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Crowdfunding is too expensive (hackeress.com)
57 points by shawnee_ on Dec 29, 2014 | hide | past | web | favorite | 48 comments

shrug As someone who's done Kickstarters for comic books, it's still a hell of a lot less expensive than printing a ton of books on spec and getting them into the bookstore/comic shop distribution system. You'll lose like 50-75% of your cover price to all the middlemen involved in that.

When you plan your campaign, you look at the cuts taken by your crowdfunding site and its payment processor, and you work out all your numbers with that taken into account. I just go with a flat 10% of the take going to Kickstarter and Amazon. And if you're shipping stuff, build a lot of slack into the budget for that too. It keeps creeping up.

If 2% of the final number either way matters to you, then good luck finding a way to take payments without them. I mean, yeah, it'd be nice to live in a world without payment fees, sure. You'd have to battle the huge amounts of money banks have available to pour int politics. Have fun tilting at that windmill, Hackeress.

To add to your comment, it's not so much that banks have money to pour into politics. It's that A) the infrastructure to process the payments has a tangible cost and B) that fraudulent transactions need some form of insurance. B) is a large part of the system.

The overblown rhetoric used makes this piece hard to read.

For example, charging a rate that the market will bear for a product like payment processing is simply the free market, not some kind of 'evil' practice.

> simply the free market

This is a common misconception. A market is only "free" to the degree that it is perfect[1].

I hope we'd all agree that payment processing is nowhere near a perfect market. The barriers to entry are quite high. It takes a huge amount of lawyers and regulation wrangling to get a new financial startup up and running. Consumers certainly do not have clear information or free choice about which payment processor to use. I'm sure there are other things making this area far from perfect.

I like the idea of the free market, and it seems to work tolerably well for a lot of things, but I really get frustrated by this idea that it's a magic bullet. Free markets are pretty great for determining prices for brain-dead simple physical commodities that are simple to produce. As soon as you start straying from that, they very quickly become inefficient.

[1]: http://en.wikipedia.org/wiki/Perfect_market

I upvoted your post, but I wanted to reply because this is so on-point. So very many people who talk about free markets fail to understand that imperfect markets and free markets are at odds. The veneration of free markets sounds so very good...and then the people who cheer for them happily go along with unregulated, imperfect markets which hurt them.

Of course there are market imperfections for other reasons. Back at the turn of the century when people were railing at Ebay because it "raised the price of junk incredibly" I defended it as just bringing more buyers and thus making the market "more free". The result was higher prices.

In that case, buyers wanted their imperfect markets because nobody at the local garage sale realized this old Lionel electric train was "collectable" and so would sell it for $10, but on Ebay it was going for $300 and that caused the garage sale prices to skyrocket.

From the payments market perspective it is one of the reasons I find Dwolla so interesting as they decided to just take on payments completely. That was a really interesting move.

That's why I said free market (as per the colloquial definition) rather than a perfect market, which is the platonic ideal that real-world markets approximate to varying degrees. They certainly aren't magic and certainly get oversold by some, but they are how we allow (many) prices to be set in the US and are usually much better than the alternatives.

Customers of payment processors have plenty of choice: a business, such as Amazon, can choose whomever it wishes. (Of course customers of Amazon don't have visibility of processor, neither to they choose which services Amazon uses for cardboard recycling nor internet connectivity)

This is so blind. There's a market in which there are services like Dwolla that require a delay and set-up with your bank and have low fees by avoiding credit cards altogether (incidentally, I think that sort of service is best option we have), questionable legal and practical issues for Bitcoin, and then a whole bunch of services that charge exactly the same random rate. And you say it has some sort of positive quality as a free market.

What are you saying? That choosing among a bunch of services that offer basically the same system at the same rate is empowering to customers??

This sounds like the same old useless argument that some surface-level choice automatically means everything is justified. Choice in itself is neutral. It's not a great thing just for its own sake. It's about what the choices actually are.

1. The customers of credit processing are businesses (merchants), not people buying stuff from those businesses

2. There is no single rate, especially once different fee structures are accounted for: https://www.sba.gov/blogs/best-credit-card-processing-small-...


3. Having dozens of companies to choose between ranging from simple-yet-expensive to complicated-but-potentially-cheaper seems like the ideal situation to be in. This seems like a functional market to me.

True, but it is a LITTLE suspicious that they all charge exactly the same amount despite competition in the space.

They can only go so low. Here's a pdf of Visa's interchange rates: http://usa.visa.com/download/merchants/visa-usa-interchange-... . (Mastercard is similar, and Amex is even more expensive.)

It's 10 dense pages of tables, but it essentially sets a lower bound on the pricing you can get from one of the companies discussed in the article. Everyone would love to see the card networks lower (and simplify) their fees, but that's not what's being railed against in the article.

The European Commission is planning to cap (VISA, Mastercard etc) card fees to 0.2% of the transaction.


Given the business model of credit cards, where the banks eat losses due to fraud, there is some justification for a percentage of the transaction since the liability involved in a $1000 fraud transaction is much greater than that of a $10 fraud transaction.

In some other business model that might not be the case, but on that kind of platform you might have much stronger technical and procedural protections against fraud so it might be like PayPal where if you do anything that is even slightly sketchy (i.e. a crowdfunding campaign) you get kicked.

A bit tangential to your point, but... banks generally don't eat losses due to common credit card fraud (a stolen/cloned card number being misused). When you call your bank and say that some charges on your card were unauthorized, and they give you back that money, it immediately comes out of the bank accounts of the stores that made the charges. They are paying for the reversals, not the card issuer. Each of those stores also pays a significant chargeback fee, which more than covers the cost of that customer support agent that took the call, and reissuing the physical card if necessary. Plus, much of the transaction fee goes to paying out rewards to card holders and to the processing networks that make everything work (e.g. VisaNet), rather than to the banks' profits. That reflects the fact that the banks generally don't have significant fraud losses to cover. The cost to banks from reissuing cards after massive data breaches at major retailers is a relatively new phenomenon and isn't priced into those fees.

Could crowdfunding sites require ACH transfers instead of credit card network processing, thereby substantially reducing their processing fees?

Dwolla has been working on a better interface for that, and their transaction costs are far lower than anything mentioned in this article.

I'm aware of Dwolla, but unsure why an additional middleman is required. Direct ACH transfers cost 15-20 cents/transaction, and Dwolla isn't required to do that, just a bank that supports you submitting properly formatted text files.

That actually depends. Online sites, like the one I run, get to pay chargebacks and the associated fees ($10-25, in my experience). The situation is different for card-present transactions, though; in that case, the merchant is usually covered.

We're living in a world where anyone, anywhere in the world can raise money from complete strangers, with essentially no oversight into whether the money actually is effectively directed towards what they claim it's going to be, and some financial intermediary takes single digit fees for doing so[1]. Sounds rather low compared with the cost of sending out emissaries to persuade people to part with money by hand, or dealing with the rich people and financial institutions that traditionally sponsor such programmes and their expectations...

[1]not to mention the crowdfunding platform, which often takes a larger chunk of fees for providing a pretty interface to the payments infrastructure, some eyeballs and some t&cs but apparently isn't subject to the same criticism?

This isn't about crowd funding at all its about payment processing. Makes the title pretty misleading. As somebody who spends virtually all my time running a company combatting online payment fees I love anything that seeks to shed light on the horrific online payment processing fees but this title seems completely mismatched to the content.

Yes it is. Some sites take 5-7% on top of processing fees.

Obligatory non-US HNer snark: I wish I my credit card processing rates were 2.9% + 30ยข expensive, not 8.9% expensive.

"For the record, MOST online payment processors have been treating debit card transactions like credit card transactions, and therefore charge the higher interchange -- even when they have no legal right to do so."

Erm, you are aware that lower interchange fees for debit cards used at point-of-sale is because users have to type in a PIN on a (nominally) secure terminal? That reduces fraud risk, so the rate is lower.

Most payment UIs don't prompt for PIN, so they don't get the rate. Tighten down your tinfoil hat before typing next time.

(full disclosure: I'm a developer at a payment processor)

The fee will be different even for a credit card depending on whether or not the card is present.

Here's a breakdown of who gets what fees during payment processing:

1. Credit Card issuer. They get the bulk of the fees because they assume all cardholder risks. Besides fraud risk, they also care about the riskiness of the loan to the cardholder.

2. Gateway / Third Party Processor. The gateway helps a merchant process some part of the fees(e.g. tokenization, authorizations, settlements, etc.). Generally, they get a smallest percentage of the transaction. Authorize.net or Stripe would be examples of these.

3. Merchant's bank. They basically buy a merchant's credit/debit sales. They get a percentage of the transaction. If your transaction volume is high enough, you can probably convince your bank to lower your rate.

4. Visa/MC. Technically, they don't get anything. However, banks are required to pay dues in order to offer or process MC or Visa cards.

Some other things to note:

Online sites often use a Gateway directly and don't have a merchant bank. In those cases, the Gateway is acting as both a gateway and a merchant's bank.

Issuing banks (the bank that gives customers a credit card) charge higher fees for reward cards so that they can provide customers with rewards. Rewards cards are annoying for merchants because one can't always tell if a card is a reward card or a regular credit card. Additionally, fees for different rewards are different. These fees can be found in the voluminous fine print in your credit card agreements.

For the last eight months I have been working on an app called Lighthouse. It's nearly ready for public (beta) release, probably in the next couple of weeks.

Lighthouse is an all-or-nothing crowdfunding app that uses the smart contracts feature of the Bitcoin protocol. You do not need to deposit money with a third party site. Anyone can create a project, or pledge money to someone elses project and revoke that pledge before the project is claimed if they want the money back.

Unlike Kickstarter, there are no fees and it works in any country, although you do have to use Bitcoin so you are exposed to volatility and exchange fees (if your costs are in some other currency which is quite likely).

Over time I expect and hope that volatility will slowly decrease, and there are lots of ways to optimise currency exchange fees. So whilst this is somewhat exploratory today, I hope it can grow into a real competitor over the long run (5-10 years).


I have no love for the payments industry, but this article overstates things a bit. I dropped out when it started ranting about charging credit-card-level fees for debit cards. There is a reason why those cards are run as credit from an online site - there's no alternative. Have you ever typed a PIN number into a web site? The whole infrastructure is set up to make it impossible (in theory) to capture and store the PIN number; it's supposed to be proof that the card holder was present. That property is not present for arbitrary web sites, so they have to run the cards as credit.

Perhaps in the US. In other parts of the world you can use debit cards online. Far from as common as it should be though. Fees are naturally much lower for such transactions.

In the US, you're basically responsible for fraud on your debit purchases (banks often make vague claims otherwise, but it's very hit-or-miss whether they'll back them up), while you are completely protected from fraud on a credit card. So using a debit card with a merchant you don't completely trust is very risky.

Do you type in your pin?

In Germany the debit card would be tied to a bank account. In that case you select a different payment method and just type in your (SEPA) bank account number.

For VISA debit and credit cards some banks now require online PIN (different from the card PIN) and then send a transaction code to your mobile which you type into the web form.

UK position here, almost all card transactions use 3-D Secure[0] rather than making the user enter their PIN.

I could rant about how bad the 3-D Secure idea is, but that's another discussion entirely.

[0] https://en.wikipedia.org/wiki/3-D_Secure

The merchant complaint is legitimate: Many credit cards have variable rates depending on the type of credit card. Many premium cards have higher transaction rates and a merchant is forced to accept all cards of that brand or none. So no, a credit card is not just a credit card and a debit card is not just a debit card. That simplification can happen at the 2.9% + $0.30 level, but many of the discounted rates get much more complicated with tiers for various cards -> You are extremely unlikely to get a 1% rate at high volume on a 1.25% cashback card for example.

I think the title is a bit misleading. The article only talks about payment processing fees. The situation for crowdfunding is even worse. Crowdfunding platforms like kickstarter take an additional 5% fee...

But of course, there is a way around some of the fees charged by paypal or stripe. You can open your own merchant account and handle card payments yourself; then you might get lower per-transaction fees. But then you need to do a lot of bureaucratic nonsense that will probably end up costing you more...

I hope we will see more crowdfunding websites adopt Bitcoin. It allows projects to get a lot more money because basically all of the money could go to them.

The daily variance of USDBTC is around 2.3% - over a multi-week crowdfunding campaign the volatility of Bitcoin could easily cost you vastly more than payment processing fees and is unpredictable.

Volatility is not a reason to avoid accepting Bitcoin for payments. You don't have to hold any bitcoins at all if you use a processor like BitPay or Coinbase; it couldn't be simpler. If you want to get more complicated there are plenty of other options too, like Coinapult locks, Bitreserve, or hedging with derivatives on an exchange.

Apart from, you know, the Bitcoin transaction fees. Plus the fees to convert money into Bitcoin.

bitcoin transaction fees do not depend on the amount transferred. for a standard p2pk transaction of any amount the fee is less than 50 cents https://en.bitcoin.it/wiki/Transaction_fees

Less than half a cent, actually. Many people pay more than they need for no real reason.

Plus fraud costs.

What fraud costs? Bitcoin transactions are (basically) irreversible.

You either received them or you didn't, and if your policy is to allow refunds to your customers (when they report a fraud or for any other reason) then all you have to do is send it back. So, what fraud costs?

what fraud costs? please elaborate

Crowdfunding is by far not the worst offender in all of these fees.

What about event tickets? Even http://www.dnalounge.com/ charges outrageous "service" fees when buying tickets online. For NYE, the ticket price is 50$, service fee is another 10$ -- that's some 20% commission! (And not at all unique to NYE, either.)

If card processing fees bother her so much, then why doesn't she take checks/cheques?

I'd hazard a guess that after a few weeks of doing that, the overhead of card processing looks pretty good.

I wonder if the typo in the HN submission (crow instead of crowd) was intentional.

Thanks, we missed that one.

Is that guy saying Paypal is crowdfunding? WTF.

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