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I'm happy to answer any questions or take suggestions for future issues if you have them, HN. Repeating something I've said before: this is the 3rd issue of a

I'm happy to answer any questions or take suggestions for future issues if you have them, HN. Repeating something I've said before: this is the 3rd issue of a weekly newsletter, and its going to come out on every Friday for the foreseeable future. As someone who has spent more than 10 years here, I'm keenly sensitive to HN's desire to not have the front page be as predictable as my new shipping cadence. I'd appreciate if folks could be selective in submitting these; in prior years I'd space out my essays to avoid wearing out my welcome but that's difficult to do with a newsletter that is open-to-the-public.

jiqiren 5y ago
Is it true top tier customer reward cards (black/platinum/amex business/etc) have interchange fees that push into 3% territory? If so, how do companies like Square make money when they only charge the merchant 2.6% for a POS transaction?
- amance 5y ago
  No. Aggregate interchange for top-tier Visa and Mastercard personal cards maxes out at ~2.3%. Corporate cards actually earn significantly higher interchange, but even those don't aggregate out above 3%. Actually, the networks spend a lot of time policing banks from trying to arbitrage the difference by issuing corporate cards to individuals. Payment processors like Square just know that their margins will vary by the type of card used by consumers, but aim to have an aggregate positive margin across all cards. Once you get into enterprise contract negotiations with them though, they'll look at your card mix to make a pricing offer.
- fragmede 5y ago
  Square, by virtue of their business model, get lower interchange fee because charges where the credit card is present, has lower fees. Online-only merchants get no such discount.
steveklabnik 5y ago
One thing that might be fun to cover: I got in a twitter discussion today about why Europeans don't use credit cards as much as people do in the US. Researching this question and related ones ("why are wire transfers free in Europe but not in the US") are basically impossible to Google, as similar but not actually good results ("the cheapest way to wire money to Europe") drown out any primary resources.
- brummm 5y ago
  Interchange rates in Europe are capped at an order of magnitude lower than in the US. The economics of rewards credit cards just don't work out in Europe.
- avn2109 5y ago
  Semi-related: What happens with interchange and related fees, when an American credit card is used in Europe?
  - fragmede 5y ago
    Ooh that's a good one. It includes a detour into some really weird forex stuff. If you're used to it it's not that weird but as a American, with US credit card, and a US bank account who then banks exclusively in USD, I found it complicated and fascinating. Basically, other countries can bank in USD sometimes, so there's a weird corner case that you can send USD to a merchant but can land in their account as $converted_currency or USD that isn't so corner. I'll let patio11 cover this (if/when he gets to it) as there are details I no longer have access to and thus can't do the subject justice.
    - lotsofpulp 5y ago
      As an aside, if you are using no forex fee US credit card, and a foreign merchant asks if you want to pay with USD or the local currency, always choose local currency. If you choose USD, then the merchant gets to choose whatever exchange rate they want to convert at, and will be far from the spot price (hence some merchants go out of their way to ask you if you want to pay with USD). If you choose the local currency, then your American bank will give you an exchange rate extremely close to the spot rate and the transaction ends up being much cheaper for you.
TorKlingberg 5y ago
I take it interchange fees is the reason some small stores will not take credit cards for small purchases, and low-margin stores will often not take Amex. Separately, is the "credit score" system a particularly American concept? In the UK the credit report companies will give you a number, but it seems to be something they make up to fill a consumer demand rather than something card issuers actually use. Do you know how the FICO score became such a central thing in US consumer credit, and does Japan work differently?
- patio11 5y ago
  Substantially correct on the first part. In particular, and depends on the region/processor/card brand, many SMBs will have interchange which has a fixed-per-transaction component in addition to a percentage fee, and that can be prohibitive at small "basket" sizes. The U.S. has the world's most developed and widely relied upon credit reporting infrastructure, by a substantial margin. The history of FICO doesn't quite fit into the margins of this comment but I'd love to do an issue on it someday. Credit scores per se are less a thing in Japan but there are cross-issuer I-can't-believe-its-not-bureaus which have information sharing agreements, the dominant purpose of them being identifying fraudulent actors and account takeovers rather than credit risk (nearly zero in Japan, historically).
  - TorKlingberg 5y ago
    Thank you. It matches my impression that lenders in other countries do share information, but mainly negative factors such as defaults. Than means "credit building" does not exist in the same way. > nearly zero in Japan, historically That surprises me actually. I know Japan has a very, let's say, high conscientiousness culture but do they never get into economic problems and are simply unable to pay card bills?
    - patio11 5y ago
      "Never" is a strong word, but you're welcome to read the English-language reports of Japanese lenders which break this out for their consumer businesses. Factors which generally tend to depress it include low revolving credit use, relatively high underwriting standards for credit (not solely a positive thing—ask your favorite Japan-resident foreigner for stories sometime), formal or informal risk transfer, outsourcing collections to the yakuza by policy [0], etc. [0] I feel it necessary to say "I am not making this up. It happened at first-rate financial institutions many times within the last 20 years."
throwawaaaaay17 5y ago
Why not write on Substack? I'd love a comments section for your newsletter.
- patio11 5y ago
  I welcome comments in my inbox but, having long-ago had them on my blog, do not consider the lack of them a bug.
  - fragmede 5y ago
    Which is very reasonable. The SaaS product for comment moderation on a very niche site hasn't arrived yet (afaik. links welcome). Realistically though, you've outsourced the cost of that that work to dang/the team on HN. Which is what I'd do, but I wonder how dang feels about providing that as a service.
amance 5y ago
Patrick, as someone with a startup in this space, I just want to say that your content is fantastic. I really appreciated reading this, and was unaware that Japan had a (pricing cartel?) with rewards. Is the market highly concentrated there as it is in the US? If it is indeed an inexplicable coordination situation, has there ever been any antitrust action in this space there?
- patio11 5y ago
  Due to my quirky position as a foreigner who works in the financial industry in Japan I will not comment on structural sources for observed pricing discipline, but if you're interested in this topic, you may enjoy the Japan Fair Trade Commission's writing on it: https://www.jftc.go.jp/en/pressreleases/yearly-2019/March/SurveyonCreditCardMarketReport.pdf https://www.jftc.go.jp/en/pressreleases/yearly-2019/March/Su... It's an active area for them, according to their public statements.
computator 5y ago
If you have a credit card that charges no foreign exchange fee, could you overpay your credit card (i.e., leave a balance in your favor on the card), then withdraw cash at foreign ATM machines, thereby avoiding both forex fees and credit card interest? The terms & conditions on my credit card sound like it should work (I shouldn’t be charged interest if I have a credit balance), but I’ve never tried it. Failing that idea, do you have any tips for frequent American travellers on how to get foreign cash without paying excessive conversion fees?
- toast0 5y ago
  > Failing that idea, do you have any tips for frequent American travellers on how to get foreign cash without paying excessive conversion fees? Many credit union deposit accounts with ATM access can use some foreign ATMs with no fees and reasonable forex rates. Some online deposit accounts with ATM fee reimbursements will also reimburse foreign ATM fees and have reasonable forex rates. Things like Schwab and Fidelity, IIRC. My personal experience is a bit dated, but I'd try to have two separate cards on different networks if possible, because my ATM card only worked in half of the UK ATMs I tried, and that wasn't very convenient, as the ATMs I couldn't used were at the chunnel station and I needed cash for an unlicensed taxi.
  - divbzero 5y ago
    I second the parent’s suggestion of using a checking account that supports low-fee foreign withdrawals. Charles Schwab has worked for me at many international ATMs. Some people advise sticking with four-digit PINs for compatibility with older ATMs [1] but I don’t know if that’s a practical limitation at this point. [1]: https://www.latimes.com/travel/deals/la-tr-spot-20140713-story.html https://www.latimes.com/travel/deals/la-tr-spot-20140713-sto...
- leesalminen 5y ago
  I just used a US Capital One 360 debit card to withdraw Costa Rica Colones today. Based on Google’s currency conversion for today, it cost me $0.80 more than it should have. Maybe other banks / countries are more egregious?
vineyardmike 5y ago
Hey Patrick, Thanks for this. I'm earlier in my career but very interested in fintech, so as i explore where i want to go, your writing has been immensely helpful and informative! I am particularly fascinated at the moment by the world of differences in how finances work for people vs businesses. (eg. People typically pay taxes in income, but businesses pay taxes on profit. That leads to differences in how money is made/spent between those groups.) I guess one suggestion i have for your newsletter is in how credit is given to businesses - humans (at least in US) have fairly well understood credit scores. Its well documented how credit card companies, consumer loans, mortgages evaluate individual credit from those scores, but how does a business acquire credit to for short term spending (corp cards), what about to make big CapEx purchases like buildings, maybe even for financial funds and speculative transactions? How are those businesses evaluated, underwritten, etc? What about banks borrowing from other banks?
hammock 5y ago
>It is believed by many that banks make lots of money selling "your data." This is not a significant contributor to the economics of credit cards, for reasons which are slightly too complicated to get into in this piece. The short version: much like Google and Facebook, issuers can demonstrate to the most sophisticated organizations on the planet that they can deterministically influence actual purchasing behavior. That's easier to sell than a CSV file and worth more to more businesses. What did you mean by this? I get that raw customer transaction data might not be as valuable as one would think, but you seem to suggest that there is another thing they do with the data that DOES make money. Can you elaborate?
beambot 5y ago
(1) If you find the time, I'd be very keen to read about this history of how this market came to exist & how the earliest entrants succeeded or failed. Pointers to books (or better yet, your voice) would be great! (2) How do you think crypto & defi will change the credit card markets?
contingencies 5y ago
1. History and death of attempts at carrier-proxied mobile payments, including SMS and so forth. 2. Parallel graph of dominant internet access points and type thereof (fixed/mobile) per market vs. dominant payment systems and payment characteristics such as payment size, card not present, etc. 3. True history of SWIFT. 4. Parallel graph of Chinese mobile payment growth vs. historical credit card payment growth. 5. Overarching trend in bank points of presence including ATMs and branches across multiple developed markets vs. mobile. 6. Trends in subscription payments as a percentage of overall credit card spend + subscription support in alternate settlement systems.

jiqiren 5y ago

Is it true top tier customer reward cards (black/platinum/amex business/etc) have interchange fees that push into 3% territory? If so, how do companies like Square make money when they only charge the merchant 2.6% for a POS transaction?

amance 5y ago
No. Aggregate interchange for top-tier Visa and Mastercard personal cards maxes out at ~2.3%. Corporate cards actually earn significantly higher interchange, but even those don't aggregate out above 3%. Actually, the networks spend a lot of time policing banks from trying to arbitrage the difference by issuing corporate cards to individuals. Payment processors like Square just know that their margins will vary by the type of card used by consumers, but aim to have an aggregate positive margin across all cards. Once you get into enterprise contract negotiations with them though, they'll look at your card mix to make a pricing offer.
fragmede 5y ago
Square, by virtue of their business model, get lower interchange fee because charges where the credit card is present, has lower fees. Online-only merchants get no such discount.

steveklabnik 5y ago

One thing that might be fun to cover: I got in a twitter discussion today about why Europeans don't use credit cards as much as people do in the US. Researching this question and related ones ("why are wire transfers free in Europe but not in the US") are basically impossible to Google, as similar but not actually good results ("the cheapest way to wire money to Europe") drown out any primary resources.

brummm 5y ago
Interchange rates in Europe are capped at an order of magnitude lower than in the US. The economics of rewards credit cards just don't work out in Europe.
avn2109 5y ago
Semi-related: What happens with interchange and related fees, when an American credit card is used in Europe?
- fragmede 5y ago
  Ooh that's a good one. It includes a detour into some really weird forex stuff. If you're used to it it's not that weird but as a American, with US credit card, and a US bank account who then banks exclusively in USD, I found it complicated and fascinating. Basically, other countries can bank in USD sometimes, so there's a weird corner case that you can send USD to a merchant but can land in their account as $converted_currency or USD that isn't so corner. I'll let patio11 cover this (if/when he gets to it) as there are details I no longer have access to and thus can't do the subject justice.
  - lotsofpulp 5y ago
    As an aside, if you are using no forex fee US credit card, and a foreign merchant asks if you want to pay with USD or the local currency, always choose local currency. If you choose USD, then the merchant gets to choose whatever exchange rate they want to convert at, and will be far from the spot price (hence some merchants go out of their way to ask you if you want to pay with USD). If you choose the local currency, then your American bank will give you an exchange rate extremely close to the spot rate and the transaction ends up being much cheaper for you.

TorKlingberg 5y ago

I take it interchange fees is the reason some small stores will not take credit cards for small purchases, and low-margin stores will often not take Amex. Separately, is the "credit score" system a particularly American concept? In the UK the credit report companies will give you a number, but it seems to be something they make up to fill a consumer demand rather than something card issuers actually use. Do you know how the FICO score became such a central thing in US consumer credit, and does Japan work differently?

patio11 5y ago
Substantially correct on the first part. In particular, and depends on the region/processor/card brand, many SMBs will have interchange which has a fixed-per-transaction component in addition to a percentage fee, and that can be prohibitive at small "basket" sizes. The U.S. has the world's most developed and widely relied upon credit reporting infrastructure, by a substantial margin. The history of FICO doesn't quite fit into the margins of this comment but I'd love to do an issue on it someday. Credit scores per se are less a thing in Japan but there are cross-issuer I-can't-believe-its-not-bureaus which have information sharing agreements, the dominant purpose of them being identifying fraudulent actors and account takeovers rather than credit risk (nearly zero in Japan, historically).
- TorKlingberg 5y ago
  Thank you. It matches my impression that lenders in other countries do share information, but mainly negative factors such as defaults. Than means "credit building" does not exist in the same way. > nearly zero in Japan, historically That surprises me actually. I know Japan has a very, let's say, high conscientiousness culture but do they never get into economic problems and are simply unable to pay card bills?
  - patio11 5y ago
    "Never" is a strong word, but you're welcome to read the English-language reports of Japanese lenders which break this out for their consumer businesses. Factors which generally tend to depress it include low revolving credit use, relatively high underwriting standards for credit (not solely a positive thing—ask your favorite Japan-resident foreigner for stories sometime), formal or informal risk transfer, outsourcing collections to the yakuza by policy [0], etc. [0] I feel it necessary to say "I am not making this up. It happened at first-rate financial institutions many times within the last 20 years."

throwawaaaaay17 5y ago

Why not write on Substack? I'd love a comments section for your newsletter.

patio11 5y ago
I welcome comments in my inbox but, having long-ago had them on my blog, do not consider the lack of them a bug.
- fragmede 5y ago
  Which is very reasonable. The SaaS product for comment moderation on a very niche site hasn't arrived yet (afaik. links welcome). Realistically though, you've outsourced the cost of that that work to dang/the team on HN. Which is what I'd do, but I wonder how dang feels about providing that as a service.

amance 5y ago

Patrick, as someone with a startup in this space, I just want to say that your content is fantastic. I really appreciated reading this, and was unaware that Japan had a (pricing cartel?) with rewards. Is the market highly concentrated there as it is in the US? If it is indeed an inexplicable coordination situation, has there ever been any antitrust action in this space there?

patio11 5y ago
Due to my quirky position as a foreigner who works in the financial industry in Japan I will not comment on structural sources for observed pricing discipline, but if you're interested in this topic, you may enjoy the Japan Fair Trade Commission's writing on it: https://www.jftc.go.jp/en/pressreleases/yearly-2019/March/SurveyonCreditCardMarketReport.pdf https://www.jftc.go.jp/en/pressreleases/yearly-2019/March/Su... It's an active area for them, according to their public statements.

computator 5y ago

If you have a credit card that charges no foreign exchange fee, could you overpay your credit card (i.e., leave a balance in your favor on the card), then withdraw cash at foreign ATM machines, thereby avoiding both forex fees and credit card interest? The terms & conditions on my credit card sound like it should work (I shouldn’t be charged interest if I have a credit balance), but I’ve never tried it. Failing that idea, do you have any tips for frequent American travellers on how to get foreign cash without paying excessive conversion fees?

toast0 5y ago
> Failing that idea, do you have any tips for frequent American travellers on how to get foreign cash without paying excessive conversion fees? Many credit union deposit accounts with ATM access can use some foreign ATMs with no fees and reasonable forex rates. Some online deposit accounts with ATM fee reimbursements will also reimburse foreign ATM fees and have reasonable forex rates. Things like Schwab and Fidelity, IIRC. My personal experience is a bit dated, but I'd try to have two separate cards on different networks if possible, because my ATM card only worked in half of the UK ATMs I tried, and that wasn't very convenient, as the ATMs I couldn't used were at the chunnel station and I needed cash for an unlicensed taxi.
- divbzero 5y ago
  I second the parent’s suggestion of using a checking account that supports low-fee foreign withdrawals. Charles Schwab has worked for me at many international ATMs. Some people advise sticking with four-digit PINs for compatibility with older ATMs [1] but I don’t know if that’s a practical limitation at this point. [1]: https://www.latimes.com/travel/deals/la-tr-spot-20140713-story.html https://www.latimes.com/travel/deals/la-tr-spot-20140713-sto...
leesalminen 5y ago
I just used a US Capital One 360 debit card to withdraw Costa Rica Colones today. Based on Google’s currency conversion for today, it cost me $0.80 more than it should have. Maybe other banks / countries are more egregious?

vineyardmike 5y ago

Hey Patrick, Thanks for this. I'm earlier in my career but very interested in fintech, so as i explore where i want to go, your writing has been immensely helpful and informative! I am particularly fascinated at the moment by the world of differences in how finances work for people vs businesses. (eg. People typically pay taxes in income, but businesses pay taxes on profit. That leads to differences in how money is made/spent between those groups.) I guess one suggestion i have for your newsletter is in how credit is given to businesses - humans (at least in US) have fairly well understood credit scores. Its well documented how credit card companies, consumer loans, mortgages evaluate individual credit from those scores, but how does a business acquire credit to for short term spending (corp cards), what about to make big CapEx purchases like buildings, maybe even for financial funds and speculative transactions? How are those businesses evaluated, underwritten, etc? What about banks borrowing from other banks?

hammock 5y ago

>It is believed by many that banks make lots of money selling "your data." This is not a significant contributor to the economics of credit cards, for reasons which are slightly too complicated to get into in this piece. The short version: much like Google and Facebook, issuers can demonstrate to the most sophisticated organizations on the planet that they can deterministically influence actual purchasing behavior. That's easier to sell than a CSV file and worth more to more businesses. What did you mean by this? I get that raw customer transaction data might not be as valuable as one would think, but you seem to suggest that there is another thing they do with the data that DOES make money. Can you elaborate?

beambot 5y ago

(1) If you find the time, I'd be very keen to read about this history of how this market came to exist & how the earliest entrants succeeded or failed. Pointers to books (or better yet, your voice) would be great! (2) How do you think crypto & defi will change the credit card markets?

contingencies 5y ago

1. History and death of attempts at carrier-proxied mobile payments, including SMS and so forth. 2. Parallel graph of dominant internet access points and type thereof (fixed/mobile) per market vs. dominant payment systems and payment characteristics such as payment size, card not present, etc. 3. True history of SWIFT. 4. Parallel graph of Chinese mobile payment growth vs. historical credit card payment growth. 5. Overarching trend in bank points of presence including ATMs and branches across multiple developed markets vs. mobile. 6. Trends in subscription payments as a percentage of overall credit card spend + subscription support in alternate settlement systems.