Comment by masterponomo | Hacker News Reader

Comment by masterponomo | Hacker News Reader

The main issue banks are dealing with is the Congressional move to limit debit card interchange fees. I have spent a good part of the past 25 years working on systems that allow acquiring banks to claim the lowest interchange fee. It's not a trivial process, and acquirers and merchants make significant investments to improve things at the point of sale. They expect to recoup some of that investment by paying lower interchange fees. For a simple example, one of the earliest (circa 1985) distinctions was between electronically-capture and paper-keyed transactions. Electronic qualified for a lower fee because it was more secure, more accurate, and more timely. Then within electronic-capture, the networks began rewarding quicker deposits--deposit within 7 days and pay a lower rate, then 3 days, then 1 day. Now there are many, many (perhaps 100's) of fee programs worldwide, with each card network having its own rules and technologies. By crudely limiting fees to an unrealistic 0.12/transaction, Congress is destroying the marketplace effects that drive innovation in the networks. Banks are justified in an equally crude reaction: you take away our ability to price a service realistically over here, so I guess we'd better raise another price over there.

First of all, it's the Federal Reserve, not congress, who is limiting transaction fees. Second of all, 12 cents is not an unreasonably low cost for a transaction. The payment networks cost virtually nothing to operate, and this becomes abundantly clear when you look at the profit margins of companies like Visa and MasterCard, which are higher than virtually any other company out there.

There is very little innovation in payment networks. There are established players -- Visa and MasterCard -- who charge merchants 1% or more of every purchase made. They pass along much of this money to banks, and payment networks essentially end up competing on how high their fees can possibly be so that banks choose their brand of card. And because the payment networks demand that merchants charge the same price for cash or card, retailers are forced to increase their prices for consumers who pay in cash.

If there were real competition, we would see payment networks competing to lower their fees. But you don't see that.

I stand corrected. The point of sale devices, the card association IT systems and networks, the bank IT and networks (a worldwide network that predated the 'net), the whole departments of people who support merchants, the fraud prevention measures, the training, the government and card association rules compliance--all integral parts of "the payment networks" are cost free. I should have reasoned backwards from a company's profit margins and realized that these infrastructure costs don't exist, and operating costs are an illusion. I should have also realized that the move into chip cards, the use of heavy-duty encryption, the rapid adoption of contactless payments products, the support for e-commerce in a world where identify verification can be a challenge, exposing the bank to untold risk, all are not innovations, they're just the cost-free hobbies of some rich bank persons. Thank you for the enlightenment, you smecking genius. I will now hang my head in shame for speaking out of turn after actually working on these systems for a quarter century and not realizing that it was so inexpensive.

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