Visa, Plaid, networks, and jobs
stratechery.com
stratechery.com
I never got why credit cards were such a big deal for merchants, until reading this.
I never got why credit cards were such a big deal for consumers, until I heard this: https://www.npr.org/2019/06/26/736352315/episode-922-the-cos...
What a week of learning about credit cards it has been!
I can understand credit as a natural extension of “running a tab” at a hotel or restaurant—you order now, and settle your account later, for various definitions of “later.” But why would a retailer be interested in offering private/internal credit that they had to manage and settle? Sounds negative-ROI to me.
People would set up accounts at their local stores so all their common daily and weekly errands could be done without cash. Then once a month (after payday) they would take cash around to all the local stores paying their accounts. (Or write a check, I guess)
Stores supported this because it was a form of lock-in, and because it reduced friction. Faster than exchanging cash too, or writing a check.
When working correctly (the customer comes in and pays without prompting) it's super low effort. Especially for stores with only one location and checkout counter. Only really costs time and money when a customer requires chasing up.
You're probably coming from the opposite frame, that requiring cash up front for all transactions was the norm. It wasn't. We've been extending credit and taking on debts for millennia. It's just how money works.
It seems to me that this store credit thing has been very much a US thing, and it probably is the reason why credit-based electronic payment systems took over the US while at the same time debit-based systems accomplishing the exact same goal became dominant in many European countries.
Funny thing: when it comes to gasoline, the roles are reversed. In the US, you get no gas if you don't first go into that store and prepay or provide a credit card that guarantees a payment. In most of Europe, you just drive up to the gas pump and fill up, and then you go into that little store in order to pay.
I think our account number was 14? Simple enough for a child to remember.
Around age 9 I was using the account on my own to buy food after school. I'd state the account number, and the cashier would write the credit down with a pen into a special notepad they kept under the cash register.
With contactless today I guess you can solve it with just one person, but I really liked the two-factor.
And the community service, of course.
A recent observation:
Shop to a little girl: What's your Numbra?
Little Girl: 718-.....
Owner comes by: That's Sharon and Jacob's account. You are not his daughter.
Little girls freezes.
Owner continues: Unless you are their niece from Upstate who has come for Christmas.
Little girl visibly relaxes and the grocer bags her items.
For setting up direct deposit at most workplaces (in the US, at least), you just give HR your bank routing and account numbers when you start and that's it. I've never gone through any kind of verification process.
Pocketing this technique for future use!
For me, it's always been about that buffer between my actual money and the merchant. Sure, credit card rewards programs have been great, but having a middleman who is more or less on my side in all financial transactions is a game changer.
If I use my debit card, the money is out of my possession; it's possible to get it back, but it's not certain, and while I'm waiting for that to happen, I don't have access to that money. (And if I use cash, I pretty much just have to accept that the money is gone the second it leaves my hands.)
If I use a credit card, I still have the money, and can dispute the charge. Even if I don't notice the problem until after I pay my credit card bill, I still have a single entity (who, again, is more or less on my side) who will refund my money if I have a valid complaint, even if the merchant isn't playing ball or is a fraudster.
If you pay your credit card bill off in full every month, you're not paying anything extra unless the merchant charges a premium for credit card transactions. If you carry a balance, you're paying on that, sure, but nothing requires you to do so.
(Also, of course, you might be actually getting 1% or more back on credit card transactions, if they have cash back programs.)
The merchant is paying extra, and that cost is hidden in the price I pay.
If what you really meant is that the cost of the credit card transaction is implicitly in the price everyone is being charged, then sure, I see your point -- except that I think it actually strengthens the original poster's argument for using credit cards! If you pay $25 for a widget in cash and I pay $25 for the same widget on my credit card, then we're literally both paying the same price, but I'm getting the ostensible benefit of using the credit card and you're not. (I would actually argue, unlike the OP, that this is mostly true for debit cards as well, in that you still have a bank fighting to get your money back in a way that isn't true with cash.)
We also have an "EFTPOS" network that is independent of Visa/MC. It's a debit account network owned by the banks that give you access to savings or cheque accounts. It's charges are much lower than Visa/MC, so merchants like when you use it and don't apply a surcharge.
Even cash likely has a higher fee, if not from simple counting mistakes on many small transactions, then complexities like the safe, the risk to employees (insurance), the controller effectively managing the cash each day, the security of a bank truck, and more.
But it should be pointed out that those numbers are in the context of a quote from ~1958. Back then, postage was $0.04. Also, $4.58 and $12.82 (as examples) would be worth $40.52 and $113.41 today. So I'm not actually sure if a 6% charge on sales would be worth it here. I don't know what the cost of labor would have been back then (assume minimum wage in that area in 1958 maybe). Anyway, the point is the numbers don't seem as alarming and obvious to me after looking up postage and inflation at the time.
See rules on surcharging: https://usa.visa.com/dam/VCOM/global/support-legal/documents...
And minimum transaction amounts (minimum can't exceed $10): https://usa.visa.com/dam/VCOM/download/merchants/minimum-tra...
https://ec.europa.eu/commission/presscorner/detail/en/IP_19_...
In this example the fees capped were for outsiders who are buying things in the EEA. e.g. an American buying something from an Italian vineyard or an Australian buying some authentic British tableware (for now).
The EU also forbids hidden fees for most types of transaction. It wants the advertised price to match the price paid by consumers‡. If I have 25 EUR in my pocket and you advertise a product for 25 EUR I should be able to get that product. Whereas in the US if you see a product advertised for $25 you know they'll want maybe $30 or more as they add fees, taxes and charges on top of the supposed price. As a consequence this means the fee for a card ends up built in to most online prices in Europe, even if you actually transact in some other way that reduces or eliminates the fee for the seller. So ensuring the fee is low makes good sense here too.
‡ British supermarkets (used to?) use a trick to reduce taxes here - they charge you a fee for their backend card processing, but they subtract that fee from your checkout price. The cost to you doesn't change, and you'd never notice unless you read the small print, but they've successfully argued that this service fee should be taxed differently than your purchases, saving them money. Since it doesn't affect the headline price versus price paid the EU doesn't care.
However, some people think the credit card companies are inflating the price of goods with rewards, without taking into account how expensive cash is to deal with. To count, to detect counterfeiting, to lock up, to trust employees, to move. Processing cash isnt cheap, and can involve considerable risk, including increased IRS scrutiny.
Handling money is a cost, like rent and electricity, built into everything we do. Credit card networks are much more efficient than existing alternatives.
Every once in a while, I'll run into places that do a cash discount, usually smaller businesses. It's super common at gas stations - even big chains.
I have noticed gas stations are more prone to this (along with very small business), although it happens on occasion at restaurants as well. I figure, with 3% restaurant rewards, I break even at 3% restaurant charge and or using cash.
Why would businesses that offers a cash discount (which means they also accept credit/debit) lose customers?
Ie; gas station 1 has a 3c cash discount. Gas station 2 has no discount, but you don't feel like you're not getting the discount. Gas station 3 can even compete by having a 1c credit discount.
The dominance of cards is mostly American or, at the very least, location-dependent.
That's generally prohibited by the credit card merchant agreement. Gas stations are one of the rare exceptions.
That is not true.
> Cash Discount programs are legal in all 50 states per the Durbin Amendment (part of the 2010 Dodd-Frank Law), which states that businesses are permitted to offer a discount to customers as an incentive for paying with cash.
https://www.quantumelectronicpayments.com/implement-legal-an...
If you had to carry cash for small purchases that would remove the convenience of cards.
Buying a single pack of gum on a rewards credit card might lose the merchant money. They’ll make up for it in aggregate, but that transaction has a negative return. I understand the desire to limit how frequently they sell at a loss.
Credit card agreements used to require parity with cash and no minimums (as Visa and MasterCard had to create new buying habits). But recent laws have placed restrictions on those restrictions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 permits businesses to impose a minimum purchase amount of up to $10 for credit card use, but the minimum must be the same for all credit card issuers and payment card networks.
https://usa.visa.com/dam/VCOM/download/merchants/surcharging...
https://www.mastercard.us/en-us/merchants/get-support/mercha...
I don't think they expect or want customers to pay by cash.
That, plus user transaction data is hugely valuable as its own product: tracking users and their spending habits and selling the signal. Cash takes away from that revenue stream.
But otherwise you are right. Plus register employees need cash bonds I believe for insurance.
This type of centralisation makes me sad, but it's probably true for most startups. By using Plaid or an Open Banking service from another party (e.g. Experian) you'll pay fees to get information you can get for free if you integrate directly with the banks.
Even though the open banking APIs are uniform, any company wishing to use them still has to register with each and every bank, and test the integration works with each one. Until you've done it once, it's hard to know whether it will be easy (you write the code once, and it works flawlessly for all banks) or you have edge cases (e.g. some banks have funny timeout issues). So if you're a developer on a deadline, you will likely prefer to use a single API.
If they'd all support a standard API, plaid would vaporize overnight.
In the UK, the banks already support a standard API, but it's still easier for developers to use an intermediary to access those APIs. Because using Plaid or Experian they don't need per-bank credentials and tests.
They also push all the risk in terms of Plaid being compromised onto the User's, instead of the service provider.
This is a winning deal for Plaid, because in the event of an undiscovered breach, there is no proof in the form of say, hackers running off with Plaid's hypothetical Autonomous System's credentials and generating fraudulent activity that can be shut down by just patching the breach and changing Plaid's credentials.
Instead, banks have to scratch their heads and figure out why all these seemingly random customers are calling about fraudulent activity at right around the same time.
It's absolutely terrible in the diagnostics department, but seemingly ideal for exploiting legal grey areas for avoiding culpability if something goes wrong.
I'm not sure federated OAuth is the answer, but it's a damn sight better than what Plaid is doing.
This also hints that a not-Visa competitor will appear in the credit union space, since credit unions often have a shared provider for banking websites (and bill pay, and etc.) and would presumably set up their own competitive API provider on top of that.
...which suggests you're not necessarily paying for the integration with a free service - you're paying for the integration at a grand scale. I.E. - paying to not have to do all that work yourself.
For the data Plaid was providing, this isn't really true at all in the US. Last I checked, the big banks were very guarded in their API access and you either had to have (1) a large payment (2) a high minimum balance and (3) pay for an audit from their auditor of choice.
I think Europe is different in this regard but the US players really had no incentive to do anything Plaid offered.
Right, I'm talking specifically about open banking, which isn't a thing in the US.
* It's suggested is that Visa will 'fix' the security concerns that Plaid introduces (the use of username & password collection), but it seems unclear how Visa would be able to change the fundamentals of the Plaid<->bank interactions?
* It's also theorized that European banks will prefer to use Plaid rather than a privately recommended solution (not referenced in the article) to achieve EU open banking compliance. Do Plaid have strong relationships with EU banks at present, and would it not be more likely that Plaid would implement against the existing EU open banking APIs (single implementation, no lobbying) than that Plaid would implement their own alternative (requiring per-institution implementation, and also lobbying to ensure their approach is accepted both by banks and EU regulators)?
But does that then imply that users authenticate with their bank via Visa (i.e. Visa becoming an identity provider -- not totally unimaginable given their association with customer-issued cards)? Or instead that banks would implicitly offer this data to Plaid/Visa under their card issuance ToS, without user authentication required?
(I'm not really asking for answers, I don't think we can really know at this point. It just leads to questions like this and I'm curious)
But ya, I bet they're going to push hard on "provide us openid connect" in future contract negotiations to solve the security problem.
When he does consider the perspective of the user or consumer, it's still indirectly from the perspective of the capitalist: users/consumers will behave in X way, get Y value, etc, which is why [megacorp] should do Z.
I'd really like to see him take a broader view. Could he imagine a set of rules/regulations that would result in a better outcome for the public?
I've long been thinking about this problem:
- we all much prefer a single platform/network
- but if there's a single platform/network, then there aren't good market incentives on the side of the provider
This seems like such a fundamental problem in a space he writes so much about. Ben Thompson, please think and write about this!
This is the Trump government failing us and gifting the next generation's financing needs to the next generation of rent-seekers.
Considered in the context of the rest of the UK's regulatory environment (porn filters, etc), it seems plausible that the UK gov's push for bank APIs is less about being kind to their citizens and more about undermining cash and pushing all financial activity onto infrastructure that's easily accessible to a surveillance state.
I'd like to have tech like this in America, but I don't think we have the spine on any front. We aren't willing to hardball businesses on timeline/featureset (for example: the partial and late rollout of chip/pin in the US), and we aren't willing to write legislation that protects citizens from abuse and creates punitive structures that make abuse of citizen data by companies an economically irrational act.
In light of that, I wonder if shitty APIs are the lesser of two evils.
Pocketsmith got around this by adding feeds from Salt Edge, thankfully. I've actually become quite dependent on having proper cashflow, balance sheet and P + L statements for my personal finances.