Visa and Mastercard don't keep much of interchange at all and never have.
The vast majority is paid to issuing banks to pay for loan origination, fraud and, most significantly, to return in the form of cash back or points.
These networks charge 0.2% for debit and 0.3% for credit in Europe as per regulation, you just don't get rewards there.
Kinda sounds like they're just going to squeeze issuing banks. Cash back and points cards in Canada (already pretty weak offerings compared to the US) are going to get further watered down. I've no real opinion on this, tbh.
Some napkin math that may not be right: Visa processed 11.6T in payment volume last year. Net revenue was $29B. Opex was $9.3B. Net income was $16B. That means their net revenue is about 0.25% and their net income is like 0.137% of transaction volume. This passes the smell test given their EU-mandated numbers. [1]
These numbers are not public, but the grapevine is that visa/mastercard keeps about a third of all interchange.
Credit card rewards are a regressive tax on the poor -- literally, only those like us here on HN with good credit can get 2% cashback on everything, the rest who pay with debit/cash effectively subsidise our 2% discount. I enjoy my 2% cashback, but really would rather see a world where, like the EU, interchange got slashed to 30bps and it all went away.
Take a look around the rest of the world -- Alipay in China is 55bps, TNG is Malaysia is 50, Pix in Brazil (I can't find concrete numbers, but seems to be around 22bps), etc. 2-300 bps is outrageous, we should demand better.
I don't know what's the solution here. I'm weary of government intervention in capping prices, but I'm not sure what's the alternative here -- force each card to be available over multiple networks and for them to bid the interchange per transaction? Durbin amendment style caps? I don't know. But I do know that the status quo cannot stand.
> I'm weary of government intervention in capping prices, but I'm not sure what's the alternative here
Instead of capping prices, you could simply require any fees to be paid by the cardholder. Combine that with a standard for payment processing so that lots of companies could compete for payment processing and fees would drop really fast.
If someone is using a POS terminal like Toast or Square, it should be trivial for them to support lots of new payment companies if they're all adhering to a standard. If consumers have to pay the fee, they're going to shop around for the lowest-fee card (just as many shop around for the highest-reward card now). You wouldn't need government caps.
You could tell stores "once you accept payments with the new system, the consumer is responsible for the fees." This would drop fees really fast - even for stores that didn't upgrade their credit card machines. If Walmart, Target, CVS, etc. all update their machines quickly, I'm going to find a card with a low fee. Then when I use that card at a non-upgraded shop, they have to pay the fee, but it's a much lower fee since I had shopped around for a low fee.
The issue right now is that the person choosing the card doesn't feel any of the pain. As the article notes, Visa (Canada) charges 1.25% for a regular consumer card or 2.08% for a premium card. I will pay with a premium card since it will give me nice rewards and I don't feel the additional 0.83% that the store has to pay. If I did have to feel it, I would make different decisions.
If you're looking to change behavior, align people's incentives. Another commenter said that they're capped at 0.3% in Europe. Consumers might hate the idea of paying 0.3% additional, but I think credit card companies would drop below that cap if consumers had to pay it. I think they'd look to make it up on interest or other things. As you note, credit cards can come with 2% rewards so they're essentially giving you the whole interchange fee back already. Make consumers shop around for the lowest fee cards.
The problem is that stores need to take the cards that consumers have with little option to forgo the fees. If Bank of America had a no-fee card while Chase charged 1.5%, consumers would move to BofA if they felt the fee.
Visa & Mastercard do not keep any of the interchange fee. It all goes to the issuer of the card. Visa & MC charge "scheme fees" which are much lower (except for cross-border txns).
You're correct about Pix, it averages at 0.22% [1]. It's free for personal transactions and some card/POS machines have zeroed the fees when you scan a Pix QR code to pay at small shops. It's currently the most popular payment method in Brazil (credit card is second) [2]. It's slower than just tapping my Apple Watch to pay, but tap-to-pay with Pix is in development and I can't wait for it. Installments are also coming. Our Banco Central is really pushing it and the big banks are not liking it, at all. Good.
A nice side-effect of it all is that many credit cards are offering great rewards without any annual fee. I get year-round access to VIP lounges at any airport here, car/travel insurance AND cashback/miles for $0, it's a very different scenario from say 5 years ago.
You are talking about fractions of a percent, for transactions where banks in aggregate take some risk, while Google and Apple keep their 30.000/100.000 ransom on all transactions...
Studies show you buy more with a credit card than cash. You think you're saving 1-3% but you would easily save that with slightly more conservative spending.
It's also worth mentioning the real business is analyzing the consumer data you give them for pennies.
Still don't understand why US is so obsessed with credit cards. Debit is much more easy and straight forward, it's the standard in EU. Most of us only have cc to purchase stuff from US sites. Why such a complicated solution? Looks like a bank product.
> Credit card rewards are a regressive tax on the poor
Maybe credit card loyalty systems are specifically, but if you want to make comments about the entire system of credit cards then you should look at the entire system of credit cards to figure out who’s subsidising who. On the other side of credit card rewards the fact that revenue from high spenders subsidises credit account defaults. If you chose to only focus on that single element of the system you could just as reasonably say that credit cards are a progressive tax on the rich.
Yes, I'd like to see a world without silly credit card cashbacks, too. And ideally they'd slay that beast by removing regulations, not by piling more on top.
> I don't know what's the solution here. I'm weary of government intervention in capping prices, but I'm not sure what's the alternative here -- force each card to be available over multiple networks and for them to bid the interchange per transaction? Durbin amendment style caps? I don't know. But I do know that the status quo cannot stand.
Perhaps make it easier for new payment providers to enter the market? Here in Asia we have lots of alternatives popping up (like Grab pay). And merchants are happy to support them, because they typically charge lower fees than Visa and Mastercard.
I think there is a strong case for credit card fees to be zero for all involved, and the government paying some fixed amount for the running of basic payment processing systems.
Just like the government pays to produce bank notes and coins today.
They charge more yes, but make of the credit cards in the US also provide a lot more: travel insurance, Trip interruption insurance, purchase protection, extended warranty, etc.
India could be a good model here. Basically, the likes of Venmo/Zelle have replaced everything. They are not allowed to charge a transaction fee (I’m pretty sure…and if they are, it’s set very low), and they are required to work across platforms (so a Venmo user should be able to pay a Zelle user directly without having to download Zelle).
Why should there even be something like cash back or points programs? These programs are taking money from the merchant and giving it to the end-consumer, while the middle-men keep a cut.
I believe a world without these programs (or as you said “watered-down” versions) is more fair for the merchant and others shoppers not using such cards.
Especially if the merchant is not allowed to charge the end-consumer with this added fee.
The programs don’t take money from the merchants - they raise their prices to cover the fees.
The reality is that they exist largely because the people earning the points aren’t paying the bills. Most CC Rewards programs target the professional class of travelers - people who travel for work where the employer pays the bill. It’s essentially taking from consulting companies’ clients to give to the employees.
Amex doesn't count - they run their own system end to end and charge retailers stupidly high fees. That's why most retailers don't take them.
As for rewards on MC and Visa, which card are you on? In my experience, either the rewards are very small, or they are for specific retailers only, where the Bank has done a deal directly with the merchant. Occasionally they are a loss leader for the bank, working on the principle that you are
The article is wrong about the UK capping interchange fees. Removing the EU cap was one of the first EU rules that the government decided to abolish after Brexit. At one point it meant you weren't going to be able to use a Visa card with Amazon, you'd have to switch to Mastercard.
Fintechs seem to do just fine in Europe, so I would suggest this is a pretty myopic take. Have you seen Adyen (Dutch, $ADYEY)? PayPal? Like it or not those companies provide value to their merchants so they're able to charge for their services. That isn't going to change with lower interchange.
For anyone reading this thread and not knowing what the terms being tossed around mean, but curious, there was recently a thread here [0] with some resources that you can check out to understand the space a bit. I devoured two of the three books [1], [2] in about 4 days total, they're really easy to get through, definitely recommend.
Looks like this is an agreement between Visa/Mastercard and banks with the Canadian Federal government to lower credit card transaction fees for small businesses.
Applies to annual charges below $300K/$175K CAD for Visa/Mastercard.
They still will charge higher fees to large businesses. "As part of these new agreements with Visa and Mastercard, Canada’s large banks have agreed to protect Canadians’ reward points."
Notably, this seems to be a partial extension to a 2018 agreement with Visa, Mastercard and Amex to lower fees to 1.40% for five years for "small and medium sized businesses": https://www.canada.ca/en/department-finance/news/2018/08/new... The prior agreement was for medium businesses with credit sales under $5 million CAD and small businesses with sales under $1 million CAD.
The 2018 agreement claimed that it would save businesses "$250 million [CAD] per year", while the 2023 agreement claims "$1 billion [CAD] over five years". Since less companies are covered in the 2023 agreement, I assume rates will be going up for some businesses that no longer qualify under the voluntary agreement.
> That means on a $100 purchase, if a customer pays with a credit card, the retailer will get at least $99, where they previously would have kept as little as $97 in some cases.
I absolutely love the heavy lifting “as little as” is doing here.
> Businesses with annual Visa sales volume below $300,000 will qualify for the lower fee, as will those who do less than $175,000 from MasterCard.
That’s revenue, not profit. So your business basically needs to be casual or failing to get the lower rate.
What I often find surprising is people or shops complaining about the fees, and then trying to use cash everywhere. Dealing with cash is so incredible expensive, just because you don't see the fee doesn't mean it's not there.
Like my parents had to deal a lot with cash before. That meant thataafter every shift, you had to spend time counting it, and whole processes around that. Safe storage, extra security, extra threat of robbing. Then have to spend time taking the money to a bank, and purchasing rolls of change.
> I absolutely love the heavy lifting “as little as” is doing here.
My understanding is that grocery store margins are typically between 1% and 3%, so even "small" shifts in the interchange rate can have massive impacts on their bottom line.
Not to mention parent poster neglected to take the wider picture into account.
That $2 dollar difference comes out to $20 over ten transactions, $200 over a hundred transactions, $2000 over a thousand transactions, and so forth. That is a huge difference.
I would assume that grocery store margins are that low because they price competitively, so this will just drop prices by a few % and the grocery store margins will stay the same.
I bet this is mostly so that very small business who might have switched to Venmo or some other P2P payment system (Interac in Canada?) stay with Visa/MC
I love how tech margins are so insane we think going from 3% to 1% isn't that much, meanwhile entire industries built on the margins that fit in said gap...
> where they previously would have kept as little as $97 in some cases
Or lower. A number of years ago I worked in an Apple reseller, and there were Apple products that wouldn't break even when the customer paid with AMEX, and that's only based on margin/card fees, not counting all other business costs.
IIRC AMEX could reach as high as 5% and Apple's wholesale discount could be as low as 5%. Possibly the worst two companies to be stuck between as a retailer!
The last time I checked, most UK banks add 2.75% to the Visa/MC wholesale rate.
Occasionally, a bank will create an account whose debit card has 0% FX loading, to help gain customers. Then, once they've gained a bunch of customers, they'll change the terms of the account.
The market is still ripe for disruption, this is a defensive move based on fear and the eventually that the era of free money for these players is coming to an end. These middle man are going to be cut out sooner than even they expected, since every smart phone is a PoS device e.g., the move with iPhones in Australia https://www.smartcompany.com.au/industries/retail/apple-ipho...
It's already started, unsurprisingly in countries like China, India or Brazil, that didn't have widespread card acceptance and could push mobile payments faster.
The EU has more or less given up on creating a new competing card payment scheme (EPI) and wants to support mobile payments instead. The EMPSA has already started federating a few domestic networks, and should also eventually be interoperable with AliPay, WeChat, UPI and so on.
Let's be 100% clear on this - nobody is forcing the merchants into accepting credit cards. In fact, many don't. They do fine as cash-only businesses.
The hard economic reality is that accepting credit cards increases your sales, presumably enough to make the interchange fees worth it.
At last, Afterpay, Affirm etc. charge 600 bps (6%) interchange for their 4 split payments offer. Again, no one forces merchants to accept these payment methods, but the ones that do clearly see the benefit to the top line resulting from higher conversions.
Even a flat fee would be better. Cost doesn't really increase with higher dollar transactions; cash doesn't physically move just because a card was used.
Readit News
The vast majority is paid to issuing banks to pay for loan origination, fraud and, most significantly, to return in the form of cash back or points.
These networks charge 0.2% for debit and 0.3% for credit in Europe as per regulation, you just don't get rewards there.
Kinda sounds like they're just going to squeeze issuing banks. Cash back and points cards in Canada (already pretty weak offerings compared to the US) are going to get further watered down. I've no real opinion on this, tbh.
Some napkin math that may not be right: Visa processed 11.6T in payment volume last year. Net revenue was $29B. Opex was $9.3B. Net income was $16B. That means their net revenue is about 0.25% and their net income is like 0.137% of transaction volume. This passes the smell test given their EU-mandated numbers. [1]
[1] https://annualreport.visa.com/financials/default.aspx
Credit card rewards are a regressive tax on the poor -- literally, only those like us here on HN with good credit can get 2% cashback on everything, the rest who pay with debit/cash effectively subsidise our 2% discount. I enjoy my 2% cashback, but really would rather see a world where, like the EU, interchange got slashed to 30bps and it all went away.
Take a look around the rest of the world -- Alipay in China is 55bps, TNG is Malaysia is 50, Pix in Brazil (I can't find concrete numbers, but seems to be around 22bps), etc. 2-300 bps is outrageous, we should demand better.
I don't know what's the solution here. I'm weary of government intervention in capping prices, but I'm not sure what's the alternative here -- force each card to be available over multiple networks and for them to bid the interchange per transaction? Durbin amendment style caps? I don't know. But I do know that the status quo cannot stand.
Edit: see the classic Boston Fed paper https://www.bostonfed.org/publications/public-policy-discuss... for a more through explanation of my point
Instead of capping prices, you could simply require any fees to be paid by the cardholder. Combine that with a standard for payment processing so that lots of companies could compete for payment processing and fees would drop really fast.
If someone is using a POS terminal like Toast or Square, it should be trivial for them to support lots of new payment companies if they're all adhering to a standard. If consumers have to pay the fee, they're going to shop around for the lowest-fee card (just as many shop around for the highest-reward card now). You wouldn't need government caps.
You could tell stores "once you accept payments with the new system, the consumer is responsible for the fees." This would drop fees really fast - even for stores that didn't upgrade their credit card machines. If Walmart, Target, CVS, etc. all update their machines quickly, I'm going to find a card with a low fee. Then when I use that card at a non-upgraded shop, they have to pay the fee, but it's a much lower fee since I had shopped around for a low fee.
The issue right now is that the person choosing the card doesn't feel any of the pain. As the article notes, Visa (Canada) charges 1.25% for a regular consumer card or 2.08% for a premium card. I will pay with a premium card since it will give me nice rewards and I don't feel the additional 0.83% that the store has to pay. If I did have to feel it, I would make different decisions.
If you're looking to change behavior, align people's incentives. Another commenter said that they're capped at 0.3% in Europe. Consumers might hate the idea of paying 0.3% additional, but I think credit card companies would drop below that cap if consumers had to pay it. I think they'd look to make it up on interest or other things. As you note, credit cards can come with 2% rewards so they're essentially giving you the whole interchange fee back already. Make consumers shop around for the lowest fee cards.
The problem is that stores need to take the cards that consumers have with little option to forgo the fees. If Bank of America had a no-fee card while Chase charged 1.5%, consumers would move to BofA if they felt the fee.
Interchange is public information: https://usa.visa.com/dam/VCOM/download/merchants/visa-usa-in...
A nice side-effect of it all is that many credit cards are offering great rewards without any annual fee. I get year-round access to VIP lounges at any airport here, car/travel insurance AND cashback/miles for $0, it's a very different scenario from say 5 years ago.
[1] https://www.infomoney.com.br/minhas-financas/pix-e-mais-bara...
[2] https://febrabantech.febraban.org.br/temas/meios-de-pagament...
It's also worth mentioning the real business is analyzing the consumer data you give them for pennies.
I will say the Durbin exemption for banks with under $10B in assets is pretty silly.
Maybe credit card loyalty systems are specifically, but if you want to make comments about the entire system of credit cards then you should look at the entire system of credit cards to figure out who’s subsidising who. On the other side of credit card rewards the fact that revenue from high spenders subsidises credit account defaults. If you chose to only focus on that single element of the system you could just as reasonably say that credit cards are a progressive tax on the rich.
> I don't know what's the solution here. I'm weary of government intervention in capping prices, but I'm not sure what's the alternative here -- force each card to be available over multiple networks and for them to bid the interchange per transaction? Durbin amendment style caps? I don't know. But I do know that the status quo cannot stand.
Perhaps make it easier for new payment providers to enter the market? Here in Asia we have lots of alternatives popping up (like Grab pay). And merchants are happy to support them, because they typically charge lower fees than Visa and Mastercard.
Just like the government pays to produce bank notes and coins today.
I believe a world without these programs (or as you said “watered-down” versions) is more fair for the merchant and others shoppers not using such cards. Especially if the merchant is not allowed to charge the end-consumer with this added fee.
The reality is that they exist largely because the people earning the points aren’t paying the bills. Most CC Rewards programs target the professional class of travelers - people who travel for work where the employer pays the bill. It’s essentially taking from consulting companies’ clients to give to the employees.
This, people, is what a duopoly looks like.
As for rewards on MC and Visa, which card are you on? In my experience, either the rewards are very small, or they are for specific retailers only, where the Bank has done a deal directly with the merchant. Occasionally they are a loss leader for the bank, working on the principle that you are
The article is wrong about the UK capping interchange fees. Removing the EU cap was one of the first EU rules that the government decided to abolish after Brexit. At one point it meant you weren't going to be able to use a Visa card with Amazon, you'd have to switch to Mastercard.
[0] https://news.ycombinator.com/item?id=35714145
[1] https://www.amazon.com/Field-Guide-Global-Payments/dp/057829...
[2] https://www.amazon.com/Anatomy-Swipe-Making-Money-Move/dp/16...
https://tebi.co/blog/of-cards-and-costs/
The government's press release is here: https://www.canada.ca/en/department-finance/news/2023/05/gov...
Applies to annual charges below $300K/$175K CAD for Visa/Mastercard.
They still will charge higher fees to large businesses. "As part of these new agreements with Visa and Mastercard, Canada’s large banks have agreed to protect Canadians’ reward points."
Notably, this seems to be a partial extension to a 2018 agreement with Visa, Mastercard and Amex to lower fees to 1.40% for five years for "small and medium sized businesses": https://www.canada.ca/en/department-finance/news/2018/08/new... The prior agreement was for medium businesses with credit sales under $5 million CAD and small businesses with sales under $1 million CAD.
The 2018 agreement claimed that it would save businesses "$250 million [CAD] per year", while the 2023 agreement claims "$1 billion [CAD] over five years". Since less companies are covered in the 2023 agreement, I assume rates will be going up for some businesses that no longer qualify under the voluntary agreement.
I absolutely love the heavy lifting “as little as” is doing here.
> Businesses with annual Visa sales volume below $300,000 will qualify for the lower fee, as will those who do less than $175,000 from MasterCard.
That’s revenue, not profit. So your business basically needs to be casual or failing to get the lower rate.
Like my parents had to deal a lot with cash before. That meant thataafter every shift, you had to spend time counting it, and whole processes around that. Safe storage, extra security, extra threat of robbing. Then have to spend time taking the money to a bank, and purchasing rolls of change.
- Storage and security doesn't have to be expensive if you're smart about it.
- You can set your prices so that you don't keep running out of a certain coin.
- You are not obliged to take the money to the bank.
It really is not "incredibly expensive" to deal with cash.
My understanding is that grocery store margins are typically between 1% and 3%, so even "small" shifts in the interchange rate can have massive impacts on their bottom line.
That $2 dollar difference comes out to $20 over ten transactions, $200 over a hundred transactions, $2000 over a thousand transactions, and so forth. That is a huge difference.
Or in a positive version - it may be just starting up, so every $ matters.
Or lower. A number of years ago I worked in an Apple reseller, and there were Apple products that wouldn't break even when the customer paid with AMEX, and that's only based on margin/card fees, not counting all other business costs.
IIRC AMEX could reach as high as 5% and Apple's wholesale discount could be as low as 5%. Possibly the worst two companies to be stuck between as a retailer!
Occasionally, a bank will create an account whose debit card has 0% FX loading, to help gain customers. Then, once they've gained a bunch of customers, they'll change the terms of the account.
Deleted Comment
The EU has more or less given up on creating a new competing card payment scheme (EPI) and wants to support mobile payments instead. The EMPSA has already started federating a few domestic networks, and should also eventually be interoperable with AliPay, WeChat, UPI and so on.
This is the single greatest open scam in the world.
The hard economic reality is that accepting credit cards increases your sales, presumably enough to make the interchange fees worth it.
At last, Afterpay, Affirm etc. charge 600 bps (6%) interchange for their 4 split payments offer. Again, no one forces merchants to accept these payment methods, but the ones that do clearly see the benefit to the top line resulting from higher conversions.
Taxes? Do you pay a toll to use each and every road for your car?
Do something like what India has done.
You’re paying for a network that’s lost value. You’re paying for a brand at this point. It’s a scam.