How credit cards make money
bam.kalzumeus.com
bam.kalzumeus.com
The Supreme Court ruled that amex was able to keep the anti-steering provision in merchant contracts because they defined credit cards as a two sided market, and the harm to customers couldn’t be proven. In essence, the Supreme Court set a precedent that in any 2 sided market, in order for something to be considered anti competitive, a high bar needed to be met: the government must show that both sides of a 2 sided market be harmed in order for something to be anti competitive.
Had the ruling been the other way, almost every industry would have been impacted- Uber, App Stores, Advertising…etc are all 2 sided markets.
In essence, Credit cards have had a huge impact to our lives this century for reasons that are not appreciated enough.
Cravath, Swaine & Moore was the law firm defending Amex and the anti-steering measures, and now they're Epic Games' lawyers attacking anti-steering measures.
That looks familiar... I could swear I've seen that on GrokLaw, but of course it's been so long I can't for the life of me remember which side they were on -- or even which case.
Or you could even look within the US and examine the singular state that is a civil law jurisdiction and there is no real impact vs the other 49 states. In fact I’d wager a guess very few people even know 1 of the states is a civil law jurisdiction because it has very little impact in practice.
It's not like that in civil law jurisdictions. Had this case been in France, the decision on credit card would not have created a precedent that Uber and AirBnB and App Store could use to their advantage, because the concept of precedent does not exist in the same manner in France.
And Louisiana and Quebec are not civil law jurisdiction, they are mixed systems because they are still subject to federal laws and supreme courts, so they have civil and common law both.
> “multiply that effect by some unknown but really large number and you'll arrive at the total impact”
There are countless comparative law articles on civil/common law systems, it’s not exactly clear this “impact” you’re trying to measure. I suppose you could try to determine the number of codified laws in a civil law jurisdiction vs the number of original cases cited in published opinions in a common law country. But even with a total number of cases that relied on stare decisis in rulings, I just don’t know what impact that reveals.
This article is a great history of how the modern credit card came into being https://www.washingtonpost.com/archive/lifestyle/magazine/19...
There's a particularly interesting twist to the story that I really always enjoyed. When the person I'm talking to is a POC, typically black, they always also mention that he was the only person in town that gave their family credit for anything. This is small town Texas, still very conservative and still above 75% white as is/was my family.
Sorry for the tangent but the discussion made me think of this mildly interesting story.
* Has dwindled quite a lot in last decade or so. Because of the time, those folks that remember the store are losing numbers (but also I haven't lived there in a while either)
I knew the great grandmother. I remember her fondly, but she didn’t talk much other than in duty of running the house. Food, cleaning, gardening, laundry, etc. They were depression era mentality. Saved all the butter container. I think they themselves were raised by Czech/Pol immigrants to Texas.
Anyways, I knew they did well financially because of seeing my grandfather squander a ton of assets. They were super modest folks but as the town grew, they built apartment complex. They had several 100s units. Also the grocery store was on a gold mine of a street intersection. Supermarket competition and sufficient rental income are my guess at what caused my great grandfather to close the store and sell the land.
People would have to pay for their drugs, submit a claim by mail (or drop off at their employer) and get a cheque.
Sometimes they could send the cheque to the pharmacy directly.
Sometimes the pharmacy (or dentist or whoever) would submit the claim for you.
Credit cards reduced the necessity of this (so you’re not floating the cost, but the pharmacy is directly until they get paid by the insureco).
There’s still some people that will pay cash in Canada for their meds and submit their receipts so they can get that 1-2% in points, but that doesn’t really work where drug prices aren’t controlled.
As pharmacy chains and insureco increasingly become one and the same, and the insureco can take its time paying out-of-network pharmacies to starve them a bit.
Fyi, vast majority of those are co-branded cards which means they are underwritten by a bank. Examples:
- Amazon VISA card is underwritten by Chase Bank
- Costco VISA card is underwritten by Citi Bank
If you look closely on the Pep Boys card, you'll see who the bank issuer is.
It's different from the old days of mom&pop grocery stores running their own ledger of customer accounts. The grocery store was the actual lender of credit. With co-branded credit cards, it's the bank and not the retailer that's lending money for customers to buy merchandise.
Edit: Ops link takes you to a chapter in the book :-)
Basically, the Durbin Amendment caps interchange on debit cards at a far, far lower rate than credit cards; they also have different networks (not MC or Visa) that can be run at least for in person transactions. However, the limit does not apply to banks with less than $10 billion in assets.
This is why some online banks can offer lower fees and sometimes even debit cash back (1% is the most I've seen though, so not competitive with credit). But its also why ever fintech under the sun pushes debit cards so heavily--the debit card is issued by a (small, non Durbin-covered) partner bank who then shares revenue with the fintech company.
At the end of the day, credit cards are still significant better for customers. You can have multiple cards with different benefits while keeping all your money in one place, and you can prevent overdrafts because you don't have random subscriptions taking out unpredictable amounts of money in the middle of the night and causing a check to bounce the next day. You are no longer obsessing over "early payday" features or ACH speeds.
Credit cards also provide a nice hack to allow cash deposit for those with only online banks--you can often use a big bank's ATM to make a payment towards the credit card, allowing you to get rid of ordinary amounts of cash.
From a financial website…
“ CREDIT CARDS Credit cards offer consumers the widest fraud protection. By Federal law, a cardholder is only liable for the first $50 of an unauthorized transaction at most, with many issuers offering cards with zero liability. DEBIT CARDS Debit card holders are protected under a different law, the Electronic Funds Transfer Act. With debit cards, users' liability is capped at $50 only if they notify the bank within two days of realizing the debit card is missing. Beyond that, they could be responsible for up to $500 of a crook’s spending spree. And waiting more than 60 days to contact the bank could leave a user stuck paying every cent of the unauthorized charges.”
I had a debit card saved on Aliexpress. The account was compromised by unknown means (maybe public wifi). Someone bought several $1,000+ phones from China that shipped to me in the US. I presume the sellers were in on it and were selling me unwanted inventory at inflated prices. Because they had tracking information, my bank (HSBC) said their hands were tied and I lost several thousand dollars overnight. It didn't matter that it was obviously fraud -- I provided customer service emails, logs showing the purchases all happened at 4am local time, and all at the exact same timestamp.
Moral of the story: don't use debit cards, don't save your cards online (save them in your browser and unselect "save this card"), don’t expect your bank to have effective fraud detection, and don't trust Aliexpress to have your back.
Also, please don't bank with HSBC. They are the worst of the worst. You'd be better off with Wells, that's how bad HSBC is. https://www.icij.org/investigations/fincen-files/hsbc-moved-...
I just noticed:
The same provider also give 25 IBANs per account. I could, for free, put 25 virtual debit cards on them, and have the IBANs empty unless I put money on it. Good luck scamming me this way. After all, the accounts are empty except for a few min when I put money on them to spend it.
What's name of your debit card provider?
So you find my card in the wild, good luck.
Most of the time that's an anti-feature - there is no point of hiding transactions of you buying bread, it could provide you an alibi in case you are accused of a crime, but there is no conceivable way it could be used against you.. (people don't stop to buy bread on the way to the crime scene)
Not being able to indebt yourself is THE major advantage of debit card. Not everybody in this world is reasonable when it is about spending and finance management.
In some European countries with a more conservative mindset related to debts (Germany, France, ...), people will tend to have the exact opposite stance :
"Why would I ever need a credit card ? It is dangerous. My debit card is accepted everywhere"
Suppose you charge $1000 each month at the rate of about $33 per day, and also pay it off when the bill is due.
In a year, you've gotten 1.5% of $12,000 back which is $180, but you could also look at it as though they are paying you 36% per year to use (on average) $500 of their money.
The latter interpretation makes it seem irresistible to me.
I use a debit card for groceries and such. However, just to be sure, my paycheck goes to an account with no cards attached. I then transfer small amounts ($100 or so) every now and then to the debit card account.
This limits my exposure to card fraud, and also has the nice side benefit of giving me back some of that "spending feeling" that cash has. If I have to transfer say three days in a row it's noticeable and I can think about what I've spent it on, and maybe slow down a bit if I know I'm running low.
Sure was an awkward call with the USAA security department after they worked out the exact timeline and actions of the attack. They didn't really have much to say in their own defense. Cost them about five grand in the end. The really annoying part is that now if my wife needs to call them for anything on the phone they make her jump through many hoops to identify herself. E.g. she has to answer the credit bureau-based questions every time, plus a PIN, plus a phone password. We may move banks just so we're not stuck with an online-only relationship because of this experience.
Paycheck to cards not attached does not matter, ACH transfers can still be done much easier vs a EMV/Stripe read of a debit card.
So all you are doing is amplifying your risk without any reward.
Only using it on gas & groceries, will average 16 points per dollar (approx 12-16%) when we reach $15,000 spent total.
The new deal is similarly structured but horrible in comparison, “shop small” is the category so it’s not realistic to max out the bonus spend without overspending.
There are some edge cases where one might overdraft more (delayed transactions IIRC), but again no fees.
But a lawsuit might untie them. That said fraud can sometimes be too hard to prove.
I'd paid with a credit card, so I asked my card provider to do either a chargeback or section 75 (I forget which) to force a refund, and the money was back in my account within a couple of weeks.
Any other cards anybody can recommend?
Sort of.
Do they still require using Chrome for that feature?
Fuck Google, I'm not about to use them for that!
If there's a dispute over a charge, I believe with debit cards the money is still out of your account until it gets sorted out -- this could be days or weeks.
With credit cards, the money in dispute is not "owed" to the card company, and at worst it reduces your available credit by that amount, which is only an issue if you're spending enough to max your card out anyway.
Even though the end result is similar, there's a bad feeling about the debit card fraud: It's my money tied up, while with credit it's the card issuer's money.
> Every time you use [a debit card], you put your money and your bank account at risk. > > Instead, use a credit card. I use one for practically all of my purchases, even when I’m traveling abroad. With credit cards, federal law limits my liability if there’s an unauthorized use of my card. > > When I use a credit card, I’m spending the credit card company’s money every day until I pay my bill at the end of the month. Meanwhile, my money is earning interest in a bank account.
https://www.cnbc.com/2019/08/27/debit-cards-are-dangerous-wa...
I' have all my autopayments set up on a specific card that never leaves a drawer in my house.
End result is that when the burner card gets compromised, as it does several times a year at gas pumps and such, I toss it out, get a new one and it's not all that painful. The autopayment card has yet to be compromised.
I wish it were easier to get temporary card numbers without giving someone else access to my purchase data.
It used to be a huge pain, because after that I would have to update all my stored payments and autopays.
Debit cards do have the disadvantage of your money being gone until the bank makes you whole. But I'm not sure if the liability is really any different (unless physically stolen and not reported, I guess).
An excellent point. Although my bank (Chase) caps my debit card liability at $50 despite the difference in the law.
But that has its own disadvantages. Whenever I travel, if I use the debit card, I invariably get declined the first time I use it and my phone and email blow up with "Fraud Alert!" notifications.
Which is annoying as hell, especially since if I use a credit card for the same transaction, Chase doesn't flag that as fraud.
Which, of course, is related to how they indemnify my debit card above and beyond the law.
That's for consumers, but what protection do I get on my company credit card?
Accepting credit card as merchant for years now I only had 2 fraud issues, both using American credit cards.
Yeah, I don't know. Thing is, I don't like the stress involved. I prefer to deal with the money I have, not with the money I hope I'll have in one month's time. Not to mention, the cognitive burden of constantly keeping in mind the various balances and expected money flows, and having to manually push money around. It all feels like working with an angle grinder without protective gear.
My ideal credit card would be one that's automatically capped to the balance on my account, pays itself automatically, with no involvement on my part, and doesn't let any person that knows its number pay for stuff with it.
Oh, wait. That's exactly what a debit card is. :).
"The major difference between a thing that might go wrong and a thing that cannot possibly go wrong is that when a thing that cannot possibly go wrong goes wrong it usually turns out to be impossible to get at or repair."
I'm especially leery of anything that someone powerful and/or authoritative says can't go wrong, because when it does go wrong, that's what they'll say, again.
The bank contacted me immediately and said they noticed strange behavior on my card and had thus blocked it. They sent me a transcript with the obvious fraudulent charges highlighted, and asked me to identify any additional ones.
When I asked about reimbursement the man sighed and said they might not get everything back, but then quickly corrected himself: they were legally required to reimburse me, it was just the bank that would potentially loose some money. I had everything back in my account within 24 hours.
So I have a question, to people who warn me of the dangers of debit card fraud and preach the advantages of credit: was I just exceptionally lucky with my bank? My bank was just a run-of-the-mill small town local bank, I wouldn't have expected anything extraordinary out of them. But yet their response to fraud was stellar. It's really left me wondering what all the hype is about.
>I had everything back in my account within 24 hours
That's the thing though, they take your money, rather than the banks, even if briefly. Does it matter? I don't know, but it seems like a quantifiable risk.
I think that banks are privileged in some way, in being able to take what they claim you owe them, from any accounts with them.
So my theory is that it's prudent to be paying via some third party on general principles. I don't even use a credit card from the same bank that has my checking. Partly because of inferior terms and customer service, but partly to avoid them having leverage in a dispute.
> Yeah, I don't know.
Credit cards are safer for the consumer, by regulation. So that much is just factual.
You can set up automatic payment for your credit cards if you like, no involvement. I don't because I like to review each line item and control when I post the payment, but it's possible.
A debit card is basically an open port into your bank account. A credit card is a firewall which buffers all withdrawal requests for a month (or so) until you approve them (or reject any fraudulent ones).
do you routinely overdraw your bank account? if not, you probably a) keep more than enough in checking to cover a typical month's expenses, or b) carefully track your balance to ensure each purchase won't take you past zero. unless having a credit card in your hand gives you an uncontrollable urge to spend more money than you have, I don't really see how this is any less trouble than a debit card. if you're not living paycheck to paycheck, just put the card on autopay and keep 2X your monthly expenses in checking. if you don't have a lot of surplus income, you need to be careful, but it's no different with debit.
I think the point above was more or less:
- With a debit card if you have 10k in the bank and spend 100 dollars a month, you don't need to do anything extra.
- With a credit card, you need to remember to pay off your balance.
it's worth noting that issuers generally make money on credit cards. this is in contrast to checking accounts, which are often a loss leader. the card issuer will happily let you screw yourself over (to a point, this is what the credit limit is for), but they won't go out of their way to directly screw you. there's far less incentive to do overtly malicious things like debit reordering (pretty common for checking accounts). [0]
so yes, all major issuers offer autopay. there is a subtlety here in that they don't usually let you autopay your current balance in its entirety. instead, they'll let you autopay the last statement balance at most, which is enough to avoid accruing any interest.
tl;dr: if you keep a decent buffer in your checking account and set up autopay, a credit card is no more trouble than a debit card (and actually less trouble, in some ways).
https://en.wikipedia.org/wiki/Overdraft#Transaction_processi...
[1]: https://www.huffpost.com/entry/overdraft-protection-expi_n_6...
https://www.ftc.gov/tips-advice/business-center/guidance/new...
https://en.wikipedia.org/wiki/Expressions_Hair_Design_v._Sch...
It is very clear that most merchants earn more from people using credit cards more often, otherwise they would try to dissuade or offset it by adding a premium for using credit cards.
Target sort of does this by giving a 5% discount if you pay via ACH from your bank account (via a debit target redcard account), and in the western US, a grocery store company called Winco advertises it does not take credit cards at all in order to provide the lowest prices.
On the other hand, Aldi in the US used to only take debit cards, and they started taking credit cards 5 or so years ago, so they are obviously assuming they will earn more money by lifting prices a little and attracting credit card users.
The obviously silly analogue would be that a merchant who dislikes guns could choose to hang a sign in their texas cafe with "no guns allowed", but they probably won't. That doesn't mean they WANT people to bring in guns, but that they think it would do too much harm within the market they're in to reject them. It would be a case of "reluctant acceptance of reality".
I think credit cards are the same. It should be self-evident that a merchant would want customers to pay with debit cards since the lack of interchange fees means the merchant makes strictly more money. Of course they want to make more money. But they also must accept that charging more fees for credit card users or rejecting them entirely would reduce overall customer base and profit, and so they accept that people can use credit cards. They want customers, not credit card usage.
I'm not sure if this is still the case, but if it is, then that is one situations where accepting credit cards pays for itself.
It is helpful to keep in mind that different businesses can pay wildly different fees for CC transactions. Walmart can sell you a $0.50 item for basically nothing, while a corner market might be better off if you stole it instead. So Walmart might absolutely want everyone to use credit cards while the corner market would likely prefer nobody did.
Can you elaborate? IME merchants do NOT want people to use credit cards; transaction fees eat into the sale price. I remember a time when some electronics stores would explicitly advertise a cash discount, so as to avoid the transaction fees. I once worked in a bar that accepted every major credit card, save American Express, because of their several-points-higher transaction fee. The premium is added to offset this.
How is it very clear that most merchants earn more?
Because they do not offer discounts for cash/debit, and they also do not charge a fee for using credit card.
As I showed in my post, legally, merchants are clear to advertise higher prices for credit card users. The fact that they do not means they do not want to dissuade credit card use. From there, it follows that since businesses are interested in earning more money, that if they do not want to dissuade credit card use, then they must be earning more money (or at least breaking even) due to people using credit cards.
People spend more money when they use credit cards than debit/cash. Note that my above post specified “most merchants”, not all merchants. Obviously, some merchants do benefit from dissuading credit card use, such as the examples I gave, or many gas stations and small restaurants or convenience stores.
Except they do. Especially smaller, mom & pop stores, as I mentioned here[0].
> Note that my above post specified “most merchants”, not all merchants. Obviously, some merchants do benefit from dissuading credit card use, such as the examples I gave, or many gas stations and small restaurants or convenience stores.
Or they just prefer to deal in cash so they don't have to pay as much in taxes.
https://www.nerdwallet.com/article/credit-cards/credit-cards...
It's really only a matter of time until I remove credit cards completely in favour of non-US, local, low fee, secure, banking alternatives which already make up the far majority of transactions.
Many small retail stores in my area (delis, bodegas, restaurants) incentivize cash/debit. Not by charging less for them, but by charging extra for using a credit card.
Small retailers pay significantly more for CC processing than large retailers. 5-10x more, in some cases.
> Note that my above post specified “most merchants”, not all merchants. Obviously, some merchants do benefit from dissuading credit card use, such as the examples I gave, or many gas stations and small restaurants or convenience stores.
Is my comment unwelcome because you said something similar?
It is not. It's the converse.
And the effect is likely quite different -- discounts for cash are usually significantly less than surcharges for credit cards.
https://www.law.cornell.edu/supremecourt/text/16-1454
> The antisteering provisions do not, however, prevent merchants from steering customers toward debit cards, checks, or cash.
So Ohio v Amex is about having different prices for AmEx compared to Visa/MC/Discover, whereas Expressions Hair design was about having different prices for cash/debit compared to credit cards.
I think what happened was due to Dodd Frank in 2010 explicitly allowing cash/debit card discounts, and political focus on credit card processors from states to drop their requirements that merchants not have different prices for cash/debit/credit card purchases, all the processors backed off from preventing merchants to not give lower pricing to cash/debit card users. However, Visa/MC even backed off from preventing merchants from giving lower pricing for any other card processor, since they wanted to avoid anti trust scrutiny since they are already so prominent. However, AmEx decided to fight it, and won big not just for AmEx but other two sided markets.
It definitely leads to a logically inconsistent result where merchants can display different prices, but the route taken to get to each decision was wildly different. Amex could have maintained in its contracts that merchants could not offer lower pricing for cash/debit cards, but I think AmEx wanted to avoid the way that would make them look (Amex versus Visa/MC is a David v Goliath case, whereas AmEx vs cash/debit is rich people versus poor people).
Here is a good comparison of both rulings:
https://jobs.luc.edu/media/lucedu/law/centers/antitrust/pdfs...
Timing ACH payments _sucks_.
Tangential, but I'm in a renting situation where my landlord demands rent land in their account on the first of the month. Receiving rent on the 26th (i.e. 5 days early, not 26 days late) was deemed "too confusing" for them. I now have to play this awful game of timing ACH transfers to land on their account as close to the first as I possibly can.
Also your bank may be able to do this for you. If you add your landlord as a bill pay recipient and set the due date as the 1st, the bank will mail the check on the appropriate day, and if it arrives late, will often cover the late fee.
Also, no, my bank will not do this for me. My landlord actually is overseas (permanently), so mailing a check is not feasible.
I ran into this at my last place. I'm the sort of person who likes to pay things ahead so I don't have to think or worry about them. I was used to paying my rent ahead and quarterly.
When I moved to the new place (in a western state), the apartment company insisted that rent be paid exactly on the 1st, and paid online.
Not only did it not want the rent early, it was not possible to pay early, as the company's online system would show a zero balance, and would not show a payment mechanism.
Even worse — I couldn't pay a bunch up front. It would only allow payments for the exact amount due for that month.
Payment was also accepted by check. But only in person, and with a $75 "processing" fee.
And this wasn't some rinky-dink neighborhood landlord. It was a national apartment company with over 20,000 units in a dozen states.
Interestingly, my new apartment has the same online system as the old one, but allows me to pay however much I want as often as I want. (As long as it's not late, duh.) So it wasn't a technical limitation, it was management's policy.
That's illegal in New York[0].
In Germany credit card chargebacks are very cumbersome. I had 3 banks' customer service tell me at first that it isn't possible (like they had no process for it or the agent never did that or is too lazy) and then the next agent said it works but has huge-list-of-drawbacks-fill-9001-forms-and-waste-days effort.
Do you mean “in cash” or, like, as any single transaction?
1: https://www.bankofamerica.com/banking-information/assistance...
Then I had an idea - I got a piece of black construction paper for a background and it was much happier taking pictures of checks on that.
How are you paying cash online at all?
Thank you, I had no idea about this! Going to seriously help me "deposit" cash since my bank's closest physical presence is two states away...
You should look at getting a charge card. Basically a credit card where you can't keep a balance. Its basically a pay-after debit card where you can not pay a charge if its fraud.
Some have nice perks, but you can just ignore that if you want.
Is that also some weird American quirk? Everyone I know has a couple debit Visa/MCs..
> For another, this ended up being an almost peculiarly American experience. In Europe, regulators were worried about the cost of interchange to businesses (rather than consumers) and capped it. Since issuers didn’t have the margin to compete on rewards paid for by interchange, they instead leaned into branding and convenience, and credit cards became a smaller portion of the payment mix (about 47% of electronic payments, compared to almost 70% in the U.S.).
First, the 47% is for all types of cards, debit and credit. Second in the SEPA space (at least the eurozone), wire transfers are free of charge, and are frequently used(for rent, salary, buying a kitchen, even between friends, at least in France), which removes some of the uses for bank cards. Furthermore, bank cards usually have limits, so buying expensive things (like a car or kitchen) isn't necessarily straightforward, unlike a wire transfer. IMHO shit prices and delays are the reason peope in the US often use cheques where in the EU we'd use a wire transfer, and it isn't really true that cards are less used here.
Hmm not everywhere. I recently went to the Netherlands and was surprised to see not everyone accepted credit cards - while they do accept (local) debit cards. My cards are Romanian, so you can't blame US banks.
In one small store they explained to me that accepting Visa/MC would cost them 10%, which looked insane to me.
However, it's gotten drastically better in the past few years, with at least the bigger stores accepting Visa/MasterCard now.
I'm guessing this has to do with the fact that Maestro is being phased out in favour of MC debit: https://www.mastercard.com/news/europe/en/perspectives/en/20...
Moreover I'm fairly certain that before the mandatory cap on interchange, countries with relatively high card payments were also the ones with the cheapest PSP fees.
Repeating something I've said before: this is the 3rd issue of a weekly newsletter, and its going to come out on every Friday for the foreseeable future. As someone who has spent more than 10 years here, I'm keenly sensitive to HN's desire to not have the front page be as predictable as my new shipping cadence. I'd appreciate if folks could be selective in submitting these; in prior years I'd space out my essays to avoid wearing out my welcome but that's difficult to do with a newsletter that is open-to-the-public.
Basically, other countries can bank in USD sometimes, so there's a weird corner case that you can send USD to a merchant but can land in their account as $converted_currency or USD that isn't so corner. I'll let patio11 cover this (if/when he gets to it) as there are details I no longer have access to and thus can't do the subject justice.
Once you start investigating, you will find many different reasons. Some cultures favor cash because it's concrete, or for privacy reasons. In some countries, banks prioritized efficiency and were quick to phase out checks in favor of wire transfers. In many cases, stores were used to cheap domestic payment methods and didn't start accepting international credit cards until banks made them cheap enough. And in some cultures, there is a deep aversion to anything related to debt. If you dig further, many of the reasons can be traced back to adverse experiences in the 20th century, including world wars, the hard times after them, hyperinflation, and living under nazi/communist rule.
this applies only to a subset of Europe or european banks.
Separately, is the "credit score" system a particularly American concept? In the UK the credit report companies will give you a number, but it seems to be something they make up to fill a consumer demand rather than something card issuers actually use. Do you know how the FICO score became such a central thing in US consumer credit, and does Japan work differently?
The U.S. has the world's most developed and widely relied upon credit reporting infrastructure, by a substantial margin. The history of FICO doesn't quite fit into the margins of this comment but I'd love to do an issue on it someday. Credit scores per se are less a thing in Japan but there are cross-issuer I-can't-believe-its-not-bureaus which have information sharing agreements, the dominant purpose of them being identifying fraudulent actors and account takeovers rather than credit risk (nearly zero in Japan, historically).
> nearly zero in Japan, historically
That surprises me actually. I know Japan has a very, let's say, high conscientiousness culture but do they never get into economic problems and are simply unable to pay card bills?
Not debating you but a random reddit commenter says a (pseudo) "credit score" in Japan is implementation and semantics. The CIC, Zengin, and JICC organizations' credit histories data functions very similar to a USA credit score.
https://old.reddit.com/r/japanlife/comments/goy0vv/are_credi...
Thanks for this. I'm earlier in my career but very interested in fintech, so as i explore where i want to go, your writing has been immensely helpful and informative!
I am particularly fascinated at the moment by the world of differences in how finances work for people vs businesses. (eg. People typically pay taxes in income, but businesses pay taxes on profit. That leads to differences in how money is made/spent between those groups.)
I guess one suggestion i have for your newsletter is in how credit is given to businesses - humans (at least in US) have fairly well understood credit scores. Its well documented how credit card companies, consumer loans, mortgages evaluate individual credit from those scores, but how does a business acquire credit to for short term spending (corp cards), what about to make big CapEx purchases like buildings, maybe even for financial funds and speculative transactions? How are those businesses evaluated, underwritten, etc? What about banks borrowing from other banks?
What did you mean by this? I get that raw customer transaction data might not be as valuable as one would think, but you seem to suggest that there is another thing they do with the data that DOES make money. Can you elaborate?
Corporate cards actually earn significantly higher interchange, but even those don't aggregate out above 3%. Actually, the networks spend a lot of time policing banks from trying to arbitrage the difference by issuing corporate cards to individuals.
Payment processors like Square just know that their margins will vary by the type of card used by consumers, but aim to have an aggregate positive margin across all cards. Once you get into enterprise contract negotiations with them though, they'll look at your card mix to make a pricing offer.
2. Parallel graph of dominant internet access points and type thereof (fixed/mobile) per market vs. dominant payment systems and payment characteristics such as payment size, card not present, etc.
3. True history of SWIFT.
4. Parallel graph of Chinese mobile payment growth vs. historical credit card payment growth.
5. Overarching trend in bank points of presence including ATMs and branches across multiple developed markets vs. mobile.
6. Trends in subscription payments as a percentage of overall credit card spend + subscription support in alternate settlement systems.
The terms & conditions on my credit card sound like it should work (I shouldn’t be charged interest if I have a credit balance), but I’ve never tried it.
Failing that idea, do you have any tips for frequent American travellers on how to get foreign cash without paying excessive conversion fees?
Many credit union deposit accounts with ATM access can use some foreign ATMs with no fees and reasonable forex rates. Some online deposit accounts with ATM fee reimbursements will also reimburse foreign ATM fees and have reasonable forex rates. Things like Schwab and Fidelity, IIRC. My personal experience is a bit dated, but I'd try to have two separate cards on different networks if possible, because my ATM card only worked in half of the UK ATMs I tried, and that wasn't very convenient, as the ATMs I couldn't used were at the chunnel station and I needed cash for an unlicensed taxi.
There are plenty of debit cards that you can use at foreign atm's with no ATM fee or foreign transaction fee.
(2) How do you think crypto & defi will change the credit card markets?
This article of yours is fascinating: https://bam.kalzumeus.com/archive/financial-innovation-is-ha...
Thanks
Someday I'll try to curate a reading list but in the meanwhile the sort of things I read are generally the sort of things I link to in essays/on Twitter/etc. Everything from WSJ to Byrne Hobart's newsletter to Fed research papers to e.g. almost any book that looks plausibly interesting about financial fraud (best one: Lying about Money, Dan Davies).
I express no strong opinion on whether you personally are contribution margin negative for your issuer. On a portfolio level though, this is extremely well studied and extremely clear: that archetype is staggeringly contribution margin positive. It's actually one of the best performing ones at some issuers, principally because the archetype spends a lot per account, has negligible defaults for non-fraudulent users, and therefore earns lots of interchange at favorable margins.
It is possible, given the design of individual products, that a user with close-to-optimal spending decisions is contribution margin negative on individual products and potentially on all accounts with a particular issuer. People outside the credit card ecosystem believe this is much more common than it actually happens. A lot of thought goes into the design of products to decrease the likelihood of adverse use, cap the damages, and encourage users who are very skilled at gamesmanship to game their way to being contribution positive.
While there are legitimate tracking concerns, the data the credit card companies capture and disseminate is incredibly fascinating. You've got spending data, layered with market segments, layered with location data (both on the cardholder and the business side), and even time of day. Overlay all that with very accessible data from the Census or ESRI, and they can really tell a significant story of how money flows through the modern economy. This is what's feeding the internal fraud detection engines (which have gotten a lot better), but there are also private institutions that are more than willing to pay the credit cards a hefty sum to get access to all this data.
I feel like that user is typically the sort who enjoys telling anyone who will listen about how they managed to get great rewards from their card. With all that free marketing, the credit card issuer is probably happy to have them as a customer, even if they lose a little bit of money on them.
Out of curiosity, what names does that archetype go by?
And if you actually are spending, as you suggest, they make enough from the merchants who are eating the 3% transaction fee.
You're the data product, like every other cool free thing over the last decade, and they have a sustainable business model.
And if you ever do have a disruption in your earnings while you are floating a balance on the credit card, you've just become their whale customer that is paying for the whole operation with interest. By the time you default they really don't care about collections because they've already made so much, they're very ready to sell off the debt to some collections agency for pennies. You can be the most meticulous and responsible user of debt, and still have this happen to you eventually. They're just the house in their credit casino and all they have to do is wait.
You mean, the customer eating the 3% fee? The merchant isn’t going to take the hit to their margins, the interchange fee is built into the price of what you are buying.
How on earth can it make sense for us to get issued two $95/year CCs, as happened this year. I can use the 20% AirBnB bonus to cash in $1200, each card, as happened once. We're waiting on passports for the second. Edit: I've also cashed in points for 12 transatlantic flights over the last 15 years, on other CCs.
We haven't missed a CC payment in decades. I can cancel at any time. We don't have that many accounts to switch, might take an hour.
We're puzzled. But ok, we do it.
Edit2: Ok, after reading more comments, the profit from us would seem to come out of spend. Some more details then. We make net slightly less than 6 figures, and save 50% of that for retirement. House payment is $800, and nearly done. Travel is our vice, but we do eg a week in Paris for maybe $1500, and we do everything we want to. A big chunk of that is AirBnB, and... the CC typically pays that.
I'm not denying that the super solid big spenders aren't super profitable for the issuers. I am puzzled why we get issued the cards. I mean, 2 cards from the same vendor just splits the pie between the two accounts, and increases the spend zero.
If you think you are winning on rewards, you might also believe you can win long-term playing in a casino.
The card networks told merchants they are risking losing any and all chargeback for non chip purchases a few years ago. If a merchant is taking mag stripe still, that is their risk.
> If you think you are winning on rewards, you might also believe you can win long-term playing in a casino.
I am definitely earning more via cash back rewards than I am paying in fees. A 2% cash back card which can be had for free, gets you pretty close. At 5% cash back, you’re clearly earning more than however much prices are inflated to pay for the card processor fees.
And at the end of the day, I don’t have the option of paying 5% less at most places. So any percent cash back is a win.
I suspect that the bank is winning much more than you think on your business, even if you are getting a good reward. They are getting other people to pay them even more than they are paying you.
Maximizing credit card reward can be a hobby that leads to minor ROI- like investing in individual stocks it might be lucrative and if you enjoy it more than golf definitely pursue it. But don't think you are fleecing Bank of America or Chase or whomever.
I pay $550 annually for one card, but I easily pay for that (and then some) through statement credit and redeeming points. The net value I get out of the card is well over $1k per year. But it's not clear to me whether or not the issuer makes that back via other means. Just they aren't making that back from me. I expect card issuers are very very much aware of customers just like me, and are able to financially justify my existence.
They can also earn money from retailers to promote them to you. Point hunters often end up spending extra to reach a rewards threshold, which can be very profitable for the retailer. It's also common to sign up for a card with great introductory rewards and then keep using it for years, because you get busy and forget to switch card every few months.
Only a handful of their cards - the Green/Gold/Platinum - are charge cards, and they all now have "Pay Over Time" (allowing a month-to-month balance on charges over $100) and "Plan It" (allowing one or more charges to be put on a 3-24 month payment plan with a fixed finance fee).
https://www.americanexpress.com/en-us/benefits/payment-flexi...
https://www.americanexpress.com/us/credit-cards/features-ben...
Citibank did just that with me.
They do. When they do it aggressively, it results in bad PR, though.
This article says the cost to handle cash is 5 to 15%, more than credit cards.
Privileging cash as a customer isn’t universally better for the merchant.
Otherwise shop owners have many many ways to signal how much they want you to do something or not. Wether the card reader is hidden under the counter or the most prominent thing when you need to pay could be a very clear signal for instance.
Tangentially, I was happy to be able to use debit to buy a new car. Had to phone my credit union to tell them to raise the limit on the day of the transaction, but it saved me having to go to the bank during their working hours to get a certified cheque.
WTF? Why is this burden on the customer? If you want to support them you buy from them, period.
For example, I want to implement a QR payment application, think like transferring money through Venmo using QR code, now Paypal does it, very popular in China -- basically a payment processing application but my local country - think Mexico or Peru. How does one understand all the requirements to make it work?
It makes me wonder how did Stripe founder obtains this crucial knowledge to build what they have. Payment processor or integrating with banks. Same thing what Plaid is doing. If I wanted to create an API to interact with a bank for my local city here in the U.S., do I call up a bank teller and ask me to connect me to someone who is interested in integrating their bank with the world?
I am certain doing a CFA or master degree in finance will get you no where if your goal is build what Plaid and Stripe have done. Instead, you need to know big shot and have ties with them to achieve success. It kind of make sense this to be true otherwise an developer in India or Ukraine can build APIs ...
"In early 2010 John and Patrick began working on Stripe together. At the time Patrick was working on several side projects and they debated why it was so difficult to accept payments on the web. They sought to solve the problem and see if it was possible to make it simple - really simple. The next 6-months they played with it, showed it to friends, and saw how people interacted with it, iterating along the way."
[1] https://www.startupgrind.com/blog/the-collison-brothers-and-...
I always wondered this, but when some minor crime seems to get heavily investigated by police. Seems like there are avenues to report something and have it taken seriously that just doesn’t exist for the general public calling the general number.
I know you've been a major skeptic of the gratuitous pyramiding, wash trading, and shaky (or non existent) foundation of Tether etc
But w/your depth of knowledge on the current financial system would be very interested in your take on the current market and next gens of defi / staking / shared pools / etc
Would love to see you ingest and break that all down
https://techcrunch.com/2021/10/13/payments-giant-stripe-says...
I personally find this confusing, it often changes the meaning of the title IMO.
It's also fun/interesting to look at the published interchange rates for various classes of commerce. Here's Mastercard's: https://www.mastercard.us/content/dam/public/mastercardcom/n...
[1] https://www.amazon.com/Payments-Systems-U-S-Third-Profession...
https://www.fastcompany.com/90490923/credit-card-companies-a...
"Credit cards make money through net interest, interchange, fees, and marketing contributions."
I love you.
no
>mostly [aware] how it is a complicated bundle of services with a pricing structure strictly more complicated than a venture capital fund’s.
yes
FTFY
In this case, the domain is a clear cue to me.
(Thanks for the praise! Hope to continue earning it.)
2. kalzumeus.com is patio11's personal domain, so it's even less necessary to put the author in the title.
That's technically not accurate. Credit card networks do not earn money from interchange [1].
[1] "Visa does not make money from individual transactions." https://revenuesandprofits.com/how-visa-makes-money-understa...
Which is effectively the same thing.
You’re assuming the card networks are even charging issuers, and issuers are funding these fees from the revenue they collect in interchange. They are not.
It’s not uncommon for the card networks to not even charge issuers at all. The card networks need to win over the issuers to even issue cards for their network. It’s much easier to win an issuers business by not charging them any fees at all.
How it’s worded implies issuers are even paying a fee & that fee is derived from interchange. When that’s not always the case.