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Comment by ztan | Hacker News Reader

This may be a dumb question, as I'm not very familiar with how these things work. Why do they charge less when the transaction is a physical swipe 2.75% vs 3.5% + 15¢ if you enter numbers manually? Does it actually cost Square less when you swipe? If not, what is the idea behind this encouragement of physical swipe?

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Does it actually cost Square less when you swipe?

Yes. Credit card processors charge a lower fee if you can say that you got the number from swiping a card, rather than manually entering it in.

Is this verifiable? Is there extra information on your magnetic strip? Could you not just push the same signal as the credit card numbers into the iphone's microphone jack?

You can always lie and send the code saying it's a swiped transaction without swiping a card. The risk there is losing the ability to ever accept credit cards for the rest of your life. If you violate a policy like that, you're added to the Terminated Merchant File. Not only is the business's information placed in the file, but the names and social security numbers of every principal of the business. MAPs will check the list before approving a new account. None of the business's owners will be able to accept credit cards again, even if they form new companies.

Proportionate risk.

If you have the card physically in hand then there is less risk that the transaction is fraudulent (for a start, the card holder is presumably present)

Yes it does cost them a lot less. The biggest expense Square faces is the interchange rate that it must pay to Visa/MC and they are much lower for swiped transactions.

Small technicality: Visa and MasterCard don't receive the interchange fees, the issuing institutions do.

Swipe(total) Fee = Switch Fee + Interchange Fee

Ah.. okay now it makes sense. I knew it was kind of a dumb question. Thanks all.

Good questions are non-obvious and not simple to Google. It was a good question.

Interchange (set by Visa/Mastercard) is different if swiped. The reason is simple - much lower chance of fraud if swiped (much easier to steal numbers without someone knowing than stealing the physical card)

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