that is a step in the right direction.

But I agree having instantaneous transfers instituted at the bank level would be real progress. Unfortunately congress can't even agree on the incremental changes it makes to the existing system, so I have little hope for sweeping reform.

As the global experience shows, it won't happen without government regulation forcing it - the current system has a strong financial motivation to keep it slow and expensive forever, but other than that there aren't any serious obstacles.

No way. Feeding the credit card system is feeding children to satan.

Replacing ACH is a much better solution. Like what Dwolla has done.

Offermatic [0] used to do the same thing with issuing refunds to cards. They could offer rewards such as "Get 10 dollars off your next purchase > $50 at xyz". They would poll your cc to check for the purchase at xyz and you would then see a refund for $10 from offermatic on the same card. I personally thought that this company had a lot of potential.

[0] http://www.crunchbase.com/company/offermatic

I always wondered how can ACH be automated and take days to process transactions? Do they use an almost infinite number of monkeys for their automation system?

Very interesting. The big concern here is what exactly happens in case of fraud. With credit cards, this is less of a hassle for the consumer, since the issuer takes the hit. With debit, it's a pita to get your money back if it's stolen. I use my debit card only at the ATM for this reason.

Yeah, it's unclear what Square's responsibility is in this situation, especially since they are indirectly performing transactions on your behalf.

This is all irrelevant when Bitcoin supplants all these silly money transfer companies anyway.

I agree. Bitcoin is a technological advance for all of civilization (like the printing press), while Square is just a slight optimization of the status quo.

I tried Square Cash. Sent a payment to a friend and immediately received a notice that due to fraud detection my account had been permanently closed. Completely turned me off from Square and I don't ever intend on using one of their services.

How does square make money(or not lose money) in this transaction?

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