There's a whole infrastructure of liability for payer and merchant that exists below the surface of every transaction.

This is why, unfortunately, credit card companies can charge the fees that they do. For example, the issuing banks take on liability if payers don't pay, for example. I don't think Stripe is willing to get in the business of this unless they want to turn into a bank.

I think you might be surprised how much risk Stripe is willing to take on when they can gain hundreds of basis points on cutting out the networks. Only time will tell though :)

Not if it means having to turn into a bank. The repercussions on their business will be draconian. Although I would be surprised if they haven't already explored or fully gone through a money transmitter license for a subsidiary.

Can't they just buy a Bank?

Almost certainly they would, and there might be some small banks out there they could buy or merge with. That would get them out of a lot of legal issues, and also buy them some relevant legal expertise.

However, I seem to recall WalMart investigating this option a while back, and it never happened. It may be that the more you look at the option of becoming a bank, the more it looks like it would take over your life/business. Also, there are doubtless many lobbyists who the existing banks employ who would try to stop it.

I think the issue is being a bank vs owning a bank.

What's the risk if payments were to be debited from the customer's bank directly?

Related side note: I've always wondered, if people don't ever need the "credit" in the credit card transaction, could they get a discount of 2 odd % on each transaction that the CC companies charge, say if they connect their bank accounts directly to they payment methods? This would effectively a debit card but not using the VISA/MC networks. What's stopping Apple/Google pay from processing payments directly from my bank?

Almost none. PIN/passwords render fraud to negligible amounts. That's why debit card transaction have fees for ~$0.10 under Durbin. Companies like Stripe make a killing whenever their customers use debit cards instead of credit cards because they're charging 2.9 +0.30 with a cost of 0.10.

But if you had to rely on debit cards only, then commerce at least in the US would grind to a halt. I believe the average American CC debt is ~$8000.

nordstrom used to do this, back when it was also a bank and issued their own line of credit cards. they also negotiated more favorable terms with visa because of it. they marketed the crap out of their own cards so they could keep more of the fees.

but the regulatory environment tightened up and being both a bank and a retailer became less appealing, and consumers found store branded credit cards less appealing, so they sold the bank portion.

They're protected from being cut out because they are the networks on which the credit card system runs. If you look at a stripe-issued card, you'll see there's still a visa or mc logo in the corner.

I understand how the system works; the requests hit the API before the credit card network. Hence the ability to cut out the network if Stripe is willing to take the chargeback/fraud risk.

You're saying Stripe would process directly when their own card is used on their own network, and then outside the network they'd process through visa/mc?

Well something like that depending on the Stripe infrastructure.

That currently happens when an issuer card is used in a merchant that is acquired/processed with the same issuing bank. It is called an "on us" transaction and doesn't need to fire through the card scheme rails.

I assume that still incurs a visa fee. Perhaps just bypasses the underwriting. Otherwise, I can't imagine visa would allow this.

I can't see how they could disallow it to be honest. That would be seriously anti-competitive.

No, they would need to become money transmitters according to what you wrote above. AFAIK they aren't money transmitters yet.

They list themselves as having money transmitter licenses across the US.

see e.g. https://stripe.com/us/payments and https://stripe.com/connect (under "Rigorous Compliance" and "Compliance respectively").

You'll also find them on CA's directory of money transmitters. http://www.dbo.ca.gov/Licensees/money_transmitters/money_tra...

It depends on the jurisdiction, but they are in many! It is something they have been working towards for quite some time.