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I have been pondering transaction costs lately. Seems like this is an area where intervention could have massive impact: these costs are effectively a tax that

I have been pondering transaction costs lately. Seems like this is an area where intervention could have massive impact: these costs are effectively a tax that incurs deadweight loss so according to prevailing economic theory if we can reduce it the whole economy should be catalysed. IIUC governments already introduce price caps for certain elements of this market but I think we could be doing more? Like mandating incumbents to implement open standards and subsidising their competitors? Dunno though I'm not very informed about the topic, just suddenly discovered recently how much of my income is just funding a fairly small number of payment providers.

PeterisP 4y ago
Stripe provides value-added 'premium' service which competes with merchant banking solutions offered by most EU banks, and Stripe does not have a dominant position. But in general, yes, EU does place a LOT of attention to these deadweight transaction costs, and has had large interventions - for example, if you look at the price listed in this very article, the reason why 'international cards' have 3.25% fee and 'standard EU cards' have a 1.5% fee is primarily caused by EU-imposed changes to interchange fees which get paid by the acquiring/merchant institution (including Stripe) to the issuing bank.
- moneywoes 4y ago
  Is there a list of competitors out there?
MrBuddyCasino 4y ago
> IIUC governments already introduce price caps for certain elements of this market but I think we could be doing more? Like mandating incumbents to implement open standards and subsidising their competitors? This is a very dangerous path to go down. Direct price control by governments usually leads to unforeseen consequences and often to disaster. Mandating open standards is probably a good idea.
abm53 4y ago
On the other hand, transaction networks clearly add massive value, so it’s very likely that net of fees (without which the network may not exist at all) these networks still add value. So it’s more a question of finding the optimal equilibrium rather than viewing fees as “deadweight”.
- bjornsing 4y ago
  “Dead weight” might be too harsh a term, but I think “rent seeking” is spot on. And it’s generally not a good idea to let rent seekers extract value in proportion to the damage they could potentially cause.
- dahfizz 4y ago
  "Dead weight loss" is an economic term. It sounds like a generic English phrase but it has a very specific meaning and formula. [1] if you are interested. Particularly the section on the dead weight loss of taxes - in this case, transaction fees operate the same as taxes. https://en.m.wikipedia.org/wiki/Deadweight_loss https://en.m.wikipedia.org/wiki/Deadweight_loss
  - runnerup 4y ago
    > transaction fees operate the same as taxes. Absolutely. And for the colloquial English phrase "dead weight" that would correspond to the portion of these fees which go above and beyond the cost of running the (high-utility) transaction network. Reducing the rent-seeking on this network also reduces both the colloquial and technical meanings of "deadweight". But for the economic term "deadweight", additional deadweight loss can be reduced by anyone who can provide similar functionality to the current interchange network but at lower cost than the current network. This wouldn't reduce the colloquial "deadweight" because in theory 100% of the fees could already be going towards necessarily funding the existing network. But it would still reduce the economic deadweight of 1-4% tax on every transaction.
scrollaway 4y ago
My years in fintech have taught me that it'll be very difficult to get these charges down without legislation. What they are is, essentially, insurance. For Visa/MC, "running the network" at cost is possible on much less money, but the network involves a lot of elements along the chain that can get transactions reverted. The "insurance" (1-3% of tx) pays for the legal-adjacent issues related to handling those transactions being contested. Go to a restaurant, use a US terminal? Great, the restaurant owner can modify the transactions after it's been authorized and long after you're gone, "because tip". There's zero checks on this, it's a matter of "it works because most people don't do it". So when it happens, sometimes the payer notices and issues a dispute and the dispute management is part of the network. This is where a lot of costs go. Anyway, the network is ridiculously bad. The fraud/aml checks are not usually shared among payment providers, because they can just milk each other instead by selling their checks. No wonder it's hard to get the transaction fees down. And yeah, it's a duopoly. The solution by the way isn't to directly try to build a global visa/mc competitor; with the moat, that's impossible. Rather, it's to build on top of what European countries are doing. EU countries have built their local competitors (Bancontact, EPS, BLIK, iDEAL, Sofort, ...). Those have lower costs, and so would any locally-targeted provider because they each have to deal with less risk and complexity. Any aggregator (like Stripe is, by the way) can take payments for all of them and push people away from card payments. The problem with that very last part is a UX issue, people like paying by card. It's a difficult problem. What makes it especially difficult IMO is that once you're down this path and become successful, it takes some very specific, very early business choices in order to be able to turn down the mountains of cash that show up to your doorstep in the form of "align your fees with the rest of the industry".
- ptman 4y ago
  https://www.epicompany.eu/ https://www.epicompany.eu/ and https://nordicpayments.eu/ https://nordicpayments.eu/ instead of Visa/MC
  - scrollaway 4y ago
    Yup exactly, but you need to take that strategy and apply it beyond europe. For this you need local networks in the US as well for example. Right now, there aren't really any; some crypto based local networks but that's all. But the US is undergoing some serious banking network updates this year and that likely means some new local networks are being built. This idea will look very different by 2024 and maybe even be feasible.
avianlyric 4y ago
The EU introduced price caps on interchange in 2015 capping interchange on credit cards at 0.3% and debit cards at 0.2%. That’s almost an order-of-magnitude lower than interchange fees in the US, which are usually around the 1%-2% level. This is big part of the reason you don’t see high value reward cards or cashback program in the EU. There simply isn’t the interchange revenue to fund them, which is good thing, because high interchange + cashback creates a nasty regressive tax that transfers vast amounts on wealth from those with poor credit ratings (usually the least well off society) to those with high credit ratings (usually the most well off in society).
- adrr 4y ago
  How do credit cards provide 60 day interest free loan with only 0.3% charge to the merchants? I can see low interchange rates for debit cards like the US the interchange for debit card for major banks is capped at 0.05%.
  - dagw 4y ago
    There is often a small annual fee connected with having a credit card (I think I pay on the order of $25 a year). Also effective interest rates are in the 15-25% range for most cards if you don't pay it off in full, which I'm sure quickly adds up.
    - hocuspocus 4y ago
      Zero-fee credit cards exist: https://www.advanzia.com/en-gb/customers https://www.advanzia.com/en-gb/customers
  - hocuspocus 4y ago
    0.3% over 60 days (in practice more like 15 to 45, only commercial cards have longer billing cycles) was really not that bad during a decade of near zero interest rates. And now that banks will finally make a bit more money on mortgages and other kinds of loans, I assume they don't mind the increasing cost of their customers' credit balance.
  - 4y ago
Timshel 4y ago
I wish those transaction cost would be made visible. Imo the seller should not care which card the client use, if it's more expensive to use a "premium" card then it should be made visible to the client and he should be the one to pay the overhead.
- IshKebab 4y ago
  Yes this is all that needs to happen. The EU should mandate that sellers can pass transaction costs on to consumers if they want (but no more than transaction costs, looking at you airlines).
  - rightbyte 4y ago
    It is important that the fee is printed on the receipt too no matter what since the card holder always pay one way or the other.
  - doikor 4y ago
    > EU should mandate that sellers can pass transaction costs on to consumers EU actually mandates the opposite. It is illegal to pass the transaction costs to the consumer. The price you see on an item has the be the final price you end up paying.
    - concerned_user 4y ago
      In many online shops in EU you can see "Administrative fee" if your order is too small for example. So while companies are not allowed to do "Credit card fee" they still do it indirectly in one way or another, those that don't impose extra fee usually have higher delivery fee.
    - pancrufty 4y ago
      I love them for it. When I don’t live in Europe it’s infuriating to see the price levitate after every checkout step. Thankfully it’s still not as bad as it used to be like 10-15 years ago.
    - 4y ago
rendaw 4y ago
I assumed it was mostly to pay for chargebacks and fraud. What I think is crazy is basically anything < $10 doesn't need chargebacks, fraud protection, etc, and the fee is inordinately burdensome for those transactions. On a $1 itunes song it would have been an >30% cut, you can forget about selling any small digital thing worth less than that.
- gergov 4y ago
  on the contrary, smaller transaction amounts are prone to MORE chargebacks because they are attractive targets for card testers
  - rendaw 4y ago
    I agree, but that's saying because credit card suck in way X, they should suck in way Y as well to accommodate. Stolen credit card information shouldn't be a thing, and people shouldn't be passing security critical 20+4 digit codes around (think oauth).
- Thorrez 4y ago
  Why wouldn't small items have chargeback costs? Do credit cards ban chargebacks for them? If someone buys something cheap, it doesn't come, and the credit card company refuses to allow a chargeback, that's going to make some customers mad.
  - rendaw 4y ago
    Would you really file the chargeback paperwork for a $1 purchase? Even if you're scammed, it's at the level where you say "I'll be careful next time" and move on.
    - Thorrez 4y ago
      I might. There are 3 reasons: * Money. This doesn't matter much too me, but it might for people who make a lot less than me. The comment I replied to was about anything less than $10, not about $1 specifically. * Preventing future scams. By doing a chargeback against scammers, you're making it more likely they'll get banned. So you're helping to prevent other people from getting scammed in the future. It's a good deed. When I see phishing sites, I report them. Why wouldn't I report a scam? * Revenge. Some people want to see the bad guys get punished.
psychlops 4y ago
Given any problem, someone will find use of authority as the answer.
- cma 4y ago
  Solving coordination problems through voting. Something as fundamental as the payment system should have people competing on making the underlying processes more efficient, not building the biggest network lock in effects.
  - psychlops 4y ago
    By raising prices, they are encouraging competition. Eventually the prices will reach a point where people stop using the product. Until then, I guess people can try to get some laws passed to force their favorite company to do what they want. Of course, more laws usually raise the price of entry for competitors.
flangola7 4y ago
I don't see a reason something as critical as transaction networks should remain privatized, it should be operated by society (via democratic government), not private interests. We don't have private corporations operate highways or the federal mail system. They may operate (heavily regulated) airlines, but not the traffic control that manages their interactions. Imagine having to pay a "takeoff clearance fee" or a toll station at every highway on-ramp.
- diogocp 4y ago
  Private highways are very common in Europe. So is mail delivery by private companies (Deutsche Post is a big one). In Portugal, the mail company is private and 90% of the highways are operated by private companies. And this is a country where the Socialist party has been in power for 20 of the last 30 years.
  - flangola7 4y ago
    That is highly surprising to me. How do you have 90% privatized highways without toll booths everywhere? Without a universal funding source like taxes how is construction and repair funded?

PeterisP 4y ago

Stripe provides value-added 'premium' service which competes with merchant banking solutions offered by most EU banks, and Stripe does not have a dominant position. But in general, yes, EU does place a LOT of attention to these deadweight transaction costs, and has had large interventions - for example, if you look at the price listed in this very article, the reason why 'international cards' have 3.25% fee and 'standard EU cards' have a 1.5% fee is primarily caused by EU-imposed changes to interchange fees which get paid by the acquiring/merchant institution (including Stripe) to the issuing bank.

moneywoes 4y ago
Is there a list of competitors out there?

MrBuddyCasino 4y ago

> IIUC governments already introduce price caps for certain elements of this market but I think we could be doing more? Like mandating incumbents to implement open standards and subsidising their competitors? This is a very dangerous path to go down. Direct price control by governments usually leads to unforeseen consequences and often to disaster. Mandating open standards is probably a good idea.

abm53 4y ago

On the other hand, transaction networks clearly add massive value, so it’s very likely that net of fees (without which the network may not exist at all) these networks still add value. So it’s more a question of finding the optimal equilibrium rather than viewing fees as “deadweight”.

bjornsing 4y ago
“Dead weight” might be too harsh a term, but I think “rent seeking” is spot on. And it’s generally not a good idea to let rent seekers extract value in proportion to the damage they could potentially cause.
dahfizz 4y ago
"Dead weight loss" is an economic term. It sounds like a generic English phrase but it has a very specific meaning and formula. [1] if you are interested. Particularly the section on the dead weight loss of taxes - in this case, transaction fees operate the same as taxes. https://en.m.wikipedia.org/wiki/Deadweight_loss https://en.m.wikipedia.org/wiki/Deadweight_loss
- runnerup 4y ago
  > transaction fees operate the same as taxes. Absolutely. And for the colloquial English phrase "dead weight" that would correspond to the portion of these fees which go above and beyond the cost of running the (high-utility) transaction network. Reducing the rent-seeking on this network also reduces both the colloquial and technical meanings of "deadweight". But for the economic term "deadweight", additional deadweight loss can be reduced by anyone who can provide similar functionality to the current interchange network but at lower cost than the current network. This wouldn't reduce the colloquial "deadweight" because in theory 100% of the fees could already be going towards necessarily funding the existing network. But it would still reduce the economic deadweight of 1-4% tax on every transaction.

scrollaway 4y ago

My years in fintech have taught me that it'll be very difficult to get these charges down without legislation. What they are is, essentially, insurance. For Visa/MC, "running the network" at cost is possible on much less money, but the network involves a lot of elements along the chain that can get transactions reverted. The "insurance" (1-3% of tx) pays for the legal-adjacent issues related to handling those transactions being contested. Go to a restaurant, use a US terminal? Great, the restaurant owner can modify the transactions after it's been authorized and long after you're gone, "because tip". There's zero checks on this, it's a matter of "it works because most people don't do it". So when it happens, sometimes the payer notices and issues a dispute and the dispute management is part of the network. This is where a lot of costs go. Anyway, the network is ridiculously bad. The fraud/aml checks are not usually shared among payment providers, because they can just milk each other instead by selling their checks. No wonder it's hard to get the transaction fees down. And yeah, it's a duopoly. The solution by the way isn't to directly try to build a global visa/mc competitor; with the moat, that's impossible. Rather, it's to build on top of what European countries are doing. EU countries have built their local competitors (Bancontact, EPS, BLIK, iDEAL, Sofort, ...). Those have lower costs, and so would any locally-targeted provider because they each have to deal with less risk and complexity. Any aggregator (like Stripe is, by the way) can take payments for all of them and push people away from card payments. The problem with that very last part is a UX issue, people like paying by card. It's a difficult problem. What makes it especially difficult IMO is that once you're down this path and become successful, it takes some very specific, very early business choices in order to be able to turn down the mountains of cash that show up to your doorstep in the form of "align your fees with the rest of the industry".

ptman 4y ago
https://www.epicompany.eu/ https://www.epicompany.eu/ and https://nordicpayments.eu/ https://nordicpayments.eu/ instead of Visa/MC
- scrollaway 4y ago
  Yup exactly, but you need to take that strategy and apply it beyond europe. For this you need local networks in the US as well for example. Right now, there aren't really any; some crypto based local networks but that's all. But the US is undergoing some serious banking network updates this year and that likely means some new local networks are being built. This idea will look very different by 2024 and maybe even be feasible.

avianlyric 4y ago

The EU introduced price caps on interchange in 2015 capping interchange on credit cards at 0.3% and debit cards at 0.2%. That’s almost an order-of-magnitude lower than interchange fees in the US, which are usually around the 1%-2% level. This is big part of the reason you don’t see high value reward cards or cashback program in the EU. There simply isn’t the interchange revenue to fund them, which is good thing, because high interchange + cashback creates a nasty regressive tax that transfers vast amounts on wealth from those with poor credit ratings (usually the least well off society) to those with high credit ratings (usually the most well off in society).

adrr 4y ago
How do credit cards provide 60 day interest free loan with only 0.3% charge to the merchants? I can see low interchange rates for debit cards like the US the interchange for debit card for major banks is capped at 0.05%.
- dagw 4y ago
  There is often a small annual fee connected with having a credit card (I think I pay on the order of $25 a year). Also effective interest rates are in the 15-25% range for most cards if you don't pay it off in full, which I'm sure quickly adds up.
  - hocuspocus 4y ago
    Zero-fee credit cards exist: https://www.advanzia.com/en-gb/customers https://www.advanzia.com/en-gb/customers
- hocuspocus 4y ago
  0.3% over 60 days (in practice more like 15 to 45, only commercial cards have longer billing cycles) was really not that bad during a decade of near zero interest rates. And now that banks will finally make a bit more money on mortgages and other kinds of loans, I assume they don't mind the increasing cost of their customers' credit balance.
- 4y ago

Timshel 4y ago

I wish those transaction cost would be made visible. Imo the seller should not care which card the client use, if it's more expensive to use a "premium" card then it should be made visible to the client and he should be the one to pay the overhead.

IshKebab 4y ago
Yes this is all that needs to happen. The EU should mandate that sellers can pass transaction costs on to consumers if they want (but no more than transaction costs, looking at you airlines).
- rightbyte 4y ago
  It is important that the fee is printed on the receipt too no matter what since the card holder always pay one way or the other.
- doikor 4y ago
  > EU should mandate that sellers can pass transaction costs on to consumers EU actually mandates the opposite. It is illegal to pass the transaction costs to the consumer. The price you see on an item has the be the final price you end up paying.
  - concerned_user 4y ago
    In many online shops in EU you can see "Administrative fee" if your order is too small for example. So while companies are not allowed to do "Credit card fee" they still do it indirectly in one way or another, those that don't impose extra fee usually have higher delivery fee.
  - pancrufty 4y ago
    I love them for it. When I don’t live in Europe it’s infuriating to see the price levitate after every checkout step. Thankfully it’s still not as bad as it used to be like 10-15 years ago.
  - 4y ago

rendaw 4y ago

I assumed it was mostly to pay for chargebacks and fraud. What I think is crazy is basically anything < $10 doesn't need chargebacks, fraud protection, etc, and the fee is inordinately burdensome for those transactions. On a $1 itunes song it would have been an >30% cut, you can forget about selling any small digital thing worth less than that.

gergov 4y ago
on the contrary, smaller transaction amounts are prone to MORE chargebacks because they are attractive targets for card testers
- rendaw 4y ago
  I agree, but that's saying because credit card suck in way X, they should suck in way Y as well to accommodate. Stolen credit card information shouldn't be a thing, and people shouldn't be passing security critical 20+4 digit codes around (think oauth).
Thorrez 4y ago
Why wouldn't small items have chargeback costs? Do credit cards ban chargebacks for them? If someone buys something cheap, it doesn't come, and the credit card company refuses to allow a chargeback, that's going to make some customers mad.
- rendaw 4y ago
  Would you really file the chargeback paperwork for a $1 purchase? Even if you're scammed, it's at the level where you say "I'll be careful next time" and move on.
  - Thorrez 4y ago
    I might. There are 3 reasons: * Money. This doesn't matter much too me, but it might for people who make a lot less than me. The comment I replied to was about anything less than $10, not about $1 specifically. * Preventing future scams. By doing a chargeback against scammers, you're making it more likely they'll get banned. So you're helping to prevent other people from getting scammed in the future. It's a good deed. When I see phishing sites, I report them. Why wouldn't I report a scam? * Revenge. Some people want to see the bad guys get punished.

psychlops 4y ago

Given any problem, someone will find use of authority as the answer.

cma 4y ago
Solving coordination problems through voting. Something as fundamental as the payment system should have people competing on making the underlying processes more efficient, not building the biggest network lock in effects.
- psychlops 4y ago
  By raising prices, they are encouraging competition. Eventually the prices will reach a point where people stop using the product. Until then, I guess people can try to get some laws passed to force their favorite company to do what they want. Of course, more laws usually raise the price of entry for competitors.

flangola7 4y ago

I don't see a reason something as critical as transaction networks should remain privatized, it should be operated by society (via democratic government), not private interests. We don't have private corporations operate highways or the federal mail system. They may operate (heavily regulated) airlines, but not the traffic control that manages their interactions. Imagine having to pay a "takeoff clearance fee" or a toll station at every highway on-ramp.

diogocp 4y ago
Private highways are very common in Europe. So is mail delivery by private companies (Deutsche Post is a big one). In Portugal, the mail company is private and 90% of the highways are operated by private companies. And this is a country where the Socialist party has been in power for 20 of the last 30 years.
- flangola7 4y ago
  That is highly surprising to me. How do you have 90% privatized highways without toll booths everywhere? Without a universal funding source like taxes how is construction and repair funded?