Apple is propping up a fundamentally broken payments industry(tomblomfield.com)
tomblomfield.com
Apple is propping up a fundamentally broken payments industry
http://tomblomfield.com/post/97304410500/apple-is-propping-up-a-fundamentally-broken-payments
52 comments
Not necessarily terrible for cardholders, in competitive markets. Comcast won't lower their rates to account for the lower credit card fees but all the grocery store chains probably will, since they have to compete with each other.
I've thought the ideal (from a fairness point of view, not "let's keep the banks' profit intact" point of view) model would be to have cut fees significantly (in the 0.5% area), eliminate rewards (again, merchants in competitive markets will lower prices accordingly), and eliminate the grace period on credit cards. This will mean debit cards would be used day-to-day by most people, and credit cards only when the financing is actually required (not as it is now where many, including myself, use credit cards for everything due to the rewards and pay in full). I prefer this to the current system of merchants paying inflated fees, which are passed onto us in higher prices, and rebated back to us by credit card companies (after taking their cut of course).
I've thought the ideal (from a fairness point of view, not "let's keep the banks' profit intact" point of view) model would be to have cut fees significantly (in the 0.5% area), eliminate rewards (again, merchants in competitive markets will lower prices accordingly), and eliminate the grace period on credit cards. This will mean debit cards would be used day-to-day by most people, and credit cards only when the financing is actually required (not as it is now where many, including myself, use credit cards for everything due to the rewards and pay in full). I prefer this to the current system of merchants paying inflated fees, which are passed onto us in higher prices, and rebated back to us by credit card companies (after taking their cut of course).
I don't think tom is advocating for DD, in this instance. Particularly since direct debit isn't really suitable for POS transactions.
Credit cards are fundamentally a 1970s business model, based on tech that paid off their sunk costs decades ago, but the barriers to entry are so high they're impossible to overcome right now.
Given you can check balances and make payments in (near)real time, at least in Europe, there's no reason to continue to use Visa/MC, other than barriers to entry. You could check balance at POS over the internet and pay from your merchant account, recovering payment within an hour or so via faster payment. Frictionless credit isn't the same as unrestricted or unregulated credit - it's about removing the tether between one bank and one cRd - disintermediation of the bank. Why can't I have a credit card linked to zopa? Or someone else, or even, within an overall limit agreed by an umbrella provider, a number of different providers. That'd be cool, and would drive channel providers to compete on costs of service delivery (the 2-3% per transaction), as well as on cost of credit. Visa and MasterCard are an absolute racket, and one of my biggest grumps is that PayPal became just like them, if not more expensive.
Credit cards are fundamentally a 1970s business model, based on tech that paid off their sunk costs decades ago, but the barriers to entry are so high they're impossible to overcome right now.
Given you can check balances and make payments in (near)real time, at least in Europe, there's no reason to continue to use Visa/MC, other than barriers to entry. You could check balance at POS over the internet and pay from your merchant account, recovering payment within an hour or so via faster payment. Frictionless credit isn't the same as unrestricted or unregulated credit - it's about removing the tether between one bank and one cRd - disintermediation of the bank. Why can't I have a credit card linked to zopa? Or someone else, or even, within an overall limit agreed by an umbrella provider, a number of different providers. That'd be cool, and would drive channel providers to compete on costs of service delivery (the 2-3% per transaction), as well as on cost of credit. Visa and MasterCard are an absolute racket, and one of my biggest grumps is that PayPal became just like them, if not more expensive.
How is direct debit not really suitable for POS transactions? It's been pretty much universal in Canada for over 20 years.
Direct debit is the UK name for what I think are generally called Automated Bank Drafts (edit: automated clearing house/ach) in the US. (Apols if different in canada, not at all familiar with that jurisdiction.) fundamental problem with DD for POS is that if set up on the same day it's not pulled for a while, and can take up to a week to arrive - it's typically used for paying utilities and the like, regular bills sort of thing, or subscriptions (although that's changing now).
In Canada we have both the traditional direct debit (where you provide online or written authority to a company to deposit/withdraw directly), but also Interac Direct Payment, which I suppose is network similar to Maestro or Girocard, except all/most payments clear same-day, since it was an extension of the ATM network and PIN pads were installed across every merchant in the country.
I believe the vast majority of retail transactions in Canada use Interact Direct Payment (over physical cash or credit cards).
https://en.wikipedia.org/wiki/Interac
I believe the vast majority of retail transactions in Canada use Interact Direct Payment (over physical cash or credit cards).
https://en.wikipedia.org/wiki/Interac
Cheers, that's really interesting!
You've missed another big advantage of credit cards in most places — they almost always come with more legal protection. If they're stolen, there are limits as to how much the card owner is liable.
That wouldn't particularly change under the system that I'm proposing, idt. (on the back of a fag packet admittedly)- legal protection and the payments mechanism aren't intrinsically linked - most of the consumer protection with cc came long after the cards had been introduced. If you had an overall limit then the thief couldn't go over that, and a similar mechanism could/would exist - it'd probably be a product differentiation, in fact.
My understanding is that the protections that come with credit cards are a natural result of contract law. When you buy something with a credit card Visa pays for it and you agree to pay them back. When someone buys something with your stolen card Visa pays for it but you did not agree to pay them back, so there is no contract and no debt. Someone stole Visa's money, not yours.
Isn't one incentive for using a credit card that it has better protections from fraud, etc? If my credit card # is stolen, I have a 30 day window to report fraud instead of paying, whereas with a debit card, the money is gone straight from my account.
No reason a competitor couldn't offer the same level of protection.
The article makes very little sense.
First, not every payment requires credit cards or a need for financing.
Second, advocating the idea of cheap and frictionless credit is dubious at best; subprime loans didn't exactly end well.
Last but not least, it's unclear what you're advocating for instead of what Apple did.
Paypal, which you mention towards the end, does everything through cards and bank accounts, with the additional twist of you carrying a balance with Paypal. But they're a bank for all intents and purposes. And regulated as such, at least in Europe. Apple isn't in that business, and that's a good thing. Remember how GE or US car businesses ended up in the wake of the subprime crisis.
First, not every payment requires credit cards or a need for financing.
Second, advocating the idea of cheap and frictionless credit is dubious at best; subprime loans didn't exactly end well.
Last but not least, it's unclear what you're advocating for instead of what Apple did.
Paypal, which you mention towards the end, does everything through cards and bank accounts, with the additional twist of you carrying a balance with Paypal. But they're a bank for all intents and purposes. And regulated as such, at least in Europe. Apple isn't in that business, and that's a good thing. Remember how GE or US car businesses ended up in the wake of the subprime crisis.
To be clear - I'm arguing for frictionless payments, without the Visa or Mastercard tax.
I'm separately arguing for a competitive credit market, freed from the banks.
People are confusing the issue of multiple "virtualised credit cards" leading to more competition in the consumer credit product markets. It seems like a backwards way of thinking.
I'm separately arguing for a competitive credit market, freed from the banks.
People are confusing the issue of multiple "virtualised credit cards" leading to more competition in the consumer credit product markets. It seems like a backwards way of thinking.
If you think about this in minimal terms, you have a merchant(pos), a purchaser/consumer, and an intermediary (though this would not be necessary for direct non-credit payments, like non-escrowed bitcoin for example). In an ideal world, a pos could publish a message like "transaction #N initiated for $X" to some "payment bus". Then the consumer would have to then publish a message like "User $Me agrees to pay $X for transaction #N".
If this were something like bitcoin, the payment could be wallet to wallet. If it were credit, some processor would have to know that they process transaction for "$Me" and find transaction #N to settle it back with the POS.
So the question really comes down to how you would implement this "payment bus". It seems like it could theoretically be something like the stock market. In fact, credit companies could be market makers and offering to settle transactions for consumers at different rates. This would have to be fast enough to be usable, but it seems like that issue is solvable with HFT solutions. But how would you get existing companies who make their own custom and profitable buses to all agree to use one generic bus and move the money making to the credit side?
If this were something like bitcoin, the payment could be wallet to wallet. If it were credit, some processor would have to know that they process transaction for "$Me" and find transaction #N to settle it back with the POS.
So the question really comes down to how you would implement this "payment bus". It seems like it could theoretically be something like the stock market. In fact, credit companies could be market makers and offering to settle transactions for consumers at different rates. This would have to be fast enough to be usable, but it seems like that issue is solvable with HFT solutions. But how would you get existing companies who make their own custom and profitable buses to all agree to use one generic bus and move the money making to the credit side?
Is there anything anout Apple Pay that prevents the underlying banking infrastructure to be replaced with another model while keeping the same experience?
A credit card is just a token that represents an intermediary that both sides trust to handle the payment. Apple Pay simply abstracts that and improves the user experience, while reducing the leakage of informaition to incidental observers.
A credit card is just a token that represents an intermediary that both sides trust to handle the payment. Apple Pay simply abstracts that and improves the user experience, while reducing the leakage of informaition to incidental observers.
Visa/MC take very little. The bulk of the fees go to card issuers who would hate to see them dwindle. And this fee revenue now mainly goes to support rewards programs which cardholders love. At least, in the USA.
> Freed from the banks
Replaced by what, the likes of PayPal? No thanks.
Just because the US banking system and Wall Street behaves like some spoiled child that shits in the kitchen and is given an award for doing so, doesn't mean the solution is an even less regulated company that operates like a bank, but isn't bound by the same rules.
Replaced by what, the likes of PayPal? No thanks.
Just because the US banking system and Wall Street behaves like some spoiled child that shits in the kitchen and is given an award for doing so, doesn't mean the solution is an even less regulated company that operates like a bank, but isn't bound by the same rules.
> frictionless payments
Oh, nice. May I ask who bears the costs and takes the credit risk? When you pay through an intermediary such as a bank, a card issuer or PayPal, all sorts of costs and risks creep in, due to infrastructure costs, chargebacks, fraud, etc. Who takes care of the bill?
Oh, nice. May I ask who bears the costs and takes the credit risk? When you pay through an intermediary such as a bank, a card issuer or PayPal, all sorts of costs and risks creep in, due to infrastructure costs, chargebacks, fraud, etc. Who takes care of the bill?
Doesn't use of Apple Pay give banks the option of routing the money/debt thru other means? Chase just announced Pay support, and has been pushing "direct pay" (Chase account to Chase account) for a few years - might they observe that an Apple Pay event is in fact going from (say) Chase account to Chase account via debit "card", so just make the transaction internally and manage to cut Visa et al out of the transaction entirely? And, as such, increasingly avoid the "fundamentally broken payments system"?
I'm not aware of this, but if I were to guess - Chase has a Chase card which they use on a Chase terminal? The terminal would be able to acknowledge this and make the payment without going through any payment network. Most likely, on credit cards, visa/mc/amex would not agree to this on new smart cards. They could be doign it automatically on the terminals without any real interact with the card (mag stripe only?), but with a contactless EMV transaction, I believe it wouldn't be possible since the terminal needs to interact with an app on the virtual card.
Think about a smart card like a phone - you can install multiple apps on it. Credit Card companies most likely won't allow a financial institute to have their own app which will supersede the credit card app when used at the financial institutes terminals. It's possible, in Canada we have Interac and Visa on one card, but not quite the same thing.
Think about a smart card like a phone - you can install multiple apps on it. Credit Card companies most likely won't allow a financial institute to have their own app which will supersede the credit card app when used at the financial institutes terminals. It's possible, in Canada we have Interac and Visa on one card, but not quite the same thing.
I doubt Apple will make any money off of transactions, can someone prove me wrong? They aren't part of the exchange, so they wouldn't have any way to collect fees. I don't know where the author thinks there would be "extra costs" - payment technology has always been something the financial institutes absorbed. In this case, I imagine Apple incurred the cost of developing the app and the payment networks will have an ongoing cost to maintain their Token Service Provider.
Apple Pay is really just an implementation of the contactless schemes (I say schemes because mastercard, visa and amex have their own flavours which preceded EMV's specs) using EMV tokenization, as the author mentions.
I agree that the payment system and requiring a third and fourth party can eventually be eliminated, but how can we expect the financial institutes to replace credit cards when they have no control over the payment networks?
Edit: I know a few years ago there was a new group created by merchants to develop a "payment card" which would be free of charges. Seeing how big merchants are, it would only make sense that they collaborate to develop a free payment technology which works with the financial institutes.
Apple Pay is really just an implementation of the contactless schemes (I say schemes because mastercard, visa and amex have their own flavours which preceded EMV's specs) using EMV tokenization, as the author mentions.
I agree that the payment system and requiring a third and fourth party can eventually be eliminated, but how can we expect the financial institutes to replace credit cards when they have no control over the payment networks?
Edit: I know a few years ago there was a new group created by merchants to develop a "payment card" which would be free of charges. Seeing how big merchants are, it would only make sense that they collaborate to develop a free payment technology which works with the financial institutes.
> I doubt Apple will make any money off of transactions, can someone prove me wrong?
It was reported by Bloomberg: http://www.bloomberg.com/news/2014-09-10/apple-said-to-reap-... (basically, in exchange for assuming some of the fraud risk).
It was reported by Bloomberg: http://www.bloomberg.com/news/2014-09-10/apple-said-to-reap-... (basically, in exchange for assuming some of the fraud risk).
Very interesting! I wonder how they will record a transaction - they said they weren't going to keep any information, but they'll need to keep a ledger somewhere of all transactions that occur on their phones.
Just Apple. Not anybody else trying to integrate with payments companies. Apple only is responsible for this.
Apple is responsible for this entire solution, is that what you're saying?
If so, that is a straight up lie. Apple worked with Clover/First Data to develop their payment app. The rest of the back-end technology has been years in progress, especially with the likes of Google and other failed attempts of mobile payment endeavors, mainly due to the lack of a secure element that they could freely open to customers to facilitate the EMV transaction. However, Google developed HCE to get over this hurdle and keep the telecommunications companies out of it completely. Apple has some impeccable timing with the release of Apple Pay, but also should be given some credit to tie all the loose ends and bring it to fruition.
If so, that is a straight up lie. Apple worked with Clover/First Data to develop their payment app. The rest of the back-end technology has been years in progress, especially with the likes of Google and other failed attempts of mobile payment endeavors, mainly due to the lack of a secure element that they could freely open to customers to facilitate the EMV transaction. However, Google developed HCE to get over this hurdle and keep the telecommunications companies out of it completely. Apple has some impeccable timing with the release of Apple Pay, but also should be given some credit to tie all the loose ends and bring it to fruition.
Embrace, extend, and extinguish.
Step one requires working with the industry.
Step one requires working with the industry.
I thought that the big issue with the current system is that every transaction uses the whole set of identifiable info (name, cc number, exp date, etc). Credit cards with chips solve the issue, but in US it would take costly upgrades across the whole ecosystem.
Apple Pay comes as a layer on top the existing system, bringing primarily the same level of security as the chip-based cards.
Of course, it is a solution that assumes you have an iPhone 6, which is not a cheap and accessible thing for everybody, and that the merchant has the reader. The large/high-end merchants will have no issues moving to NFC payments and it will make Apple Pay a viable solution.
Apple Pay comes as a layer on top the existing system, bringing primarily the same level of security as the chip-based cards.
Of course, it is a solution that assumes you have an iPhone 6, which is not a cheap and accessible thing for everybody, and that the merchant has the reader. The large/high-end merchants will have no issues moving to NFC payments and it will make Apple Pay a viable solution.
> and that the merchant has the reader.
Starting next October (2015), the liability of fraud will shift from the issuing bank to the merchant/card issuer. So Apple is ripe to take advantage of this because most (I assume) merchants will want customers to use Credit+chip or Mobile NFC because they will lessen the risk of someone committing fraud with a stolen CC. This will mean upgrades across the nation. Even card issuers like Walmart will want all its stores to upgrade.
Starting next October (2015), the liability of fraud will shift from the issuing bank to the merchant/card issuer. So Apple is ripe to take advantage of this because most (I assume) merchants will want customers to use Credit+chip or Mobile NFC because they will lessen the risk of someone committing fraud with a stolen CC. This will mean upgrades across the nation. Even card issuers like Walmart will want all its stores to upgrade.
The backend rails are intended to be agnostic. Sure, Apple's front-end (secure store, touch id, etc) is unique, but the same tokenization process that Apple Pay will use will be available to Google and others.
"merchants are paying around 2-3% of every transaction as a tax levied by those incumbents, who add little value in return."
How about fraud protection (on both ends)? I'm old enough to remember people being afraid to use credit cards online. It would be great if things like Dwolla were more ubiquitous, but until then...
How about fraud protection (on both ends)? I'm old enough to remember people being afraid to use credit cards online. It would be great if things like Dwolla were more ubiquitous, but until then...
This is the key issue. I often hear people outside of the payments industry suggesting that interchange is broken, and I explain time and again that the amount of money they think is in play is not correct. Take a look at http://www.cardfellow.com/blog/credit-card-processing-fees/
If you look through that, you'll see that the typical fees assessed by Visa and Mastercard are on the order of 25 basis points (a quarter of a percent). The rest of that 2-3% is going to price transaction risk (in both directions). No matter what you do in technology, if you're not talking about a better risk management system, the most you're going to be able to reduce interchange is about a quarter of a percent. It may not be obvious if you don't understand finances, but Apple is actually targeting the risk issue.
If you look through that, you'll see that the typical fees assessed by Visa and Mastercard are on the order of 25 basis points (a quarter of a percent). The rest of that 2-3% is going to price transaction risk (in both directions). No matter what you do in technology, if you're not talking about a better risk management system, the most you're going to be able to reduce interchange is about a quarter of a percent. It may not be obvious if you don't understand finances, but Apple is actually targeting the risk issue.
You're correct that Visa/MC take a very small portion but wrong that most of the rest goes to txn risk. In fact, much of it goes to support loyalty/rewards programs (which can easily cost issuers more than 1%).
I didn't go into rewards programs because that's an entirely more complex issue. In fact, rewards programs are a business hack upon the risk model.
At some point, someone noticed that they were accepting all of this risk money per transaction, and that they could make a tidy profit if they took only the low risk users, so that they could make profit on the risk model. Well, how do you attract the low risk users? You offer them a cut of the transaction.
Over time, as you pull more and more low risk users into the rewards pool [edit for clarity: there are only high risk users in the default pool], the cost of doing business as usual goes up, and you have to start raising your risk charges. Well, higher risk charges means more money available for rewards... and so on and so forth. Durbin should help to restore balance, but it will take some time.
At some point, someone noticed that they were accepting all of this risk money per transaction, and that they could make a tidy profit if they took only the low risk users, so that they could make profit on the risk model. Well, how do you attract the low risk users? You offer them a cut of the transaction.
Over time, as you pull more and more low risk users into the rewards pool [edit for clarity: there are only high risk users in the default pool], the cost of doing business as usual goes up, and you have to start raising your risk charges. Well, higher risk charges means more money available for rewards... and so on and so forth. Durbin should help to restore balance, but it will take some time.
The credit card companies don't do fraud protection - they practically encourage it with how little of checks they provide.
When customers issue a chargeback, they almost always side with the customer, leaving with the merchant with very little recourse. As a merchant, you just lose the money.
When customers issue a chargeback, they almost always side with the customer, leaving with the merchant with very little recourse. As a merchant, you just lose the money.
How about fraud protection (on both ends)?
Exactly. There's a reason I prefer using a credit card over directly depositing cash in a company's bank account.
It's all too easy to forget that fraudulent sellers are just as much of a problem as fraudulent buyers.
Exactly. There's a reason I prefer using a credit card over directly depositing cash in a company's bank account.
It's all too easy to forget that fraudulent sellers are just as much of a problem as fraudulent buyers.
I think another perspective is that credit card support is a good back compatible solution. If people are using their devices to store payment information then it's not very far fetched to imagine other types of wallets/credit replacing visa/mastercard/etc.
Using an iPhone makes me pay for apps that are free in the android ecosystem.. What's the inventive for me to start paying using an known expensive ecosystem?
At some point the credit card industry is going to get disrupted. It's so broken + they take on so little risk that it's just a matter of time.
My belief is that bitcoin coupled with the right payment experience will disrupt the industry at some point. I would highly suggest reading Marc Andreessen view on the subject: http://blog.pmarca.com/2014/01/22/why-bitcoin-matters/
My belief is that bitcoin coupled with the right payment experience will disrupt the industry at some point. I would highly suggest reading Marc Andreessen view on the subject: http://blog.pmarca.com/2014/01/22/why-bitcoin-matters/
Speaking of which, is there still any doubt in anyone's mind that Apple Pay is the reason Apple started banning Bitcoin apps? At the time I don't think the Apple payments rumor existed, at least not in the "almost-official" sense, and I think many were skeptical that was the reason Apple was banning those apps.
>Speaking of which, is there still any doubt in anyone's mind that Apple Pay is the reason Apple started banning Bitcoin apps?
Yeah, I totally have a doubt.
For one, Apple Pay will transport more money in its first 1-2 weeks than the whole international BitCoin system will all year.
Just consider that BitCoin's total estimated market cap is 6 billion usd -- something Apple (a single company) makes in revenues in about 8 days.
BitCoin, at the moment at least, is insignificant and fringe, size wise. The 99.9% of the 800 million users Apple has credit cards of don't use BitCoin. And all those companies Apple wants to work with, and users want to buy stuff from, don't accept it anyway.
Second, Apple rejects all kinds of apps from time to time, and given the immaturity and lack of regulation and quality control of most BitCoin exchanges (think MtGox and co), it's something they would consider kicking out of the store, or at least watching very carefully which apps they allow.
And here's the kicker. Apple has allowed those BitCoin apps back in the App Store, a few months ago:
http://appleinsider.com/articles/14/06/16/apple-begins-allow...
Yeah, I totally have a doubt.
For one, Apple Pay will transport more money in its first 1-2 weeks than the whole international BitCoin system will all year.
Just consider that BitCoin's total estimated market cap is 6 billion usd -- something Apple (a single company) makes in revenues in about 8 days.
BitCoin, at the moment at least, is insignificant and fringe, size wise. The 99.9% of the 800 million users Apple has credit cards of don't use BitCoin. And all those companies Apple wants to work with, and users want to buy stuff from, don't accept it anyway.
Second, Apple rejects all kinds of apps from time to time, and given the immaturity and lack of regulation and quality control of most BitCoin exchanges (think MtGox and co), it's something they would consider kicking out of the store, or at least watching very carefully which apps they allow.
And here's the kicker. Apple has allowed those BitCoin apps back in the App Store, a few months ago:
http://appleinsider.com/articles/14/06/16/apple-begins-allow...
I would assume that Apple rightly considers bitcoin a triviality at this point and of course the two are completely unrelated. There was good reason to consider removing the apps (used for illegal txns). And bitcoin wallets have been reinstated.
If that were the motivation, then why are PayPal, Dwolla, Venmo... etc. still in the store? And why would they have changed the rules to allow BitCoin apps into the app store?
I do not understand what this article is actually advocating for.
Direct Debit, he's one of the founders of: https://gocardless.com/
It's actually obvious really. He says that Apple Pay is an added layer on top of the:
Instead of that he proposes we cut the credit card companies (and their fees), and have payments directly from our bank accounts.
Instead of our payments going through the credit card company, banks would have to be networked between them and with the next-gen payment system, so that we can buy from a store / seller regardless of the specific bank we have an account in.
credit company -> bank/merchant account -> seller -> user
Instead of that he proposes we cut the credit card companies (and their fees), and have payments directly from our bank accounts.
Instead of our payments going through the credit card company, banks would have to be networked between them and with the next-gen payment system, so that we can buy from a store / seller regardless of the specific bank we have an account in.
Which is sorta confused. V/MC have a very small take (despite having organized one of the most impressive networks in the world). Almost all the fees go to the card issuer.
So instead of using the existing interchange services that work completely awesomely, and have really low fees, we should develop a new thing that will eventually work just as well once all the work is done on it?
Debit cards already allow me to make payments directly from my bank account, and do so for a very low fee.
I see no advantage to this, nor why he's targeting Apple Pay as some nefarious waste of resources (other than click bait).
Debit cards already allow me to make payments directly from my bank account, and do so for a very low fee.
I see no advantage to this, nor why he's targeting Apple Pay as some nefarious waste of resources (other than click bait).
More Paypal clones, I think.
The only argument that you can really make is that the issuer cut needs to be trimmed in which case rewards/loyalty cards would mostly go away. Good for merchants, bad for issuers and terrible for cardholders.
A payments network on the scale of V/MC that has worked near perfectly for over 50 years is far from "fundamentally broken".