What is the most reasonable and fair fee structure for payment processing?
Payments
Asked by Question Bot02/Jan/20141 answer
1 Answer
F
Faisal Khan
Answered 02/Jan/2014
The banking / financial system in play today, is an old system that is based on Interest.
Lending money has always based on Interest (as a very crude example think Merchant of Venice). In the early days, commercial trade and barter had interest built-in. The interest was based on getting more than what was being returned (or bartered for).
The same premise of interest based trading was extended (juxtaposed) out to the modern banking system. It was only a logical extension that when electronic transactions came into play, interest be charged.
There are two reasons (IMHO) why interest is charged, albeit I would love for someone more knowledgable and experienced to elaborate more. Anyhow, the two reasons are:
1. The initial credit card based charges were essentially 'loans' and as with any loan, an interest was levied (emphasis on the word credit on credit card). The risk was later moved from the Card Company to the Card Association. This played very well with the bankers and their model of interest based banking and transactional banking.
2. The large players (VISA, Mastercard, American Express, Discover, PayPal, etc.) continue to extract interest on your payments / charges, even if there are backed by a debit card, is because they can! They understand the leverage and dependence you have on their large payment eco-system and they will not easily allow others to come in and disrupt the model. Heck, everyone is making serious money, why abandon it!
Then came the Internet!
Though even nearly 20 years after its mainstream arrival, payment system alternatives are now truly emerging, capitalizing on the unique denominators such and the Internet and Mobile.
To say the big guys are not worried, would be an understatement. They are worried. Equally, they have the muscle to fend off such challenges via lobbying, banking partnership, etc.
Consumers and intelligent start-ups (that are based on the consumer frustration with Interest based payments), are cognizant of the fact that there exists a viable market for a payment system that is based on a a flat-fee model, i.e. transaction driven and not invoice value driven.
In the US, companies like Dwolla and Venmo (product) are taking such an approach. Companies are now experimenting and testing their business models based on a flat fee per transaction. At what value this model will settle at, depends on many factors (including number of transactions conducted through the system) and the bottom-line profitability. Network transactions costs have been going down every year. It becomes cheaper by the day to conduct a financial transaction than the year before. However, there would be resistance from many avenues on adopting this model solely. After all, who would like to just give up on the Billions of Dollars being earned through interest charged on transactions, given the majority of the population that is addicted to this system.
Until and unless the new companies don't get enough traction and mass market appeal, Interest based payments will continue to stay. As an example, in the Basel III framework, it was almost discussed but never officially included that remittance payments (workers remittance payments) be flat fee based (a move that was venomously opposed by Western Union and its all powerful lobby). It is inevitable, that remittance payments will move to a flat fee to transfer money in the coming years, and with that hope, it would almost be inevitable that payment systems (especially consumer card charged transactions that are debit card based or tied directly to the bank account) would also be flat fee in the years to come.
For money that you have, i.e. debit card / ACH based, there is no risk per se. So it makes no sense to pay for something via card (or electronically) that charges a certain percentage of the value of the transaction. Remember, a cheque is still flat fee based (that god for that!).
For credit card based transactions (where the risk of default arises), I do not think you will be seeing the %age go away, but with debit/ACH transactions, the tsunami has already started.
Lending money has always based on Interest (as a very crude example think Merchant of Venice). In the early days, commercial trade and barter had interest built-in. The interest was based on getting more than what was being returned (or bartered for).
The same premise of interest based trading was extended (juxtaposed) out to the modern banking system. It was only a logical extension that when electronic transactions came into play, interest be charged.
There are two reasons (IMHO) why interest is charged, albeit I would love for someone more knowledgable and experienced to elaborate more. Anyhow, the two reasons are:
1. The initial credit card based charges were essentially 'loans' and as with any loan, an interest was levied (emphasis on the word credit on credit card). The risk was later moved from the Card Company to the Card Association. This played very well with the bankers and their model of interest based banking and transactional banking.
2. The large players (VISA, Mastercard, American Express, Discover, PayPal, etc.) continue to extract interest on your payments / charges, even if there are backed by a debit card, is because they can! They understand the leverage and dependence you have on their large payment eco-system and they will not easily allow others to come in and disrupt the model. Heck, everyone is making serious money, why abandon it!
Then came the Internet!
Though even nearly 20 years after its mainstream arrival, payment system alternatives are now truly emerging, capitalizing on the unique denominators such and the Internet and Mobile.
To say the big guys are not worried, would be an understatement. They are worried. Equally, they have the muscle to fend off such challenges via lobbying, banking partnership, etc.
Consumers and intelligent start-ups (that are based on the consumer frustration with Interest based payments), are cognizant of the fact that there exists a viable market for a payment system that is based on a a flat-fee model, i.e. transaction driven and not invoice value driven.
In the US, companies like Dwolla and Venmo (product) are taking such an approach. Companies are now experimenting and testing their business models based on a flat fee per transaction. At what value this model will settle at, depends on many factors (including number of transactions conducted through the system) and the bottom-line profitability. Network transactions costs have been going down every year. It becomes cheaper by the day to conduct a financial transaction than the year before. However, there would be resistance from many avenues on adopting this model solely. After all, who would like to just give up on the Billions of Dollars being earned through interest charged on transactions, given the majority of the population that is addicted to this system.
Until and unless the new companies don't get enough traction and mass market appeal, Interest based payments will continue to stay. As an example, in the Basel III framework, it was almost discussed but never officially included that remittance payments (workers remittance payments) be flat fee based (a move that was venomously opposed by Western Union and its all powerful lobby). It is inevitable, that remittance payments will move to a flat fee to transfer money in the coming years, and with that hope, it would almost be inevitable that payment systems (especially consumer card charged transactions that are debit card based or tied directly to the bank account) would also be flat fee in the years to come.
For money that you have, i.e. debit card / ACH based, there is no risk per se. So it makes no sense to pay for something via card (or electronically) that charges a certain percentage of the value of the transaction. Remember, a cheque is still flat fee based (that god for that!).
For credit card based transactions (where the risk of default arises), I do not think you will be seeing the %age go away, but with debit/ACH transactions, the tsunami has already started.