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Comment by ryandrake | Hacker News Reader

As a layman, I always wondered: what do Visa and MasterCard even do? They don't issue cards or actually extend credit. Banks do that. They don't assume any transaction risk. Merchants assume it. They don't actually carry any of the debt that customers produce. They don't accept balance payments from customers. They're just "facilitators" but it's unclear what that even means technically. I assume they have a few datacenter that do trillions of little lookups, but is that all there is to it? It seems like the perfect do-nothing middleman business: Insert yourself into every transaction in the world and siphon a percentage of it.

What stops a big bank from doing whatever it is they do?

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You can read the history section of MasterCard and Visa on Wikipedia. MasterCard started as an aliance of several American banks, Visa as a Bank of America product licenced to other banks. Both solve the problem of merchants having to only deal with a handful of credit card types rather than with thousands of bank-specific cards that their customers might be using (the US alone has thousands of banks).

They've been exploiting 2-sided market network effects even before the internet existed: merchants feel pressured to accept them because that what all their customers use; customers use them because that's what all the merchants accept.

Very informative long podcast that'll answer your questions

https://www.acquired.fm/episodes/visa

Amazing episode - highly recommend it.

I agree, as OP that was a very helpful explanation!

FedNow instant payments will eventually replace the majority of credit card volume, as has happened in India with UPI and Brazil’s PIX. Takes time to bootstrap this infra across the financial ecosystem. Pix even supports cross border payments natively.

https://www.thebanker.com/Brazil-s-Pix-a-threat-to-credit-ca...

https://www.pymnts.com/news/cross-border-commerce/cross-bord...

https://www.reuters.com/business/finance/brazils-pix-payment...

> "I think credit cards will cease to exist at some point soon," central bank chief Roberto Campos said nearly two years ago, discussing the potential for open finance and the Pix platform. "This system eliminates the need to have a credit card."

> Market trends have since added weight to his forecast. Use of Pix surged 74% last year to nearly 42 billion payments across the Brazilian economy — surpassing credit and debit card charges combined by about 23%, according to central bank data and industry group Abecs.

> For buyers, the switch to Pix has been nearly seamless, as they simply scan a QR code with any banking app instead of reaching for their wallet. But for sellers, it has turned the tables on the traditionally lucrative card payments industry.

why would consumers who can afford to use credit cards with rewards switch to fednow payments? are there equivalents for chargebacks, fraud protection, and rewards percentage?

Merchants are starting to surcharge credit card transactions to push the fees onto customers (rightfully so). If you want credit card benefits, you can still get them, you just have to pay for them.

This bifurcates the payment choice, so people who don't want these conveniences can avoid the cost (instead of all of us having to pay for it through internalized interchange costs) but those who do can continue to receive those benefits at their own cost.

Walmart notably filed public comments in support of FedNow [1], and they are working internally to support these rails to avoid credit card network costs.

[1] https://news.ycombinator.com/item?id=36012866

Go to somewhere like Japan where you have choices of 20 different payment vendors.

Or even here in the states and sometimes you can pay via PayPal or Venmo or QR code.

But at the end of the day, I can just tap my Visa card (or lately just Apple Pay) in way more places than anywhere else, from storefronts to vending machines, in Italy or Japan or Wisconsin, and it Just Works.

Building a network that is accepted anywhere in the world (if they want it, and short of sanctions) is a combination of engineering, marketing and management.

And you can always use your cards online, except for things Visa and Mastercard don't like! Yay!

Remember, this isn’t really a moral judgement. It’s a “we get way too many chargebacks on these categories to make it worth it” judgement.

Maybe we could see a thing where to purchase something in those categories, you have to call them and verify your identity, and that you’re buying this thing, and that you aren’t allowed to submit a chargeback.

But probably the volume isn’t worth it.

> Remember, this isn’t really a moral judgement. It’s a “we get way too many chargebacks on these categories to make it worth it” judgement

I think it can be both

In fact, I think if it weren't for the moral aspect, they wouldn't really get away with it. Imagine if they suddenly got a large problem of charge backs for groceries, gas or prescriptions. They might want to stop accepting payments for those things but the backlash would be astronomical against them

I've also never actually seen any concrete numbers about how many more chargebacks they get for adult content versus other categories. Is it possible they really don't get that many more chargebacks, but since it's a category they feel comfortable going after they decide not to accept those payments anymore?

They probably won’t give us the concrete numbers.

They definitely don’t want to get sued if they facilitate what turns out to be not just distasteful to them but potentially illegal-see the PornHub lockout by all the CC companies after it was discovered that not all the things they hosted were legal/consenting/etc.

That said, “the optimal amount of fraud is non-zero”: https://www.bitsaboutmoney.com/archive/optimal-amount-of-fra...

This is a big one. Actually deploying a network worldwide and it just working is a massive feat. I go to some backwards place in South America and if they’re not cash only they’ll take visa. If they are cash only I’ll be able to get cash from the nearest ATM.

I really dislike their duopoly and the fact they’re a tool for American politics but… it’s extremely convenient and well executed.

Contrast this with my bank, not using a third party provider, it would cost 30$ and take 3-5 business days to get money to a bank pickup location in a city.

Contrast this global coverage with the global coverage of my mobile provider that wants to charge me 6.50$/mb for data.

> What stops a big bank from doing whatever it is they do?

All over the world you're seeing local competitors trying to usurp them now that everyone is carrying a smartphone and can just install a free app to make or receive payments - the most advanced are UPI in India and WeChat/Alipay in China, but Japan has PayPay, the European countries have all kinds of local systems based on phone numbers that are extremely popular (Swish, MobilPay, Vipps, Blik, etc) and often funded by the banks who don't want to keep paying the duopoly.

Eventually these will merge or ally into global-scale competitors.

> Eventually these will merge or ally into global-scale competitors.

Those country-issued cryptocoins that are popping everywhere should enable this.

But even now, a lot of companies are appearing that do international billing. Those tend to accept the popular formats from a few countries, and convert into the popular format of another country.

Bitcoin could have been a strong contender to Visa/MC's dominance for online payments if it wasn't for it's pesky insistence to keep block sizes small and enable "Replace By Fee" making it essentially impossible to trust unconfirmed transactions.

How convenient.

Oh sure, I bet the six-transactions-per-second and $20-equivalent transaction fee and the fact that most people use it for speculation and illegal crap had nothing to do with it.

> I bet the six-transactions-per-second and $20-equivalent transaction fee

They had everything to do with it, that's my point.

The first two have a lot to do with "keep blocks small". Bitcoin basically has stopped trying to actually be a useful payment mechanism, though other cryptos are trying (still, the fact that wallet access=money gone and no chargebacks makes them not particularly suited for most consumers)

Literally every payment is used for illegal crap. I fail to see the relevance of that point.

Payments are a representation of trust. That is the opposite of crypto and blockchains. People want fast, cheap or free instant payments and if there is an exception, they want their government or legal framework to be able to step in for them, hence why no crypto payment system will ever grow beyond illegal/illicit transactions attempting to avoid the legal payment systems, or speculation (bitcoin, eth, etc). FedNow, for example, will allow you to move up to $100k-$500k (depending on your institutional limits) within 20 seconds (max SLA) for ~5 cents (whether the bank charges you for this is up to your bank). If there is an exception, your bank or the government will step in with Regulation E. Your monies in a demand deposit account are insured up to at least $250k USD (depending on titling). Hard to beat without getting into ideology territory. Crypto likely has a use case where you cannot trust your government and need to stash value somewhere that isn't a reserve currency, but those are edge cases, not the norm. There are even some startups in that space offering more secure deposit accounts to folks in places who need access to secure fiat storage, which is really a regulation/AML/KYC/customer identity play [1].

[1] https://www.ycombinator.com/companies/nsave | https://www.nsave.com/ ("nsave is a fintech that provides trusted $€£ accounts abroad for people from countries where inflation is high and banking is broken.")

Not everyone is keen on all digital payments being stored in a permanent public ledger, even assuming the data storage could be scaled.

Monero then?

Well, that and being completely public. I, for one, don't want the whole world to know whom I'm paying for things.

Most of their top engineering talent goes towards risk determination (if a transaction is legitimate or fraudulent) done on behalf of banks/merchants they have contracts with. They have a massive push for using ML to enhance that, and they have extremely strict latency requirements on processing time. All this high performance costs a lot of engineering money.

And yet, they refuse to make their protocol secure on any way that isn't mandated.

What do you mean? You mean whether to require using the physical chip on the card?

They dragged their feet to add a cryptographic chip, dragged it to make the readers accept the chips, dragged their feet again for deprecating the non-chip transactions.

Meanwhile, online purchases are still done by sending a number and trusting the person that received it. They keep dragging their feet to make any side channel verification or cryptographic validation.

But well, they dragged their feet for so long that most of the world already made some competitor with those features. I hope they go on and fail as soon as possible, they do deserve it.

It's tricky, because they decided to leave this up to the banks/merchants (along with the associated liability) rather than force it.

Network effects. Visa and Mastercard work nearly everywhere (approximately 100% of merchants who take cards in many, but not all, countries). Your big bank can* issue new cards that aren't on either network, but they need to somehow get them hooked into all the acquirers out there (or at least their payment gateways), otherwise they just don't work. So this is indeed a middleman business, but they have a big moat.

* of course, banks don't actually print the cards themselves, there are a smallish number of companies that do that, who may not be set up for your new scheme either, so that's also a thing.

Yup. Startups like GoCardless and government initiatives like UPI are all about direct bank to bank transfers to cut out the middleman by becoming the new middleman.

Paze (https://www.paze.com/) feels to me like the collective banks’ attempt to wrestle back control here. You could imagine a world where it’s a separate side channel for payment for the same credit card accounts but without the rent-seeking intermediaries.

After looking at it, the “uses a different number” would seem to imply that the side-channel thing is right. Pace-participating entities load your cards to their system, you get access via your email address, Paze acts as an interface whereby issuers associate a new unique ID with your account while still showing you your “Visa” account number or whatever and “validating possession” with CVC.

That said, my level of trust in Early Warning Systems, who runs it, is pretty low-Zelle looks like a hot mess with EWS/banks ignoring Reg E as much as they can get away with:

https://www.bankingdive.com/news/zelle-scam-reimbursement-we...

Corruption. They also co-opt well meaning, highly compensated Individual Contributors at Stripe and other fintech companies, who write on this forum self edifying posts about their own personal genius and the complexity of incrementing and decrementing integers.

> the complexity of incrementing and decrementing integers.

This is tantamount to saying that all of software is just flipping a bunch of tiny switches on and off. Reconciliation of thousands of transactions per second across billions of customers spread around the globe doesn't have as trivial of a solution as dunking on straw men in HN comments.

Whether or not the level of complexity involved with this is justified is a value judgment that I'll refrain from making but it's pretty obvious to anybody that's worked in the industry that things aren't as simple as a layperson might think.

You are borderline doing exactly the thing I am lampooning. You just are missing the part where you explain how complicated it is to decrement integers at the same time as incrementing integers and why.

There's is, and will be, many very simple responses (ex. you're right, nothing, just a middleman, etc.)

I agree with the overall premise.

But I had to wrestle with this more because I owned a point of sale company in 2010s...so, let's frame this to: if they are a vampire, how in the world are they still such a vampire 15 years later? As you put it more politely: what stops a big bank from doing whatever it is they do?

TL;Dr because they're middleman as in Switzerland, not middleman as in "pure dead weight"

No one has an incentive to cooperate with another big bank, and vice versa: they'd use rates competitively. Idk the proper game theory terminology for it anymore, but what comes to mind is "unstable equilibrium"

In this structure, all the incentives are aligned. Banks neatly separate out deposit customers from customers receiving credit, so you don't get pissed off at them if you get behind. The middleman wants to charge as much as possible, below the price where the bank is happy to take on reputation risk.

I also cannot 100% confirm this, but I think the case you're presenting is too simplistic. Ex. doesn't ring true to me there's no credit extended. Maybe they securitize it, but ex. AmEx is the one giving me up to $CREDIT_LINE to spend, unless, I've been missing it all along and the credit cards are opaquely funded by other institutions. (Wouldn't surprise me, older I get, the more I see things I've managed to miss for 36+ years)

Amex and Discover, as someone else pointed out, are their own banks too-so they are both running the payment network layer for their cards. Or they are at least at the final point; I have no idea whether there’s some blended payment layer/network that can also handle their cards, but since the article says that sometimes Visa cards aren’t processed over their network it stands to reason.

It’s still the “bank” (or credit union-a better choice, but I digress) issuing you a credit line; they’re also the ones on the hook if you don’t pay. Visa pretty much has nothing to gain by securitization, unless they want into the reinsurance industry. They just want to be paid any time their payment processing network is used or when a card with their logo on it is used.

>what do Visa and MasterCard even do?

They are the telephone wires for your calls, basically.

>I assume they have a few datacenter that do trillions of little lookups, but is that all there is to it?

They also blackmai-- sorry, convince merchants to accept their services for a fee because look how many people pay with Visa/Mastercard!

>What stops a big bank from doing whatever it is they do?

Nothing. See American Express and Discover which are both banks and payment networks because they like taking the entire pie (and presumably do a lot less blackmai-- sorry, convincing).

They have enough power to behave as a small form of government. They use this power to accept political lobbying (aka bribery, like to government) to enact regulation (like a government would) to ban businesses their lobbyists don't like.

This can very easily slaughter businesses. These companies need to be regulated as a utility instead of the insane shit that's happening now.

I hope more people start understanding that unregulated big business acting like unaccountable government is a problem.

Uh oh. You swung for the king, now you must pay! (With Visa or Mastercard, of course.)

They are the one of the biggest duopoly exist.

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