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Comment by ajra | Hacker News Reader

It seems to me that Apple can offer reduced fees due to the fact that they'll have less fraud as a result of requiring touch/face ID for every purchase.

While interesting, it doesn't come close to solving what I feel is the largest problem with cards in the US today -- interchange fees.

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I know this is a MasterCard, but it'd be more interesting if they were able to take out the $0.35 transaction fee on every transaction. This is the bread and butter of every payment processor, and it's complete rent seeking, AND supposedly all the major processors are going to RAISE it at roughly the same time in the coming months.

Eliminating the set transaction fee could open up so many potential businesses. But I'm not sure what incentive Apple has of getting rid of it. It's a cash cow.

Indeed, why would Apple want to eliminate that fee?

But also, how is this rent seeking? Rent seeking is defined as attempting to take a larger share of existing wealth without increasing total wealth. Electronic payment systems absolutely add to total wealth.

I'm not one to cry foul every time a company turns a profit, but this industry seems pretty anticompetitive if it's not outright rent seeking.

Sounds awfully cartel-like.

Unfortunately I agree with you regarding the lack of incentives Apple has. IIRC, the money for cash back rewards comes out of the interchange fee. How do you get consumers to adopt a card that's opaquely better for businesses and immediately worse for themselves?

Make the card a novelty, some companies have tried cute colours and shapes. Using your iPhone is also very very novel

If you are looking for a cartel, look no further than experian, transunion et al. Those firms define your credit worthiness and are hacked at will, spilling out all you credit and PII info.

Why is the per-transaction fee the rent-seeking part?

I get why MC/Visa have a per-transaction fee. I don't understand why there's a percentage of the transaction on top of that. It's not any more work for a $1 transaction versus a $1,000,000 one on their end.

Wouldn't the risk of fraud make a $1 million transaction much more expensive to handle?

Yes. This is roughly half of the transaction fee. The other half is to self-fund the rewards illusion that gets customers to use the card.

> rewards illusion

Maybe if you don't pay your balance every month, but the rewards are very real for me.

The rewards may be real, but so are the cost increases the merchants gradually put in place to offset them.

We can’t pay merchants less by paying cash, so we may as well try to grab a slice of the fee via the reward. 2% sounds pretty good.

Some local merchants offer bonuses for cash usage. Of course, those only take Debit cards if not cash.

For those of us who use credit cards with rewards, the rewards significantly exceed the price increases, because most of the price increases are paid by people using other payment methods.

They're mostly paid by people who carry a balance and incur interest payments. They fuel the rewards programs.

I'm sure interest revenue plays a role in determining the rewards that are offered, but the data suggest that merchant fees, which are largely paid for by non-credit-card-using households in the form of higher prices, are a bigger contributor. The average credit-card-using household receives a net transfer of over $1,000/year from non-credit-card-using households [0] (2010).

[0] https://www.bostonfed.org/publications/public-policy-discuss...

It's like a vig the retailers pay to participate, where part of that is split with the consumers.

The way I see it, every customers who do not pay their card in full or who don't use credit cards subsidize my travels. It's honestly an extremely good deal for me and even if I pay 2.2% of every transactions, it's more than worth it for me.

I never would be able to pay for as many long haul first class flights if I saved 2.2% of the transactions and used that to buy tickets

The rewards are real -- believe me, I take advantage of them too -- but we're paying for them by the inflation caused on consumer goods by everyone using credit cards.

It's true that you pay the inflation regardless of whether you use a card or not, though. And you only get the reward if you do use a card.

Isn't the bank responsible for the fraud (and fraud detection)? Not Visa/MC?

The percentage fee is 1, for rewards necessary to get people to use the card and 2, to cover fraud which is actually a MASSIVE problem and 3, to cover defaults/payment issues.

The per-transaction fee existed to cover the additional cost of building out the network (literally running cables and wires to the merchants' stores) and providing card readers. The network is already built and has been paid for THOUSANDS of times over, and at this point it's largely obsolete. I'm also pretty sure merchants need to buy their own card readers now.

Finally, the best estimates for the cost to process a transaction is < $0.01. So that means, they're charging $0.35 for nothing, essentially.

Oh the joys of running a cartel.

Mastercard/Visa aren't paying the rewards (that's on the issuing bank), they're not doing much fraud protection (again, largely the issuing bank), and they're not responsible for any of the defaults or payment issues (you guessed it, the issuing bank).

The issuing bank sets interest rates (and late/missed payment fees, and penalty rates, etc.) to cover at least the defaults and payment issues part.

Right, but the issuing bank splits the percentage fee with the payment processor. Again, this brings up the point -- with the issuing bank taking care of all that, what is the payment processor doing that realistically costs the other 50% of that percentage fee?

If you look at Visa's margins -- it's pretty clear the answer is: not much.

I have heard running a "cartel" a few times in this thread. I don't understand this term. Could you explain what you mean by that?

A cartel is when a few organizations control something of economic value and act as a single entity in the market. For example, the 1973 oil crisis was caused when OPEC proclaimed an oil embargo. OPEC, controlling the oil market, acted as a group to greatly reduce the supply of oil to the United States (and other ally countries) for political purposes.

EDIT: In this case, payment processing is controlled by a few organizations. They have agreed to raise their prices at the same time, instead of free market style competition for the lowest price. They can do this because very few companies can do payment processing and it is very hard to become a payment processing company.

I'm pretty cartel has in English the same signification as in French

The percentage that merchants pay largely goes to the underlying (card-issuing) bank. They take some risk in chargebacks (not all chargebacks go back to the merchant). Additionally, the banks use the fees they collect to pay for their rewards programs.

>Eliminating the set transaction fee could open up so many potential businesses. But I'm not sure what incentive Apple has of getting rid of it. It's a cash cow.

It doesn't necessarily need to be eliminated, but it should be regulated: see https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32... and the effect it has had in the EU.

Doesn't Square already do that?

https://squareup.com/help/us/en/article/5068-what-are-square...

If they removed interchange fees, they wouldn't be able to offer any kind of significant cashback.

This really isn’t why. Fraud cost is negligible.

Apple literally gets a cut out of every NFC transaction. So they get to double dip here.

Why do you think "Fraud cost is negligible"?

The merchants eat it all, basically.

Goldman Sachs is taking their cut /for sure/.

A significant proportion of interchange fees goes to covering fraud chargebacks.

> the largest problem with cards in the US today -- interchange fees.

To the non-expert, what are interchange fees and why are they a problem?

>It seems to me that Apple can offer reduced fees due to the fact that they'll have less fraud as a result of requiring touch/face ID for every purchase.

I don't think that's a big component of it. It's probably has more to do with Apple users being inherently more credit-worthy. If you're well-heeled enough to be neck deep in the Apple ecosystem in the first place, you're probably less likely to be in credit default.

I'm not sure about that since smartphones are a major driver for unsustainable borrowing (edit, was: loaning).

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