> But the Fed stuck in a loophole for Discover. And that is leading Capital One to buy it.
This isn’t a “loophole”.
It’s the difference between open-loop payment networks and closed-loop.
Visa/Mastercard are open-loop.
Whereas Amex & Discover are closed loop.
On closed-loop, both the issuer and acquirer is the same bank (Discover).
It’s way easier for a merchant to not accept closed-loop than it is open-loop, because they can just elect to not get an acquiring account at that bank (Discover).
This is why Amex and Discover have always been more expensive for a merchant to accept than Visa/Mastercard.
This article is way longer that it should be and it sensationalizes a fairly well known and simple difference.
Do people do enough debit card transactions to make this loophole worthwhile?
I avoid using my debit card as much as possible since the impact of theft is much worse for me as a consumer. I experience fraudulent credit card charges every few years, but it's not real money gone from my account.
I'd be much more annoyed if it was.
With cash back and points incentives, withholding the non trivial value of the insurance of which you speak, the only rational reason to not use a credit card is bad credit. Now, for the merchant….
> The merchant just raises prices so you can pretend like your points are saving you money.
No, you are saving money, because while the merchant raises the price to account for it, everyone gets the higher price regardless how you pay. At least with a card you can get some of it back.
(With rare exceptions, some vendors do give a cash discount. In which case I always pay cash.)
The networks have a massive incentive to minimize fraud. That's not to say that they are wildly successful or anything, but I do know from first hand professional experience that card networks spend a lot of time, money, and research into detecting and preventing fraud.
- Payment networks drop accounts with a too-high fraud rate.
- They and similar businesses (e.g. Stripe) offer automated tools to deal with fraud… for a price.
Outcome: the incentive to minimize fraud, which is often a result of crap security from the payment network, is on merchants, who also get charged extra protection money to get payment networks to do stuff they ought to be doing in the first place.
Ultimately, that incentive is the legal system, which can legislate against allowing fraud and forcefully impose penalties for it. (And operating it is a socialized cost, such that your first sentence is still correct.)
Yes, because the merchants raise prices because people pay with credit cards (which take fees), you take back a little (though of course not all) of extra markup via points, assuming you use a 2% cashback card (at least) on your purchase (which assuredly many people don't).
Merchants don't automatically pass through all costs any more than they'd pass through all savings if all their customers moved to debit cards. It depends who has the pricing power.
Not really, because the "tax" applies to competitors as well. In an uncompetitive industry the merchant has pricing power and can just raise the price, true. But in a competitive industry, margins are thin and they have to raise the price or they go out of business, and so do their competitors, which is what allows them to.
There is nothing stopping stores from offering a discount if you pay in cash or debit. Businesses most often choose not to, so they must feel like they are getting somthing out of the deal.
As a small merchant I can tell you: cash sucks to deal with and it costs money too. I went to cashless years ago. The 2.x% I eat in processing is more than made up for in not having to deal with shrinkage (either due to theft or inaccuracy or counterfiet bills), security, having to count money and go to the bank regularly, etc.
It's probably different when you're at a much larger scale than I am, but even Wal-Mart (who I was employed by in my late teens) has all sorts of cash-handling procedures to mitigate the risk of money just walking away. Even a their scale, they spend 1% on CC processing, but by the time they added up all of the labor and expenses of cash handling,it might be comparable. And for a small business it's likely more.
And then there's the data collection which has value too.
People act like accepting cash is free, it is not.
Thanks, this is an interesting opinion to read! I went through a period where I asked most small/local businesses I happened to be shopping at whether they preferred cash or card, as I had both to hand. It was a small sample size, but the vast majority said they didn't care either way, and a handful said they preferred cash. I never experienced card-only or a card-preference. That did surprise me, as I expected at least some to feel as you do.
Humorously, there are laws against credit card surcharges but not against cash discounts.
Realistically, the price difference is probably not worth the hassle of needing two prices and card sales are probably affordable enough and common enough to not bother.
They basically said a surcharge for credit is effectively the same thing as a discount for cash, and because of freedom of speech, merchants are free to communicate the difference to their customers either way.
Gas stations do the cash discount for a particular reason - to get you inside the building where you might buy profitable convenience-store items, which you won't if you just stay at the pump. (Though yes, the differential might be less than the kickback from a card rewards program.)
somewhat true but the reality is far worse - points/rewards are mostly subsidised by the poorer folk who get caught paying the > 25% interest on their carried credit card balance.
you could just as well say that the mortgage interest payments the bank takes in are subsidizing credit card points, or HELOC origination fees, or account maintenance fees are subsidizing points. you could also say the bank's profits from trading securities, or their lucrative wealth managements services are subsidizing points. but none of that would be accurate. The banks have a range of services and some are big wins and some are marginal and some may even be losses, and of course the wins help balance out the losses, but unless you can show that points disappear if poor folks manage their credit better and pay more reasonable interest rates, it's not reasonable to frame points as being subsidized by the poor.
High-end rewards cards are quite profitable on their own, thanks to the annual fee, high volume of interchange fees, and the high probability of successful collection.
Low end cards aren’t expensive because they are subsidizing high-end cards; they are expensive because they need to cover the collection costs
Which means if you want to "pay less", you have to play the credit cards rewards game to its fullest. We don't get to set the prices, merchants do.
Some merchants offer cash discounts (or a credit card surcharge), and you can make use of that if you want to. Ultimately I use cards for the convenience, regardless.
more than some. pretty much every small biz in my town does so (around 3%). not to self: carry more cash. My B2B business charges a 3% surcharge for credit cards over ACH or checks.
Not really, I've tried numerous times after negotiating the sale price of a vehicle to pay for it on a credit card. They won't do it. What they will do is allow a fraction of the payment to be made on a credit card and the rest via a wire transfer
Yeah, same. As a matter of policy, I don't take incentives, commissions, kickbacks, etc, for anything. My dad was super into points-related financial games, so I get it, but I don't need to give the professional manipulators of the world any more headspace than they already have.
Credit card network operators brag that accepting their network means customers will spend more. If spend increases even 1.6%, you are on net spending more.
CC acceptance decreases "friction." Some part of it is unlinking paying with the feeling of depleting resources when you pull cash out of your purse or wallet. Maybe running low on $20 bills and having to go to an ATM makes you decide to put one item back on the shelf. Or one's bank account is nearing bottom. In younger generations the opposite ironically can happen. They feel digital numbers fully but cash is spent more freely.
A cash back reward is a reward for not behaving badly enough that your account gets closed (or the bank shuts down). If you want to get rid of all ability to consume things, you could stop working so you don't get paid.
Actually, I think points are more like a savings account than a consumption reward, since the best deals are on international flights you have to save up a lot of points for…
> I find it pretty damn rational to deliberately remove CONSUME MOAR incentives like points/miles/cash-back rewards from my life.
Can you explain why is it rational to willingly pay more for things when you could pay less?
I also wish we didn't have to play these games, but we don't get that choice. But we do have a choice to pay less (with a credit card) or pay more, so take the rational choice.
It’s rational because you see these gamification schemes as distractions that trick you into bending over to pick up pennies off the ground while the banks pick your pockets. The credit card system is ludicrous. The payments system is a natural monopoly, so it should be operated as a public utility (e.g. FedNow I guess) with much lower fees for all. No more points, but lower prices and simplicity for all (especially for merchants).
The debit card behavior is probably bank specific. I had fraudulent transactions on my debit card. The bank caught it after a few transactions, alerted me, and shutdown the card when I told them it wasn't me. I didn't get charged for any of the fraudulent transactions. I also had a restaurant charge my debit card for my bill and another customer's bill (honest mistake, not fraud). The restaurant wouldn't refund the transaction, so I disputed it with my bank, who reversed the transaction. The bank was fully set up to dispute debit card transactions from their website.
It’s bank specific but the major difference is that with credit cards you are protected by law whereas with debit cards it depends on the whims of your bank and the contract you signed with them
You call it whims, but I don't know of any bank that doesn't offer those protections. Generally the terms are that you have to report it w/i 30 or 60 days. Maybe some of the smaller credit unions?
but like the other poster, I've had people try to charge me for things that weren't mine and I've never had the problems people seem to imagine exist with debit cards.
At this point I've concluded it's a marketing scheme by the CC companies that has convinced large swathes of society that debit cards are dangerous.
Not only that, but I would argue the false sense of security of CC's makes it so people are less safe in their habits.
>You call it whims, but I don't know of any bank that doesn't offer those protections. Generally the terms are that you have to report it w/i 30 or 60 days. Maybe some of the smaller credit unions?
That's been my experience as well. Although my bank almost always declines debit card transactions if I'm more than 50 or so miles from home, making the use of credit cards much more useful when I travel.
Sure, but why deal with that uncertainty? The money is not in your account until the dispute process finishes.
With a credit card, the money never leaves your account in the first place, at least until the bill is due.
Regardless, I know I'm legally protected with any credit card I use. With a debit card, it depends on the bank's fine print as to how disputes are handled.
> The money is not in your account until the dispute process finishes.
That's not necessarily always the case.
I use a debit card for almost everything. I've been doing it this way for quite a long time now.
Both times I've filed a dispute over debit card transactions, my bank immediately put the disputed amount back into my account while they investigated the dispute.
It was inconvenient to deal with (as many things in life can be), but it was not particularly problematic.
> relying on a corporation like a bank to be nice is risky and a fragile stance (they can change ToS any instant).
Banks are a lot more tightly regulated that most other businesses, and (in my experience) don't generally have "we can change the ToS whenever we want, however we want" clauses in their customer agreements.
All the banks I've dealt with say they have to give you 30 days notice of any ToS changes, and with language like "if we reasonably consider that the change is favorable to you" (or similar).
If your bank has more leeway in changing its ToS on you, I would suggest having a look around at the terms other banks offer.
Banks have to hold up their end of the customer agreement (contract), and the terms of that agreement are enforced by contract law.
I've yet to see a bank's customer agreement wherein the contractually-defined protections for debit cards varied significantly from the legally-defined protections for credit cards. (I haven't made an exhaustive study of this, but I have read the fine print for every new bank account that I've considered.)
If you can find a customer agreement that is meaningfully different in this aspect, then: I'm all ears.
> Banks have to hold up their end of the customer agreement (contract), and the terms of that agreement are enforced by contract law.
Right, but they can change those unilaterally whenever they feel like it. Multiple times a year I'll get an updated terms of service document from this or that bank.
So you can point to a bank's a customer agreement that is meaningfully different in this aspect compared to federal requirements for credit cards, then?
Or maybe you're just spilling FUD?
Just because a thing can change, doesn't mean that it will. (It doesn't even mean that it has ever changed.)
However, I appreciate the CFPB link. Having worked in fintech I'm familiar with them.
The link does corroborate that debit card protections are weaker than credit card protections. They have with more aggressive reporting requirements (2 days) and higher potential liability ($500, or even as much as the full amount in some circumstances, though unlikely).
This document has a handy table that compares the protections side by side. As you can see, debit card protections are weaker. Scroll down to the table "Federal Protections for Unauthorized Transactions":
> They have with more aggressive reporting requirements (2 days)
between 2 days and 60. read it closer.
this is called backpedaling, as I predicted. we've now gone from "prove debit cards have federal protections!" to "but but but ... they're different!".
they're protected mr fintech family who had no idea.
But in the days between a fraudulent charge, and you reporting it, maybe you bounced a check...
There is a difference between your account balance being immediately depleted by fraud and your available credit being reduced.
> I also had a restaurant charge my debit card for my bill and another customer's bill (honest mistake, not fraud). The restaurant wouldn't refund the transaction,
I know this wasn't the point of your story, but refusing to refund the transaction takes it firmly from "honest mistake" into "fraud" territory in my book. Oops, I accidentally stole your money, my bad. No, I won't give it back. WTF?
I think perhaps you don't understand because you presumably have a reasonable amount of money and cashflow buffer. It's hard to appreciate how much of a trap credit cards are if you have very little money, or live truly paycheck to paycheck. Its so easy to accidentally run past your "$0" and be stuck in the world of 30%+ interest for a long time, spending multiples of the initial cost.
As such, debit cards are still very popular for people who need to control every dollar, which is a lot more people than you think. Often folk would rather a transaction be denied than to go into expensive debt - they've been burned, they've learned the hard way.
Some banks used to "helpfully" give you a spot loan when you ran below zero balance. Some banks still charge you overdraft fees. Most banks charge you absurd fees for basic debit features.
I see a lot of people using pre-paid credit cards. You can just roll into Walgreen's, flop cash on the counter, and "charge up" your card.
There are a lot of debit products out there. ButfFor the majority of traditional banks, if you turn off overdraft the account keeping fees for debit are far far less than the average carried CC interest bill.
Those pre paid credit cards come with their own substantial fees, and usually are without rewards or purchase protections.
> Those pre paid credit cards come with their own substantial fees, and usually are without rewards or purchase protections.
Having looked over a few the fees aren't any different than what you'd expect at a commercial bank like Wells Fargo. Many do come with rewards, often tied to the network of stores that issues them. Purchase protections aren't universal on standard cards.
> I’m not entirely sure what you’re getting at?
That debit cards aren't inherently safer than credit cards and this is reflected in the scope of available products.
I can tell you I make mid 6 figures and I still control every dollar.
But you're absolutely correct, people act as if CC's don't have the inherent risk of going into debt, not as bad but similar to a pay-day loan. People throw around the word privilege, but it applies here.
> I think perhaps you don't understand because you presumably have a reasonable amount of money and cashflow buffer.
Agreed.
> debit cards are still very popular for people who need to control every dollar,
But that's terrible advice. Debit cards will debit immediately from your account and you may know that banks are very creative in re-ordering transactions to inflict you maximum pain.
You have $1000 balance and on the same day issue payments for $10, $20, $30, $40, $50 and $999. If the bank processes those in the same order you get hit with one overdraft fee when the final $999 payment goes through.
But no, the bank will rearrange that to process $999 first, and hit you with five overdraft fees. So nice of them. I mean nice for them.
With a credit card the payments are buffered away from your balance and you can choose when to pay it.
>But that's terrible advice. Debit cards will debit immediately from your account and you may know that banks are very creative in re-ordering transactions to inflict you maximum pain.
>You have $1000 balance and on the same day issue payments for $10, $20, $30, $40, $50 and $999. If the bank processes those in the same order you get hit with one overdraft fee when the final $999 payment goes through.
>But no, the bank will rearrange that to process $999 first, and hit you with five overdraft fees. So nice of them. I mean nice for them.
According to[0/PDF] the Consumer Financial Protection Bureau (CFPB)[1], reordering transactions in that way is illegal.
Edit: I'd clarify that I am not claiming that this sort of transaction doesn't happen, but rather that it's not a new issue and happens often enough that the CFPB felt it important enough to publicly opine about its illegality several years ago.
Additional Edit: Added more context from parent comment to make their point (to which I certainly wasn't in disagreement) clearer. Apologies for any confusion.
> Debit cards will debit immediately from your account and you may know that banks are very creative in re-ordering transactions to inflict you maximum pain.
In the US that's been illegal since the late 90's, you need to update your information.
“ known as an ‘interchange fee,’ from the merchant, roughly 1.5-3.5% of every transaction”
This jumps out because it is such a wide margin. In reality the average interchange fee is 1.8%. Amex at their _highest_ rate, which is the highest of all the networks is 3.5.
So “roughly” is doing a lot of heavy lifting in that sentence which gets further amplified later in the article when they use it to multiply by the total credit volume.
I don’t know that it fully discredits the argument but it is certainly a weak rhetorical tactic.
In the payments space margins are measured in basis points, 2% seems small to laymen. 200 bips seems crazy big to anyone in the industry.
Many credit cards give 2% cash back, so they'd be operating at a loss. I'm quite sure credit card companies will never operate at a loss, so that can't be.
> That 2% attracts plenty of balance-carrying people paying 29%.
Do you have data on that to share?
It feels like that should not be the case, because the higher cash-back cards usually require a higher credit score. And people with a higher credit score are unlikely to fall into the trap of carrying a balance.
The 2% cards aren’t that hard to get, and with something like half of Americans carrying balances some of them are gonna be 2% cardholders who ran up more than they realized on a 0% APR intro rate.
You only need a few of those to make up the difference.
> The Regulation on Interchange Fees for Card-based payment transactions entered into force in June 2015.
> Therefore, the Regulation caps interchange fees for consumer debit cards to 0.2 % and consumer credit cards to 0.3 % of the value of the transaction.
Lots of speculation but no real data. No, Capital One didn't buy Discover for $35B so they could raise their debit card transaction fee by a few bps. People don't use debit cards enough for it to be worthwhile. The real reason is the boring one – there is a lot of value in the Discover brand and network and Capital One wants that.
Discover has always been stuck in a weird place in the US market. They've lived and died on their customer service reputation, yet ultimately they are just another credit card company. But with a card that really doesn't have any advantages over the others, while having a non-zero chance of not being accepted somewhere (more common than Amex).
They haven't had any other offerings at all which I've found compelling. And their banking services are too sparse to switch to as a main provider. Hard to say it will be missed.
Discover has always had the strange cash back thing. No need to find an ATM, just go into any grocery store, buy a soda or cigarettes, and have the cashier give you up to $100 cash or whatever the limit was. I wonder if anyone uses that service much anymore, but I can remember it being quite popular as an alternative to the dodgy and high-fee ATMs in the back of shitty bars back in the day.
Why on earth isn’t the Federal Reserve providing an easy money moving service that also acts as a ledger? I know about FedNow but they could also back bone transaction networks as the definitive payment pipe and cut out the middleware companies entirely
To be honest Visa type services should be provided via the central bank (again, Visa itself isn’t a credit card issuer) so businesses don’t have to soak the payment percentages
For the same reason we have tax preparation software and private health insurance (but somehow government flood insurance on vacation property). Valid historical reasons that no longer apply, and lots of lobbying.
The old government nationalized railroads and private roads for this exact reason. When a utility becomes embedded into and it’s needed to even function in society, it needs to be nationalized.
Regulatory capture has made that near impossible now. At least crypto throws another challenger in the ring and can give people and businesses an, albeit inferior, alternative.
Japan famously privatized it's trains/subways. They're now considered best in the world. They appear to have made it a positive feedback loop by letting the train companies own land and business near tracks so that over time, every station is a mini shopping center owned by the train company. Several train companies also run grocery stores at nearly every station. Some run office buildings, department stores, and apartments near the stations. All this means more riders and more riders = more customers for the other business.
This type of company owned adjacent property is not legal in most countries, as it is akin to riders largely existing in a company owned town where said company can extract significantly more rent from each rider than they otherwise would, distorting the market to hurt competition.
It doesn't seem to have hurt Japan and I'm not sure it's the same. The train company doesn't own the entire town so it's not remotely the same as "company owned town". Even if the train station owns a grocery store there are 4 others in the same neighborhood run by other companies. Same with office buildings, apartments, etc....
Also, regional ice cream sales in coastal areas correlate directly with shark attacks. Japan has the best because they see it as a first-class transportation system. America thinks public transit is a D-list expenditure, at best. Now we have D-list service quality, at best. Post-privatized UK bus systems, London aside, are a joke. Being public might not have changed that, but it sure didn't stop it. Boston's public transit is a joke, but improving. Same with their privatized regional rail service. The company took years to get enough snow removal equipment to not cancel dozens of trains in heavy snow. In Boston.
I'm not sure trading three owners for one public one is the right direction to go, particularly since there are few limits to the number of providers that could be operating in this space.
The article points this out, too, that it's incredibly expensive and difficult to start a new network from the ground up. This sounds like the thing you actually want to fix.
Yes, realistically, it's not possible at this point. Ideally, it should be done so users have some sort of recourse. Visa/MC can straight up ban you from processing payments without rhyme or reason while they hide behind KYC/AML laws. The government can't hide behind these laws.
I think cheap and ubiquitous internet access has changed the game here significantly and it seems far easier to bring new products and technologies into the merchant space than it ever has been before.
> Visa/MC can straight up ban you from processing payments without rhyme or reason while they hide behind KYC/AML law
Yes, but if you had a dozen other providers to turn to, this may not be an issue, and may force the established players to have a more transparent policy.
> The government can't hide behind these laws.
I would consider the "No Fly List" as a terrifying example of where this naivete inevitably ends.
I don't think you fully grasp the ramifications here.
governments will give utilities a monopoly but with requirements such as they must service everyone regardless of profitability or they get fined all to shit.
So why would any utility take that offer? Do you have an example of such a contract between state and private company that you find these terms? I'd like to take a look at the bidding process.
If the government is corrupt or corruptible (and which aren't?) then "service everyone" isn't as objective as it seems.
Meanwhile you can just force all the collective carriers to post their prices and their profits publicly or threaten them with complete loss of license to operate. This has been effective in the past and allows for a more open system with many competitors rather than a state selected contractor.
This is one of those cases where you don't know what you're talking about and you should stop speaking as if you're an authority here.
I love how you throw in bidding as if we're not talking about the government giving a monopoly in exchange for guarantees (it's considered a public good). This exchange of guarantees has made energy one of the most stable long term investments in a way that other investments just aren't. Gee, why would anyone take that deal?
Where are you referring to? In the US railroads were never nationalized (long-term) and private roads were never much of a thing, and the US has a pretty good (freight) railroad system [1].
To expand on your point, the United States Railroad Association only lasted for a little over two years until the Esch-Cummins Act was passed in 1920. Later, Conrail was under federal control for about a decade before it was sold to private investors in 1987, but it had a more regional focus.
I woke up this morning with an odd thought. User interfaces are hard, they are not many but we have people who are really good at designing those, we also know how to user test them. Election programs are non binding, you can say one thing then do the exact opposite after winning. (Referenda are also complicated.) It doesn't seem to make sense in the modern age to be able to change your vote every x years. It's a great formula for [say] the 17th century.
What if we designed a really neat configuration page for the government and allow people to change whatever settings exposed to them. You check a candidate you like and with each option their choice is the default. If you don't agree with something you simply change it.
Then, one by one we take the topics away from the politicians so that they can focus on the rest of the work.
For choosing the party you get 3 up and 3 down votes that you may spend however you like.
A separate election is held to chose the team to populate and work on the interface so that gradually more and more topics get exposed. Their job would also be to research and estimate how familiar the population is with a topic along with a budget to educate the voter.
It would be enlightening for the candidates as well.
Eventually we can shut down the legacy system and have one or more nudgeable robot overlords.
Don't worry, I'm sure the dream will fade in a few hours.
It basically lets each citizen choose between direct or representative democracy, per issue, and does away with arbitrary things like election dates and even candidates (you can "elect" any other citizen to vote on your behalf, as can they). The only reason we don't have it is because it's basically impossible without software. Even very complex ranked choice voting can be tallied manually.
The interesting thing in the moment was not the formula necessarily but the idea to start with the interface.
If you are dealing with such monstrosity of an application all battles are lost at the interface level. It has to work for everyone, there is no room for excuses about dumb users, they are the target audience.
While in the US the number seems infinite, in the Netherlands we have roughly 140 000 laws that each could have a series of check boxes and sliders. Say we all do 4 per day, that would be only 1460 annually. It would take 100 years which seems to long. At 40 per day it would require to much effort.
If the interface is to work as desired a large amount of law needs to go.
We should burn the books most worthy first. Experts can compete finding the most nonsensical laws. Short videos can be made to explain why the law exists.
We assign a good number of test subjects to pick the least likeable ones until we have a good list of candidates unlikely to survive.
There must be a good feedback report of the terrible implications after a law is deleted.
I can see it already, naked people around camp fires, drinking booze in public, selling food after sundown, making music without a license, singing songs insulting the monarch.
We also don't know if the outcomes would be preferrable. Do we need to move democracy into a high-frequency trading kind of world to do the things we want to?
How about you make a database of questions related to voting history. The algorithm matches the candidate whose history aligns closest with your selections.
The reason we don't have free tax preparation software (or a tax system that doesn't require that) and don't have free health care is because of competence issues. Taxes seems like a different dimension of problem, so let's leave it aside for the moment. Do we really believe that the people that work in the government here (in the US) are actually competent enough to administer a public health care system? I don't. I'd like to be convinced otherwise. Maybe you mean to say that we'd, I don't know, outlay lobbying and redirect that economic activity toward paying market salaries to people who are, in fact, competent enough to administer a public healthcare system.
>Do we really believe that the people that work in the government here (in the US) are actually competent enough to administer a public health care system? I don't. I'd like to be convinced otherwise.
Sorry for the late reply.
Belief is unnecessary. The US government has been administering Medicare[0] since 1965 -- longer than I've been alive.
I find it a bit dishonest to claim that healthcare cannot be publicly administered because of trust issues when it's cheaper everywhere else and administered publicly even in places with high corruption like Russia.
It's cheaper everywhere else because it's so incompetently (or corruptly) regulated here. If you can't demonstrate an ability to solve that problem here, putting more of the system under the same regulators seems like doing things out of order.
Pointing to Russia on costs also points to the other side of the problem: Their healthcare system is severely under-funded. That's one way to make it cost less.
For federal taxes only... and with silly limitations that exist... because lobbying? And oh by the way, the IRS isn't actually offering anything, they'll refer you to third parties that will then make money off of you if you have anything beyond the most basic filing, and also if you want to file state taxes.
Why would the IRS provide a filing service for state income taxes? Go ask your state government to provide this if you want it. The IRS isn't the one collecting those taxes
The problem still remains that they have a number in mind about what I owe and I'm not allowed to know it until I file. Just tell me what I owe and give me the option to approve it. The IRS provides free filing, but if your taxes are complex good luck. If you are the one who prepared them you absorb the liability when the IRS comes after you. The likes of TurboTax are still in favorable positions despite the free option now being available.
> The problem still remains that they have a number in mind about what I owe and I'm not allowed to know it until I file.
They can't. Too much of the tax code is subjective and based upon claimed circumstance. If they did know this, they wouldn't need auditors.
> If you are the one who prepared them you absorb the liability when the IRS comes after you.
The liability is typically just the difference between what you paid and what you owe. It's hard to believe most people are so bad at taxes their efforts would be mistaken for willful criminal fraud.
I'd imagine anyone who can even figure out the various forms needed and what to fill out wouldn't even get far enough to accidentally give the impression of criminal intent. It's less about the money and more about the time cost of login back and forth with the IRS. Three years ago I started a business and my taxes were very complex. LLC filing, HSA and partial savings liquidation, investments, contractors, payroll, and so on. My tax return was 4 months late over $40-something dollars, and they knew exactly what it was they just refused to tell my accountant. So we did the whole "here's what I have, is this what you want" dance. Such a complete waste of resources.
The problem is fraud + disputes. Who's liable for people sending money to fraudsters? For letting fraudsters operate on the platform? See the fraud issues of Zelle, which is basically a free money moving service comparable to FedNow.
The service the networks provide is a way for all participants (banks, people, businesses, etc) to trust one another, as well as a healthy rules-based system to address disputes. Getting this working is not trivial.
Everyone seems to forgot that a cheaper, regulated option exists, and it's Durbin debit cards. But nobody wants to use them because they don't offer the same benefits vanilla credit cards. People choose the more expensive option because it better meets the needs of customers.
The middle man doesn't really take all that much - most of interchange goes to the cost of loan origination, insurance and most importantly cash back and rewards programs. There's no annual fee 2% cash back cards. It's a little disingenuous to say the 1.5-3.5% interchange fee "mostly goes to middle men" when most of it goes right back into your pocket in one way or another.
> There's no annual fee 2% cash back cards. It's a little disingenuous to say the 1.5-3.5% interchange fee "mostly goes to middle men" when most of it goes right back into your pocket in one way or another.
There are two problems with this. The first is that not everybody is eligible for the no annual fee 2% cash back cards, and the people who aren't are the people in financial straits, so this is effectively a tax on the poor.
The second is that it's an anti-competition measure. Sure, maybe you get 2% out of the 3% the merchant is charged, but then you refuse to use a competing payments system because you want your 2%. And then we're stuck with the incumbents forever because anything new and different can't build a network effect when customers would have to pay a de facto 2% tax on everything they buy in order to use it.
Which is exactly what happens to your debit cards -- and then people are subject to the whims of Visa and their opaque capricious KYC implementation.
> Which is exactly what happens to your debit cards -- and then people are subject to the whims of Visa and their opaque capricious KYC implementation.
Not really. The merchant decides what kind of card to accept and how to route. It's just that customers will choose not to visit your establishment if you only accept debit, even if you have lower prices. Because they like the perks of a credit card.
The reality is the merchants pay a blended average of about 1.8% and they do so because people spend more on credit cards. It's relatively cheap, super fast, very easy and secure.
KYC is hardly capricious. Visa, issuers and acquirers have no interest in cutting off customers because, and this is true, cut off customers don't make them money. There is room for something like 'payment network neutrality' where legislation requires networks to process all legal transactions. Things can be better.
> And then we're stuck with the incumbents forever because anything new and different can't build a network effect when customers would have to pay a de facto 2% tax on everything they buy in order to use it.
I don't buy this either. The last few years saw the development of a whole new network in BNPLs. And guess what, it's not cheaper, at all. They charge 4% or more and they don't kick any of it back to customers.
The value in credit networks is in the loan origination, the insurance and to an extent the rewards. The credit networks do just fine in Europe where interchange is capped at 0.2% for debit and 0.3% for credit, and I haven't really seen a wellspring of competition. What I do see is a dearth of loyalty programs, which is a tradeoff you can choose to make.
> The merchant decides what kind of card to accept and how to route. It's just that customers will choose not to visit your establishment if you only accept debit, even if you have lower prices. Because they like the perks of a credit card.
Some customers. But then this leads to the problem: If you accept credit cards in order to satisfy those customers, other customers will use them in order to get the cash back.
> KYC is hardly capricious.
It is. They often cut off lawful businesses because they have disfavorable PR associations or political views, and sometimes apparently random people for undisclosed reasons. If it was easy to switch to any number of competitors without customers having to know any difference or sign up for different cards etc. that would be irrelevant, but it isn't.
> The last few years saw the development of a whole new network in BNPLs. And guess what, it's not cheaper, at all. They charge 4% or more and they don't kick any of it back to customers.
This is a loan. Naturally the customer is then paying interest. A credit card is nominally a form of credit too, but the fees are still charged to the merchant even when the buyer immediately pays off the card in full.
> What I do see is a dearth of loyalty programs, which is a tradeoff you can choose to make.
And this is the tradeoff we should make, because getting charged 2% more and then getting 2% back is useless, but has negative consequences like inducing complexity and customer ire to provide cash discounts or credit card surcharges, and causing customers to prefer the incumbent system in favor of competitors even more than they do otherwise.
Notice that the cost of "insurance" from the credit cards has to be passed on too. You like that you can issue a chargeback, but so can a scammer in order to rip off the merchant, and then merchants have to cover the cost of getting ripped off. Any disincentives to not implicitly buying that insurance when you trust the merchant and don't need it will tend to raise prices.
> Some customers. But then this leads to the problem: If you accept credit cards in order to satisfy those customers, other customers will use them in order to get the cash back.
Which is fine, you can offer discounts based on payment method, like at a gas station. I still pay credit.
> It is. They often cut off lawful businesses because they have disfavorable PR associations or political views, and sometimes apparently random people for undisclosed reasons.
That's not AML/KYC/CTF. That's freedom of association. KYC is a legal compliance matter. That's why I suggested a 'payment network neutrality' bill that required these systemically important networks process all lawful payments - or the introduction of a state-run network.
> This is a loan. Naturally the customer is then paying interest. A credit card is nominally a form of credit too, but the fees are still charged to the merchant even when the buyer immediately pays off the card in full.
A credit card is an interest-free loan for 1 billing cycle followed by the regular APR. Part of the interchange pays for the first billing cycle where you are not charged your APR. They don't return any of that 4% BNPL fee if you pay it off early either do they?
> You like that you can issue a chargeback, but so can a scammer in order to rip off the merchant, and then merchants have to cover the cost of getting ripped off.
Still works out better for the merchant than not taking card. That's just the reality. If it weren't then they wouldn't accept cards.
> Which is fine, you can offer discounts based on payment method, like at a gas station.
And then you need more more complicated signs, which often confuse people who then get dissatisfied.
You also may not be allowed to charge as much as it actually costs -- they allow you to recover the processing cost as a fee but not the cost of chargeback fraud.
> That's not AML/KYC/CTF. That's freedom of association. KYC is a legal compliance matter. That's why I suggested a 'payment network neutrality' bill that required these systemically important networks process all lawful payments - or the introduction of a state-run network.
No, they're related, and that's why your proposal doesn't work, or is just equivalent to doing away with KYC.
The government isn't allowed to penalize people based on vague suspicions and no proof, but private companies are. And that's what KYC is coaxed into service to do -- the bank wouldn't otherwise care if you're a drug dealer, but now the government can lean on them to drop anyone the bank has any vague suspicion might be, even if neither of them have any real proof.
But that system has false positives, because its burden of proof is trash, which turns into a serious problem when the thing dropping you has a dominant market position instead of you just being able to go to the bank across the street whose algorithm isn't quite as broken.
If you passed a law requiring them to do business with you unless it would be illegal, you're taking away the slack that was put there on purpose and they could only drop you if they could prove you're committing a crime -- and maybe that's good -- but good luck getting it passed, because the government likes the status quo.
> A credit card is an interest-free loan for 1 billing cycle followed by the regular APR. Part of the interchange pays for the first billing cycle where you are not charged your APR. They don't return any of that 4% BNPL fee if you pay it off early either do they?
The issue is that they're tied together. You can't say "I want to avoid the interchange fee by having you debit my checking account the same day" even if you don't even want the billing cycle's worth of float -- and for a percent or two a lot of people would take that deal if it was available, because that's an awful high interest rate to pay over 30 days.
> Still works out better for the merchant than not taking card. That's just the reality. If it weren't then they wouldn't accept cards.
That's only true if some viable alternative is available. They're stuck accepting cards because some customers wouldn't buy without them -- often because they're actually buying on credit -- but then once they do, other customers use them in order to get rewards or because the merchant isn't allowed to pass on the cost of chargeback fraud to only the people paying with credit cards.
And even when the merchant is pressured into accepting credit cards through structural factors, you still have to pay the cost of chargeback fraud through higher prices when they do -- you just can't avoid those higher prices by not using a credit card, which is even worse.
Discover has alqYs bewn stuck in a weird place in the US market. They've lived and died on their customer service reputation, yet ultimately they are just another credit card company. But with a card the really doesn't have any advantages over yhe others, and a non-zero chance of not being accepted somwehwere (more common than AmEx). They havn't had any other offerings at all which I've found compelling. And their banking services are too sparse to switch to as a main provider.
The thing that confuses me about fee-based payment businesses is in theory, a Surcharge for a particular payment method should cover the gap.
Is there a reason surcharges aren't sufficient to drive down interchange and take fees? Do customers just not care about paying a 2% fee? Do merchants judge that it's not worth pissing off a subset of their customer base if they use a high-fee card and just eat the expense?
It seems clear to me that the problem comes down to customers not actually paying the cost of using a particular card or network.
In the US, merchants spent years actually being forbidden (by the networks' merchant agreements, and even by law in some states) from adding a surcharge onto credit card transactions.
That's mostly gone now (although I think there are still a couple states that forbid them, Visa and MC at least allow a credit card surcharge or cash discount in their merchant agreements), but it's so normalized at this point that customers are unlikely to care that CC and cash transactions are the same price. So, if you're a merchant, you set your pricing to include your merchant fees and just take the extra profit on cash transactions.
But merchants are already paying for cash logistics. Now because of credit card fees a person paying cash has to pay 2-5% more per transaction even when not using a credit card?
>It seems clear to me that the problem comes down to customers not actually paying the cost of using a particular card or network.
You absolutely pay it; you just don't see it. Go to small town America and deal with a small business and you'll frequently find businesses that will tell you that you can get a 3% discount paying cash. Go to Walmart or Target or Costco or insert national retailer and the discount or "cash back" will be via their branded card.
Europe used to have two significant card networks of its own: Maestro (owned by Mastercard) and Visa Europe (previously owned by various European banks). But Maestro is dead now and, a few years ago, Visa Europe merged into Visa.
There were a bunch of national networks but they're slowly dying I think. The UK's Switch debit card network got rebranded as Maestro and then killed, for example. The UK still has something called Link however (used for ATM withdrawals and I think nothing else).
Fewer and fewer banks supports it. It's obvious when looking at the neobanks' offers: https://www.zupimages.net/up/24/07/zbua.png ("Réseau CB: Oui [yes] / Non [no]"). A shame as the whole French payment network now relies almost solely on Visa, a $500T US giant.
the italian "pagobancomat" system[0] (pay from your CC with an ATM card) is still alive and well, all ATMs and POS support it together with visa/mastercard. There's also an online payment system but I've not seen it used.
Most plastic you get these days supports both that and visa/maestro.
There used to be Eurocard, but it merged with MasterCard a couple of decades ago. Most countries had domestic debit card networks. Some still have, while others replaced theirs with Visa / MasterCard debit cards.
SEPA is basically free and instant. There are some shortcomings but even with them there is hardly demand for for any other service (why would consumers decide to use anything but banks transfer and/or credit/debit cards when the fees are so low?)
This isn’t a “loophole”.
It’s the difference between open-loop payment networks and closed-loop.
Visa/Mastercard are open-loop.
Whereas Amex & Discover are closed loop.
On closed-loop, both the issuer and acquirer is the same bank (Discover).
It’s way easier for a merchant to not accept closed-loop than it is open-loop, because they can just elect to not get an acquiring account at that bank (Discover).
This is why Amex and Discover have always been more expensive for a merchant to accept than Visa/Mastercard.
This article is way longer that it should be and it sensationalizes a fairly well known and simple difference.