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Slightly off topic, but it's sad to see so much brainpower and energy go into "innovation" in the financial sector. We (society) have created a complicated gam

Slightly off topic, but it's sad to see so much brainpower and energy go into "innovation" in the financial sector. We (society) have created a complicated game involving credit cards and we have to continue playing the game otherwise we lose. Merchants charge higher prices because they need to pay a 2% merchant fee, then the credit card "rewards" us with 0.5% back. Madness. If the blizzard of credit card features--cash back, reward schemes, loyalty plans, interest options, perks, airline points--all disappeared, it would be a huge net benefit to society. I realize it won't get fixed. It's sort of like simplifying income tax legislation. Almost everyone would benefit even if the amount of tax collected remained the same, but there's no mechanism to even start doing it. Same thing here with the credit cards.

a2kadet 13y ago
I'm pretty sure loyalty programs are good for the smart consumer. I would speculate credit cards were all competing with one another while charging a 2% fee. They all wanted to go lower but couldn't and needed something to compete. Enter loyalty programs, designed to attract your attention but be too confusing to actually use. TL,DR - I would guess cutting loyalty programs wouldn't lower credit card fees.
- dangrossman 13y ago
  The interchange rate charged by the card network (Visa, MasterCard, etc) is determined by the type of card presented. Rewards cards are charged a higher fee because they're reward cards (the rate is literally called "CPS Rewards"), and that extra money ends up back with the card-issuing bank who's paying the rewards. If you head into your local convenience store and pay with a cash-back card, that store will lose a larger percentage of your transaction than if you had handed the very same cashier a basic non-rewards card. http://usa.visa.com/download/merchants/visa-usa-interchange-reimbursement-fees-april2013.pdf http://usa.visa.com/download/merchants/visa-usa-interchange-...
abalone 13y ago
That's a good way of putting it.. "we have to continue playing the game otherwise we lose." But we didn't create it. Visa and the banks did. Visa was able to win over so many banks by offering the highest interchange fee. Remember, card network customers are banks, not you, so they're actually competing to raise the fee that merchants pay (interchange) that gets passed back to the bank that issued the card. In a masterful example of leveraging network effects, Visa was able to come up with the highest fee that still had wide acceptance by merchants. This pissed merchants the hell off. Theoretically it may have increased prices by 2% in general, but it's hard to say. That's part of the "genius" too, it's designed to be a small enough fee to be a rounding error that merchants just eat. It did have one advantage for consumers: it made Visa accepted absolutely everywhere by further driving its network effects. (And Mastercard too which followed the same model.) As compared to networks like AmEx or Diner's Club, for example. What happened then is the banks started competing with one another with reward programs. This basically took the margin out of the interchange and returned it to the consumers. But only if they "play the game" and know how to play it well. So what we're left with is a silly game consumers have to play to get their 2% back, which merchants really hate. This has been "fixed" through legislation in other countries. Australia for example. But guess what? They did a study and found that merchants did not lower prices. They just kept prices the same and enjoyed an extra 2% margin.
mattmanser 13y ago
You are wrong for thinking that these innovations aren't helping society. Even a brief thought about it and you can see this is much better than having to go to your bank, withdraw a large sum of money, walk to the shop with that large sum of money. It helps business, reduces the transaction friction. I once actually pondered that wouldn't it be much better if the government controlled internet search rather than google. Fairer? Less open to their constant land grabs from other aggregators? No advertising? Can you imagine what a nightmare that would have been like? What a silly idea that thought was? That's essentially what you're saying about a different industry.
- cantrevealname 13y ago
  > go to your bank, withdraw a large sum of money, walk to the shop I was speaking about frilly credit card features that force us to play a complicated game where we pay more for stuff and then get some money back by signing up for the right "reward" card or collecting points or miles or whatever. Obviously, I'm not suggesting that everything should be cash. Electronic payment systems (credit/debit cards, wire transfer, Paypal, hopefully Bitcoin) are essential of course. (Often badly implemented, but essential.)
smsm42 13y ago
You don't understand why tax code is complex. It's not complex because we don't know how to make it simple (that may be true but that is not the real reason), but because politicians explicitly do not want to make it simple. Making it simple would remove a very powerful way to control behavior from them, and if politicians of (almost) all shades hate something equally it is not being able to control something. The tax code is complex because it's not only tax code (i.e. means of extracting money from people to fund the government) but a vast regulatory engine. Credit card rewards are complex because competing on price only is hard and brutal and if you're dealing with commodities - and credit card access from the issuer side is commoditized - it drives your margins down into unsustainable territory pretty quickly. So people invent all kinds of schemes that they can compete on without getting into direct price competition. I don't see how removing this would be a huge net benefit to society. I like getting 2% back from my every purchase and 5% back from certain ones. Yes, I know these are the same 2% the merchant is charged with, but credit card companies won't work for free. So I have a choice - either they charge merchants less and don't care about me - i.e. don't entice me with rewards and so on - or they charge a bit more and give it back to me as a reward. I personally like it better when they compete for my attention - that's kind of a relationship that usually leads to a better service than "you're not the one actually paying us so we'll take your call in next 2 hours or so".
PeterisP 13y ago
It's not that "almost everyone would benefit". If we magically switched a perfect/lowfriction payment model, merchants would benefit, and consumers would benefit, but in ways invisible to them; while losing smaller visible benefits - so they wouldn't "see any benefit". On the other hand, all the infrastructure partners - i.e., anyone who actually can change the system, would lose out on this lucrative rent from the transaction fees. The only way to change that is by force from above - EU SEPA legislation is in the right direction, but IMHO not enough.

a2kadet 13y ago

I'm pretty sure loyalty programs are good for the smart consumer. I would speculate credit cards were all competing with one another while charging a 2% fee. They all wanted to go lower but couldn't and needed something to compete. Enter loyalty programs, designed to attract your attention but be too confusing to actually use. TL,DR - I would guess cutting loyalty programs wouldn't lower credit card fees.

dangrossman 13y ago
The interchange rate charged by the card network (Visa, MasterCard, etc) is determined by the type of card presented. Rewards cards are charged a higher fee because they're reward cards (the rate is literally called "CPS Rewards"), and that extra money ends up back with the card-issuing bank who's paying the rewards. If you head into your local convenience store and pay with a cash-back card, that store will lose a larger percentage of your transaction than if you had handed the very same cashier a basic non-rewards card. http://usa.visa.com/download/merchants/visa-usa-interchange-reimbursement-fees-april2013.pdf http://usa.visa.com/download/merchants/visa-usa-interchange-...

abalone 13y ago

That's a good way of putting it.. "we have to continue playing the game otherwise we lose." But we didn't create it. Visa and the banks did. Visa was able to win over so many banks by offering the highest interchange fee. Remember, card network customers are banks, not you, so they're actually competing to raise the fee that merchants pay (interchange) that gets passed back to the bank that issued the card. In a masterful example of leveraging network effects, Visa was able to come up with the highest fee that still had wide acceptance by merchants. This pissed merchants the hell off. Theoretically it may have increased prices by 2% in general, but it's hard to say. That's part of the "genius" too, it's designed to be a small enough fee to be a rounding error that merchants just eat. It did have one advantage for consumers: it made Visa accepted absolutely everywhere by further driving its network effects. (And Mastercard too which followed the same model.) As compared to networks like AmEx or Diner's Club, for example. What happened then is the banks started competing with one another with reward programs. This basically took the margin out of the interchange and returned it to the consumers. But only if they "play the game" and know how to play it well. So what we're left with is a silly game consumers have to play to get their 2% back, which merchants really hate. This has been "fixed" through legislation in other countries. Australia for example. But guess what? They did a study and found that merchants did not lower prices. They just kept prices the same and enjoyed an extra 2% margin.

mattmanser 13y ago

You are wrong for thinking that these innovations aren't helping society. Even a brief thought about it and you can see this is much better than having to go to your bank, withdraw a large sum of money, walk to the shop with that large sum of money. It helps business, reduces the transaction friction. I once actually pondered that wouldn't it be much better if the government controlled internet search rather than google. Fairer? Less open to their constant land grabs from other aggregators? No advertising? Can you imagine what a nightmare that would have been like? What a silly idea that thought was? That's essentially what you're saying about a different industry.

cantrevealname 13y ago
> go to your bank, withdraw a large sum of money, walk to the shop I was speaking about frilly credit card features that force us to play a complicated game where we pay more for stuff and then get some money back by signing up for the right "reward" card or collecting points or miles or whatever. Obviously, I'm not suggesting that everything should be cash. Electronic payment systems (credit/debit cards, wire transfer, Paypal, hopefully Bitcoin) are essential of course. (Often badly implemented, but essential.)

smsm42 13y ago

You don't understand why tax code is complex. It's not complex because we don't know how to make it simple (that may be true but that is not the real reason), but because politicians explicitly do not want to make it simple. Making it simple would remove a very powerful way to control behavior from them, and if politicians of (almost) all shades hate something equally it is not being able to control something. The tax code is complex because it's not only tax code (i.e. means of extracting money from people to fund the government) but a vast regulatory engine. Credit card rewards are complex because competing on price only is hard and brutal and if you're dealing with commodities - and credit card access from the issuer side is commoditized - it drives your margins down into unsustainable territory pretty quickly. So people invent all kinds of schemes that they can compete on without getting into direct price competition. I don't see how removing this would be a huge net benefit to society. I like getting 2% back from my every purchase and 5% back from certain ones. Yes, I know these are the same 2% the merchant is charged with, but credit card companies won't work for free. So I have a choice - either they charge merchants less and don't care about me - i.e. don't entice me with rewards and so on - or they charge a bit more and give it back to me as a reward. I personally like it better when they compete for my attention - that's kind of a relationship that usually leads to a better service than "you're not the one actually paying us so we'll take your call in next 2 hours or so".

PeterisP 13y ago

It's not that "almost everyone would benefit". If we magically switched a perfect/lowfriction payment model, merchants would benefit, and consumers would benefit, but in ways invisible to them; while losing smaller visible benefits - so they wouldn't "see any benefit". On the other hand, all the infrastructure partners - i.e., anyone who actually can change the system, would lose out on this lucrative rent from the transaction fees. The only way to change that is by force from above - EU SEPA legislation is in the right direction, but IMHO not enough.