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Debit cards are hidden financial infrastructure
- silexia 5y agoPlease note that the article points out that it cost tens of millions of dollars to launch a new bank and takes years of work. Overregulation is the reason we can't have nice things.
- jasondigitized 5y agoBankers are product managers for financial products. They implement features to acquire, activate, retain, and refer customers to ultimately drive revenue and margin. Debit cards are a first class product and overdraft fees are nothing more than a feature.
- victor106 5y ago> The government’s current target is 40% of the payments mix, about double the current amount, which would put it on parity with the present state of play in the U.S. (and behind Asian peer nations, at around 50%) It’s shocking that still about 50% is cash based.(if I am reading that right)
- stelonix 5y agoI think it means 80% is cash-based, since the double of the current amount of e-money transactions is said to be 40%.
- armendhammer 5y agoI wonder how regulated they are.
- vmception 5y ago> An interesting wrinkle about net interest is that most customers don’t contribute much. In much of the U.S., median checking account balances at account creation are only around $3,000 Thats a lot of money not in crypto or stocks. Surprising.
- shahbaby 5y agoNeed to save something for emergencies too.
- greenyoda 5y agoNot to mention everyday expenses. You can't pay your rent or phone bill with stocks or cryptocurrency.
- toomuchtodo 5y agoIt really depends where on the income and wealth ladder you are. Lower and middle income, cash is king. Upper income, you’re as invested as possible and you’re able to pay for expenses with a combination of credit/margin, investment income, and comp (salary and equity liquidation). You’re keeping as little cash on hand as possible because “cash is trash” and doesn’t keep up with inflation such that assets do.
- jltsiren 5y agoShouldn't that be the opposite? The less money you have, the more effort you should put to using it efficiently. Once you have enough money, it's worth keeping a tiny fraction of it as cash for convenience, because investing it won't change anything.
- adamnew123456 5y agoIt has to do with how long you expect a given dollar to live. Below a certain point a dollar doesn't persist very long since you're mostly living paycheck to paycheck. If you're spending most of what you earn, then what matters is that you can pay for all the essentials. It doesn't really matter what the price is in absolute terms if your paycheck keeps pace. (It would be really weird to cash your paycheck, buy some ETFs with it, then sell them all back a week later to pay rent and buy groceries. You'd just get back what you put in.) Higher up a given dollar lasts a lot longer. Even the dollars in a retirement fund will last for decades - imagine if you were wealthy enough that 95% of your assets were like that. At that point you have two choices: - Either keep it under a mattress, and lose a few percent of most of your money each year - Or put it somewhere more active, where you have enough growth to keep pace
- aynyc 5y agoUse credit card, it’s the card issuers that are on the hook for fraud. It’ll help you build credit. Use debit when you don’t have the means or credit history.
- oblio 5y agoCredit history isn't a thing in many countries and credit card rewards are often minimal. Do what makes sense in your country.
- greenyoda 5y agoGood advice, but only if you pay off your balance in full every month to avoid the huge interest charges.
- wetpaws 5y agoWhy in the world wouldn't you want to do it.
- DJBunnies 5y agoCan <> want.
- iratewizard 5y agoWith or without a credit card it's still spending what you don't have. The credit card just makes it easier to ignore the fact that you're in dire financial straights.
- wmf 5y agoBesides the gig economy I heard that a lot of retail businesses like Walmart now pay employees by debit card instead of check. So instead of a check cashing place taking 3% of people's paychecks some bank is taking 1.x% in interchange, and if the bank happens to be owned by Walmart well who would notice.
- chrisseaton 5y ago> a check cashing place taking 3% of people's paychecks You have to pay to deposit your pay in the US?
- kingcharles 5y agoIf it is a physical check (cheque), then often, yes.
- metalliqaz 5y agoyes, if you don't have a bank account. if you are not living paycheck to paycheck, you can keep the minimum balance in a checking account and then arrange have your paycheck automatically deposited every payday with Direct Deposit. This is free. Check cashing places give you cash for paper checks. They charge a fee for the service.
- alberth 5y ago> “This user might very well have somewhere on the order of $2,000 of debit card transactions a month. This implies about $300 a year in interchange revenue” There seems to be a mistake in the math above. It’s not $300 a year in interchange revenue. It would be closer to $12. Interchange in the US for credit going to an issuer is around 125 bps (and that correlates to the $300 calculation). But the US is highly regulated on debit and interchange is around just 5 bps for debit. Making the yearly debit interchange revenue to be ~$12. Which means this account holder in the illustrative example is still a net loss for the issuer. EDIT: I just finished reading the article. It’s even called out at the end of the post that debit interchange is much lower. I’m confused now how patio11 did his original math knowing he’s aware of Durbin.
- loosescrews 5y agoI think that number was supposed to be pre-Dodd-Frank (or Durbin-exempt).
- alberth 5y agoAh. Yes, that makes more sense - though definitely should be called out for those readers unaware of the regulatory change. Rumors have it there’s another change also on the US horizon.
- Cederfjard 5y agoIt makes sense to me, since it’s in chronological order. If you read the whole article, you get the whole and up-to-date picture. Also don’t forget the exemption for banks with less than $10 billion in deposits - presumably that’s pretty relevant to a lot of his readership, given fintechs and how they partner with community banks on this.
- smallerfish 5y agoI took a look through glassdoor reviews of stripe as a result of his pitch at the end - lots of complaints about work-life balance / being overworked. Any stripe engineers want to weigh in on that? Are there areas of the company that are better than others?
- unicornmama 5y agoI mean it’s a hyper growth startup. Expect to haul ass.
- mdorazio 5y agoStripe is 12 years old, has ~4,000 employees, and does several billion in revenue each year. It’s not a startup anymore. Although I do agree with your general sentiment that if you want real work-life balance, an actual startup is probably not for you.
- smallerfish 5y agoI mean I'm no stranger to startup hours. It's just unusual to see glassdoor reviews so consistently negative about the amount of work that's expected.
- mvkel 5y ago“Hypergrowth” is the operative word. Startup is also a way of running a company, not just “young company”
- numair 5y agoThe beginning of this article is a fairy tale that ignores what used to be one of the biggest drivers of revenue for banks: overdraft fees. Maybe the HN crowd has never been in a situation where they were auto-billed into a negative balance, which then caused an overdraft fee that then further drove their balance into negative territory, but this was a weekly/monthly fiasco for millions of Americans. I was once in a meeting with one of the senior executives at JPMorgan, where the guy smugly told me he felt they were “doing a service for the community” by charging people overdraft fees. After leaving the meeting, my very senior colleague said, “I had to hold myself back from throwing that guy out of his window.” These sorts of articles — half PR, half history lesson — tend to leave out these sorts of politically inconvenient but important bits of history. It’s so much work to unpack the bias...
- ca98am79 5y agoThis was the story of my parents lives when I was growing up. They constantly paid these fees and they constantly were under water financially. I never forgave the banks for this. However, my parents were also to blame - they simply were unable to manage their finances.
- deleted 5y ago[deleted]
- mherdeg 5y agoIt's not just overdraft fees right? It's overdraft fees plus transaction reordering which makes the magic happen. I'm still kind of mesmerized on this one, it felt like regulatory action almost happened, the most lucrative of the overdraft practices got limited circa 2009/2010, and then banks voluntarily toned it down and the regulators mostly looked the other way on things like reordering?
- EdwardDiego 5y agoSounds like one of those "Look! We came up with a voluntary code of conduct, so your regulatory body can stop investigating necessary regulations, we've changed honest, so please feel free to have a triumphant press conference and congratulate yourselves without actually holding us to account."
- ggm 5y agoThe credit to debit card ratio is something the Australian banking regulator looks at too. The charge fees in EFT/POS have become a significant issue when there is a floor fee for small transactions. During covid, cash handling nosedived and paywave exploded. Now, many coffee shops and traders who used to do cash are stuck with a market acceptable price for coffee, but bank charges on card processing which eats their margins in fees they can't easily pass on. Other traders have gone back to $10 minimum for card type rules.
- kccqzy 5y ago> Typically, the apps offer their users a choice: payouts at the speed of banking, for free, or payouts at the speed of the Internet, for a small convenience fee. Cash App charges 1.5% with a minimum of a quarter. This is just another way the financial system (including fintech startups) preys on the poor. If you are well off, you wouldn't want to pay any convenience fee for the privilege of receiving money from a business a few days earlier. In fact, you can think of it as interest: from first principles if someone delays a payment to you, theoretically they should pay more because of interest; now if you opt for waiting 3 days and saving the 1.5% convenience fee, you would effectively earn an interest of 1/(1-0.015)-1 = 1.5% in 3 days. That's not even an annualized figure. If annualized it would be 1.5%/3*365=122% implied annual interest rate. No one in their right mind who does not have cash flow issues would opt for receiving debit card payments with such a fee. > Many report that it transforms the nature of their interaction with the underlying application; delivery driving for casual drivers becomes something that you can burst up to fill an immediate cash need or mentally allocate against a particular desired expenditure (e.g. “Drive for 3 hours to afford a night out starting immediately after you log off.”) If your cash flow is not an issue and have credit, this is how you would handle it: let's drive for 3 hours, receive the full payment amount in a few days instead of immediately, and put all the charges from the night out on a credit card, whose bill will become due in a month or two, with no interest. But the poor doesn't have a bank account or a credit card, so they suffer. They pay more in fees. That's the injustice of the system.
- dustintrex 5y agoIt's also another illustration of how backwards US payments infra is. In the EU, SEPA instant payments are just that: by law it can take a maximum of 10 seconds for the recipient to get paid, including across countries. And, of course, they're free. https://en.wikipedia.org/wiki/Single_Euro_Payments_Area https://en.wikipedia.org/wiki/Single_Euro_Payments_Area
- toomuchtodo 5y agoThe US Federal Reserve is building an instant payment system (FedNow) that goes live in 2023 [1] [2]. Payment providers are moving upmarket and to features that stave off churn (my analysis here) due to expected revenue destruction caused by a free alternative being available (a US version of SEPA). This is alluded to in the second half of this blog post. If payment revenue (interchange and the like) declines, and net interest is insufficient for providing large swaths of US deposit accounts, something is going to have to give (community and megabanks have a ton of pull in Congress, and neobanks are beholden to someone with a bank charter). I’m not in payments (but in adjacent financial services), so I’m happy to be corrected if any of this is wrong. [1] https://www.federalreserve.gov/paymentsystems/fednow_faq.htm https://www.federalreserve.gov/paymentsystems/fednow_faq.htm [2] https://www.frbservices.org/binaries/content/assets/crsocms/financial-services/fednow/fednow-product-sheet.pdf https://www.frbservices.org/binaries/content/assets/crsocms/...
- whimsicalism 5y ago> the industry generally estimates approximately $350 a year in costs to maintain a checking account, of which approximately $120 is direct marginal cost Does this not seem ridiculously high to anyone else?
- wmf 5y agoMainframes and lawyers aren't cheap.
- likpok 5y agoThe bigger cost is the branch and the teller, both of which scale less well.
- throwaway98797 5y agoIf you think you can do it cheaper, build it. Save all of us money.
- chondl 5y agoThis seems most likely to be an error in the document: "median checking account balances at account creation are only around $3,000 ... At a 4% net interest margin, this account would only contribute about $120 in margin during its first year...." 4% of $3,000 is $12. I suspect both $350 and $120 are 10x too big. Alternatively the average checking account is 10x the median which seems unlikely.
- whimsicalism 5y ago> 4% of $3,000 is $12 no
- latchkey 5y agoIn Vietnam, even the 'credit cards' are 'debt cards'. There is no concept of a credit score there (or a legal way to really make people pay up a debt), so they came up with this work around. To get a credit card, you have to carry the total amount of 'credit' as a time deposit in your account that you can't touch.
- f3d46600-b66e 5y agoSecured credit cards also exist in America :-)
- coconut_crab 5y agoIt's not entirely true. Some banks only issue credit cards if you receive salary via their bank account or have a deposit there (mostly state owned banks) but other have no such requirement. Also they already have a credit score database up and running (CIC).
- latchkey 5y agoName one bank in Vietnam that has no such requirement. The credit score database only applies to locals and not foreigners living there, so that is what my reference was.
- Cameri 5y agoThe bank cartels probably won't last long, just wait until money becomes mostly decentralized and digitalized. We'll finally be able to use our money without limits or immoral intermediaries.
- starwind 5y agoWhat limits are you talking about?
- capableweb 5y agoHave you tried sending $10,000 or more between two "high risk" countries, like from Nigeria to Ecuador? There are so many limits for most people using banking today, where your money gets stuck in multiple places before you "verify" this and that, and then transfers take multiple days if they even get approved in the end.
- wara23arish 5y agoBankrupt governments also control what money you can receive. Example is Lebanon where if you send someone US Dollars, they’ll receive it in the local currency which is under hyperinflation. The central bank governor (government too) there is pure evil and is a US political pawn. I know it sounds outlandish, but if you look into it, you almost wont believe its real.
- spir 5y agoI'd be interested to know patio11's updated take on the long arc of crypto. As a crypto person, it's cool to see how the benefits he describes-- eg lower transaction costs, embedded finance, and novel items such as bundling reporting and instant settlement-- are also driving much of the product-side interest in crypto and web3.
- simonbarker87 5y agoLower transaction fees? I moved a few hundred £ into my wallet the other day for some Ethereum and paid like £50 in various fees and gas. The crypto world is full of layers of middle men taking their slice. Even swapping some ENS to ETH cost over $100 in gas
- throwaway98797 5y agoI mean your ENS was free money tho, so …
- simonbarker87 5y agoVery true, but same experience buying an NFT, 15% in fees etc
- throwaway98797 5y agoJust buy more expensive NFTs. Joking aside fees are a real problem. Hopefully solved in 2022.
- capableweb 5y agoThere are thousands of cryptocurrencies in use today. If you're out after faster transactions with lower fess, Algorand seems like a good option. Fee seems to be about 0.001 ALGO (0.002044 USD) about finalizes in about 5 seconds.
- spir 5y agoYou're right that ethereum's fees are extremely high, and they will only get much higher. That's because, heading into the future, ethereum isn't intended for direct use by end-users. End-users may expect to use ethereum's live & emerging scaling solutions, also known as Layer-2 networks or L2s. The ethereum chain itself has become known as the "base layer" or, more commonly, "the L1". Only rollups, governments, megacorps, and extremely rich people will be able to afford transacting directly on the L1. The good news is that L2s are becoming great for end-users. Some are live now (optimistic rollups), and the most promising of them will be live soon (zk/validity rollups). For example, Arbitrum and Optimism are optimistic rollups L2s and have achieved a significant linear decrease in transaction fees. As another example, zkSync 2.0 and StarkNet are zero-knowledge rollup L2s, also called validity rollups, that achieve a greater linear decrease in end-user cost than optimistic rollups, and unlock a (truly) exponential decrease in end-user fees by using a spectrum of off-chain data solutions. This fantastic result of exponential decrease in cost for end-users is achieved by way of an important new-ish branch of mathematics called "zero knowledge proofs". Currently, zkSync 2.0 and StarkNet are the "Luke Skywalkers" of ethereum scaling. We are expecting great things from them, and need them to deliver to allow hundreds of millions of users to onboard to ethereum next year. https://l2beat.com/ https://l2beat.com/ https://l2fees.info/ https://l2fees.info/ https://arbitrum.io/ https://arbitrum.io/ https://www.optimism.io/ https://www.optimism.io/ https://zksync.io/zkevm/ https://zksync.io/zkevm/ https://starkware.co/starknet/ https://starkware.co/starknet/
- thrower123 5y agoDebit cards prey on poor people, who have been memed into thinking credit cards are dangerous. There is no good reason to use debit over credit in the US if you have the option, but I constantly see advice from people who should know better arguing in favor of debit. If someone steals your credit card and makes fraudulent purchases, your rent and heat and electricity bill checks aren't going to bounce while the bank is resolving the issue.
- bool3max 5y agoIs that the only argument for credit over debit?
- thrower123 5y agoAgain, I'm speaking from a purely US perspective, but there is no good reason to use a debit card instead of a credit card, for the same purchasing patterns. You have better fraud protections, you don't worry about overdrafts or transaction reordering, you get a month interest-free loan if you pay back your balance every month. You get cash back or reward points or etc. And if some emergency comes up, you have credit you can call on if you need it. The argument for debit is basically "I cannot control my spending without a hard limit". Everything about debit is the same as credit cards or worse.
- wara23arish 5y agoI think the argument you mentioned is actually worth it for some people. Credit card interest rates are really high and people are better off getting charged a one time overdraft fee rather than buying stuff they cant afford and get saddled with high interest credit card debt.
- rootusrootus 5y agoHa, it's true, the limit enforced by a debit card is handy. I love my wife dearly, but her spending habit is 'if it is in the account, I can spend it.' So after trying various strategies, we just settled on keeping a debit account specifically for routine household purchases, groceries, etc. It is budgeted exactly what we plan for, not a dollar more, and she knows that when it's gone it's gone. That's not strictly true, of course, we replenish if we buy a lot of groceries in a month, but it serves as a useful signal for her that she's spending more than the generous amount we budgeted for this purpose.
- NoblePublius 5y agoThis is fantastic. It’s long been difficult for me to understand the prevalence of instant payout mechanics, or the propensity of ordinary people to use debit cards like credit cards. I’m that guy who only uses his debit card to withdraw cash, puts everything on high reward credit cards, but never carries a balance.