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Comment by patio11 | Hacker News Reader

I'm happy to answer any questions or take suggestions for future issues if you have them, HN.

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.

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One thing that might be fun to cover: I got in a twitter discussion today about why Europeans don't use credit cards as much as people do in the US. Researching this question and related ones ("why are wire transfers free in Europe but not in the US") are basically impossible to Google, as similar but not actually good results ("the cheapest way to wire money to Europe") drown out any primary resources.

Semi-related: What happens with interchange and related fees, when an American credit card is used in Europe?

Ooh that's a good one. It includes a detour into some really weird forex stuff. If you're used to it it's not that weird but as a American, with US credit card, and a US bank account who then banks exclusively in USD, I found it complicated and fascinating.

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.

As an aside, if you are using no forex fee US credit card, and a foreign merchant asks if you want to pay with USD or the local currency, always choose local currency.

If you choose USD, then the merchant gets to choose whatever exchange rate they want to convert at, and will be far from the spot price (hence some merchants go out of their way to ask you if you want to pay with USD). If you choose the local currency, then your American bank will give you an exchange rate extremely close to the spot rate and the transaction ends up being much cheaper for you.

Even if you have a card that charges an exchange fee, they likely charge a fee for USD denominated foreign transactions too, although it may be slightly less, and the more favorable exchange rate from your bank may cover the fee.

It does not directly answer your question, but many (most?) merchant agreements in EU have significantly higher fees for accepting non-EU cards. E.g. Stripe takes 1.4% vs 2.9% for EU vs non-EU (card-present EMV transactions are typically much lower cost, but that still shows the idea).

> ("why are wire transfers free in Europe but not in the US")

this applies only to a subset of Europe or european banks.

Do you want to expand where it isn't the case?

IBAN EU Transfers have to be free by law AFAIK

Instant transfers may cost fees

Europe is bigger than EU.

Are there countries where wire transfers cost money within a country?

> Europe is bigger than eu

Condescending much? Especially since this doesn’t mean anything for the question asked

Interchange rates in Europe are capped at an order of magnitude lower than in the US. The economics of rewards credit cards just don't work out in Europe.

That may be because you are asking the wrong questions. Each country had developed its own banking culture before EU started harmonizing things. You may get better results by googling for the reasons in a specific country, preferably in their language.

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.

I take it interchange fees is the reason some small stores will not take credit cards for small purchases, and low-margin stores will often not take Amex.

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?

Substantially correct on the first part. In particular, and depends on the region/processor/card brand, many SMBs will have interchange which has a fixed-per-transaction component in addition to a percentage fee, and that can be prohibitive at small "basket" sizes.

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).

Thank you. It matches my impression that lenders in other countries do share information, but mainly negative factors such as defaults. Than means "credit building" does not exist in the same way.

> 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?

"Never" is a strong word, but you're welcome to read the English-language reports of Japanese lenders which break this out for their consumer businesses. Factors which generally tend to depress it include low revolving credit use, relatively high underwriting standards for credit (not solely a positive thing—ask your favorite Japan-resident foreigner for stories sometime), formal or informal risk transfer, outsourcing collections to the yakuza by policy [0], etc.

[0] I feel it necessary to say "I am not making this up. It happened at first-rate financial institutions many times within the last 20 years."

Yeah, I'm currently going through the process of getting a mortgage for a property in Tokyo. I'm also interviewing about a potential job - nothing unusual there, moving around every 2-4 years is common in the software industry.

I was told in no uncertain terms by my real estate agent "Do not move company until your loan is approved. You're already impacted by the fact you work for a foreign company, and you will probably get declined if you start somewhere new."

The fact that I'd likely be looking at a substantial raise and therefore be in a better position to pay off any mortgage is irrelevant, the bank just cares about stability.

(I'm sure you already understand this, this story is for the benefit of other curious thread-readers)

>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).

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...

I feel bad about the stores that don't take Amex. Either their owner is relying on knowledge that's decades out of date, or they have a very bad merchant account provider. Amex cards cost no more to charge than Visa/MC cards these days. There are even Visa/MC cards with higher interchange fees than any Amex card.

Hey Patrick,

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?

Patrick, as someone with a startup in this space, I just want to say that your content is fantastic. I really appreciated reading this, and was unaware that Japan had a (pricing cartel?) with rewards. Is the market highly concentrated there as it is in the US? If it is indeed an inexplicable coordination situation, has there ever been any antitrust action in this space there?

Due to my quirky position as a foreigner who works in the financial industry in Japan I will not comment on structural sources for observed pricing discipline, but if you're interested in this topic, you may enjoy the Japan Fair Trade Commission's writing on it: https://www.jftc.go.jp/en/pressreleases/yearly-2019/March/Su... It's an active area for them, according to their public statements.

>It is believed by many that banks make lots of money selling "your data." This is not a significant contributor to the economics of credit cards, for reasons which are slightly too complicated to get into in this piece. The short version: much like Google and Facebook, issuers can demonstrate to the most sophisticated organizations on the planet that they can deterministically influence actual purchasing behavior. That's easier to sell than a CSV file and worth more to more businesses.

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?

Is it true top tier customer reward cards (black/platinum/amex business/etc) have interchange fees that push into 3% territory? If so, how do companies like Square make money when they only charge the merchant 2.6% for a POS transaction?

No. Aggregate interchange for top-tier Visa and Mastercard personal cards maxes out at ~2.3%.

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.

Square, by virtue of their business model, get lower interchange fee because charges where the credit card is present, has lower fees. Online-only merchants get no such discount.

1. History and death of attempts at carrier-proxied mobile payments, including SMS and so forth.

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.

If you have a credit card that charges no foreign exchange fee, could you overpay your credit card (i.e., leave a balance in your favor on the card), then withdraw cash at foreign ATM machines, thereby avoiding both forex fees and credit card interest?

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?

> 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.

I second the parent’s suggestion of using a checking account that supports low-fee foreign withdrawals. Charles Schwab has worked for me at many international ATMs.

Some people advise sticking with four-digit PINs for compatibility with older ATMs [1] but I don’t know if that’s a practical limitation at this point.

[1]: https://www.latimes.com/travel/deals/la-tr-spot-20140713-sto...

I just used a US Capital One 360 debit card to withdraw Costa Rica Colones today. Based on Google’s currency conversion for today, it cost me $0.80 more than it should have. Maybe other banks / countries are more egregious?

There is usually a fixed cash advance fee to pull money out of a credit card at an ATM. Last i checked it could be $20-30.

There are plenty of debit cards that you can use at foreign atm's with no ATM fee or foreign transaction fee.

(1) If you find the time, I'd be very keen to read about this history of how this market came to exist & how the earliest entrants succeeded or failed. Pointers to books (or better yet, your voice) would be great!

(2) How do you think crypto & defi will change the credit card markets?

Why not write on Substack? I'd love a comments section for your newsletter.

I welcome comments in my inbox but, having long-ago had them on my blog, do not consider the lack of them a bug.

Which is very reasonable. The SaaS product for comment moderation on a very niche site hasn't arrived yet (afaik. links welcome). Realistically though, you've outsourced the cost of that that work to dang/the team on HN. Which is what I'd do, but I wonder how dang feels about providing that as a service.

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