Sunday, August 11, 2013

It's time for a Price War in Payments

Bring on the price war.
Price wars are great; they are the very epitome of what our American capitalist economic ideals are all about: competition.
But for the last several years something else has been going on.  For the last several years, every single swipe of your debit card — every single “submit payment” click or iPhone tap for your favorite song, every single “$0.35 debit card fee” gasoline pump authorization button press you’ve been forced to accept has been much, much higher than it needs to be …  about 800 percent higher:
their initial analysis that concluded the actual cost of a debt transaction was only 4 cents.”
You read correctly.   A few days ago (before being bought by Mr. Jeff Bezos), The Washington Post broke the news that a Federal judge had overthrown the cap.
In a strongly worded decision, U.S. District Judge Richard Leon said that the Federal Reserve had not properly interpreted the 2010 financial overhaul law, which directed it to revamp the way banks charge merchants for accepting debit cards. The Fed rule “runs completely afoul of the text, design and purpose” of an amendment authored by Sen. Richard J. Durbin (D-Ill.) to limit these fees to the actual cost of processing debit card transactions.
What does this mean?  It means that our capitalist system is not working properly.  For the last several years, we’ve all essentially been forced, when engaging in natural economic activity, into padding profits of banks and other payments processors (such as my former employer, Balanced and its competitors WePay, Stripe and PayPal) who should be competing with each other for merchants' business.  But instead, they all charge about the same fees.  With collusion, they and the banks they’ve cozied up to know that “guaranteed” profit margin is much better — more money to throw around and lobby to keep things just they way they are, more huge VC rounds for those willing to hop in bed with the big banks, more barriers to entry for the little guys.
In other words:  what it all boils down to is suckage:  the more money payment processors siphon off, the less revenue the actual merchants receive; the less revenue merchants receive, the more they charge.  This naturally results in higher prices for just about everyone (including those who pay with cash!), and pretty much everything is a whole lot of foul.
By 2009, banks were reaping $16.2 billion in revenue from the fees.
This was ~4 years ago; a more modern calculation would surely yield a much higher number.  Indeed, as mentioned in my recent post the Durbin amendment was specifically targeted at this  discrepancy.

Basic economics shows that rather than engage in a price war, it is more profitable for them all to agree to tout like it’s “law” that these “Interchange Fees” set by the government are just not negotiable.  While this is a partial truth — that the Fed set a non-negotiable portion, that non-negotiable portion is actually the “max” but confusion around fixed and variable components inflated both sides.

Let’s break down the costs of the actual information.  Could it really be so simple?  Yes.  It is not nearly as complicated as they’d like us to think; from my recent post on Hacker News
The swipe is the recording of the
 - credit card # (16 digits long)
 - day/time/place of swipe or "submit payment"  
 - expiration date
 - cvc code

which, when put together, all add up to one little thing called an “auth” code which can be used to attach a particular transaction to a particular instance of potential fraud.  Maybe… 200 - 999 bytes for the swipe data alone.  The fraud detection and “cost of equipment” and other such items bundled in the price are other things they should be competing on, as well. 

Think of the cost of storing or transmitting one small text file.  Now that we mention it:  4 cents for even 999 bytes seems pretty high, actually.  

As an Industry expatriate, I would gladly testify that the only way change could have been done was from the inside out: some high-tech “startup” from Silicon Valley could have been the first mover and propagated this change without any Federal intervention.  I worked at one that could have done this, but it didn’t and I lost my job because I tried.

But personal loss aside, the question is:  Should there be any law built into any financial system that guarantees any entity the ability to make 800% profit on your use of your money?  While basically refusing to compete, and murdering anyone who dares?  Of course not.   Debit cards are not credit cards.  When dealing with any of these payments companies, always negotiate and read the laws yourself.   It is time for a price war — bring it on.  


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