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.
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?
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.