This, plus reasonable limit that require special checks to be lifted, brings cost of fraud to almost 0.
Oh, and there is no credit risk, you just check the account balance, and only process the payment after blocking the amount on the account. No credit risk.
Completely insane to take 3% for that.
3D Secure and other technologies are pretty inexistent because people pay with credit cards and not debit cards. Credit cards have a very simple process of disputing transactions, fraud insurance and other things, and by moving the risk to the bank/merchant, they eliminate the friction that comes with using 3D Secure and other multi-factor authentication solutions. Win for the customer.
> 3-D Secure is a protocol designed to be an additional security layer for online credit and debit card transactions.
3DS on every transaction is definitely frustrating; 3DS on no transaction just shifts the friction elsewhere.
I get a popup on my phone via the issuers app
CONFIRM DENY
This is online only. On site payments of ca. 100$ or less are tap and done. For higher value transactions a PIN is required.
More practically: this is still a dispute process. You still have to fill in forms, you still temporarily don't have your money, you still might not get it back. Why take that risk when you could just have a popup on your phone that you click "allow" on? 15 seconds max.
Regarding your last question, about the 15 seconds friction, you should work for a bit in online commerce to see how fast people give up paying if there's even a little inconvenience in the checkout process and go somewhere else they perceive it makes their shopping experience easier. The biggest drop in conversion rates happens at the checkout stage.
Both chargebacks and zero liability are practically available on effectively all US debit cards.
Legal protections might be a bit less than for credit cards, but still far from “you have the burden of proof”.
Actual dispute resolution can take quite long and you’re not even directly dependent on the outcome. For example, if you lose a card and it gets used in a physical store fraudulently, your bank will most likely not be able to win a dispute, but they’ll usually still have to reimburse you.
The thing that matters to you as the cardholder is only fraud liability; if and how your bank is made whole by the merchant is their concern. That’s the same across credit and debit.
In Europe, 3D Secure (when it is used) is used when you pay with both credit and debit card. From a transactions point of view there is no difference between a credit and debit card.
From a technical perspective you are right - it is a transaction, but from a dispute perspective it matters a whole lot, so it is actually more convenient for Americans to use a credit card with no second factor authentication than go through the hassle of being asked for a code or whatever second factor the bank decides to use.
(probably somewhere in https://en.wikipedia.org/wiki/Payment_Services_Directive )
That's usually handled with an app on your phone and is pretty much frictionless.
This is not a win for the customer, btw, because the credit card fees get baked into the prices.
Yes, I’m willing to pay $100 for a liter of water if you’re the only one selling it. I get a lot of value out of it!
In a competitive market, competition eventually drives down prices to a price that somewhat approaches the cost of providing the service.
This isn’t happening in payment, due to insurmountable network effects.
The payment card system is a miracle of system design and global commerce. I also want to see processing costs come down over time, but 3% is a bargain for the value you’re getting, and if you wanted to stifle any further innovation out of the industry, then regulating the profit out of it would be a good start.
Much of that goes back to cardholders in the form of cash backs. That is evidently friction not necessary to run the system.
The 3.5% get split among issuer (how much they get is public information), network, and acquirer. We also know how much issuers roughly pay out to cardholders as cashback/rewards.
The EU took that information and acted on it by outright capping the issuer portion (i.e. the interchange).
One half of the US approach for debit was similar – Durbin capped debit interchange to an extremely low percentage – but the proposals from this (now rejected) settlement look different and more market-based in that they'd allow merchants to effectively collect back the cardholder cashback in surcharges.
Durbin also has a less-known component of trying to create competition between networks by mandating debit cards to have two independent networks. Extending this to credit cards could possibly help drive down actual network fees, but this has arguably not even worked that well for debit. Also, as many people have mentioned before, the interchange slice of the swipe fee cake is by far the largest and would probably make more sense to tackle first.
The outcome of this sort of regulation is that nobody wants to invest in establishing or innovating large networks like this. Which is why all the recent innovation in payments has been centred around terrible, highly fragmented, in-app payments and EMIs, and that’s certainly not a win for consumers.
That's certainly much more than just the cost of running the technical network, but also, as we can see from the above calculation, clearly one of the smaller components of the 3.5% (since the lion's share goes to the issuers).
In that sense, the networks really do compete – for the issuers' business! Issuers then compete with each other for cardholders by paying out cashbacks, but what many find missing is competition with these dynamics as a whole.
Making that cost explicit in the form of credit card surcharges might have been a path there (I'm not sure if I'd have been a fan myself), but since this settlement is now off the table, let's see what the next move is.
And yet, fees are 0.3% in Europe, and VISA, Mastercard and Amex are still happy to do business here. And customers can STILL pay with a single FaceID with Apple Pay.
So maybe all 0.3% of trillions of Euros moved is still enough to do all this.
But all of this is secondary to the point, which is your claim that a 3% processing fee is insane. The way the system works is insane, if you said today that you wanted to build the type of system that the card bands have built, nobody would believe that it would be possible. Especially not all for a 3% processing fee. If the payment networks didn't exist, everything you buy would be a lot more than 3% more expensive, and your quality of life would be very notably reduced. The value you're getting from them is a lot more than what you're paying to use them.
Out of the latter, three parties are paid: The issuer, the merchant acquirer, and the network.
Merchants pay significantly more than 0.3% to accept card payments even in Europe.
That said, US interchange rates (i.e. what the issuer gets) are much higher than 0.3%, which is why there’s credit card rewards.
From a technological perspective at least, even the basic per-transaction cost is more than the overhead of processing a transaction and making a basic determination of the risk level of the customer identified, how variant the customer is from past behavior, and maybe even send the customer's known phone number a text to check for transaction authorization if it's even slightly risky. If it's a really large quantity maybe even connect them human to human and record the call. Those extra steps might even warrant a tiny extra charge; for the fraud reduction I suspect most businesses would approve.
Now, insurance and what not? Shouldn't there be competition in that market? That should be some other fee entirely.