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What are the biggest cost centers for a new payment provider? Software engineers? Rack space? Dispute (fraud) resolution? Marketing?

arcticbull 7y ago
Risk and compliance, honestly. Margins are razor thin, for instance Square's most recent quarterly filings where they indicated transaction margins had them at ~1%. You mess up, you've gotta process $99 more for every $1 you lost. Compliance paperwork is expensive enough but you make a mistake and prepare to have some uncomfortable chats with the government.
spookthesunset 7y ago
Fraud. One of the factors in determining your interchange fees as a merchant is your risk profile. It is why a grocery store has a different fee structure than a gas station or a restaurant. Almost the entire industry is driven by risk profiles.
- gorgoiler 7y ago
  It feels like there’s two kinds of fraud, and I think you mean both? (1) I buy a camera online, but the store mails me a brick. The payment provider steps in (at their own cost) to investigate and resolve the fraud, which is costly. (2) The technology of the payment provider itself is subverted. For example, someone clones the mag stripe on my 1980s credit card and goes on a spending spree. Again, the payment provider picks up the cost of hunting down the malefactors, and they also compensate me. Cost cost cost. When the payment system is cash, fraud is avoided by using vendors with good reputations, or at least with verifiable business names and addresses to allow legal action if they sell me a 24 megapixel brick. Protecting against subversion of the payment mechanism itself is up to me (keep my wallet safe) and the treasury (fancy holograms on bank notes.) With modern online payment systems, are they legally obliged to always be on the hook for the first type of fraud? Is the obligation because they are providing a credit line? (I think this is the case in UK law at least, with the Consumer Credit Act.) If the payment provider didn’t want to have to deal with that sort of fraud, do they just have to avoid looking like they are offering credit? I hope that we can assume that in any modern online system, the only occurrence of the second type of fraud is from insiders, as at launch (or at least, over time) the crypto is unlikely to be breakable on the wire / with card cloning / etc.
  - deleted 7y ago
    [deleted]
cududa 7y ago
Getting certified as a payment processor can take a year or two AFTER your product is built.
user5994461 7y ago
It's not about costs. It's about trust and scale, neither of which you can buy. Payment providers earn a fraction of a percent on transactions, so they must have extremely high volume in payments to be sustainable. It takes hundreds of millions just to be able to afford some workers and office. Which can't happen because trust and fraud. A legit customer, especially with any amount of volume, would never adopt a small or unknown provider. Corollary, the provider only attracts low grade or fraudsters, assuming they ain't the fraudster themselves.

arcticbull 7y ago

Risk and compliance, honestly. Margins are razor thin, for instance Square's most recent quarterly filings where they indicated transaction margins had them at ~1%. You mess up, you've gotta process $99 more for every $1 you lost. Compliance paperwork is expensive enough but you make a mistake and prepare to have some uncomfortable chats with the government.

spookthesunset 7y ago

Fraud. One of the factors in determining your interchange fees as a merchant is your risk profile. It is why a grocery store has a different fee structure than a gas station or a restaurant. Almost the entire industry is driven by risk profiles.

gorgoiler 7y ago
It feels like there’s two kinds of fraud, and I think you mean both? (1) I buy a camera online, but the store mails me a brick. The payment provider steps in (at their own cost) to investigate and resolve the fraud, which is costly. (2) The technology of the payment provider itself is subverted. For example, someone clones the mag stripe on my 1980s credit card and goes on a spending spree. Again, the payment provider picks up the cost of hunting down the malefactors, and they also compensate me. Cost cost cost. When the payment system is cash, fraud is avoided by using vendors with good reputations, or at least with verifiable business names and addresses to allow legal action if they sell me a 24 megapixel brick. Protecting against subversion of the payment mechanism itself is up to me (keep my wallet safe) and the treasury (fancy holograms on bank notes.) With modern online payment systems, are they legally obliged to always be on the hook for the first type of fraud? Is the obligation because they are providing a credit line? (I think this is the case in UK law at least, with the Consumer Credit Act.) If the payment provider didn’t want to have to deal with that sort of fraud, do they just have to avoid looking like they are offering credit? I hope that we can assume that in any modern online system, the only occurrence of the second type of fraud is from insiders, as at launch (or at least, over time) the crypto is unlikely to be breakable on the wire / with card cloning / etc.
- deleted 7y ago
  [deleted]

cududa 7y ago

Getting certified as a payment processor can take a year or two AFTER your product is built.

user5994461 7y ago

It's not about costs. It's about trust and scale, neither of which you can buy. Payment providers earn a fraction of a percent on transactions, so they must have extremely high volume in payments to be sustainable. It takes hundreds of millions just to be able to afford some workers and office. Which can't happen because trust and fraud. A legit customer, especially with any amount of volume, would never adopt a small or unknown provider. Corollary, the provider only attracts low grade or fraudsters, assuming they ain't the fraudster themselves.