It is a miracle (both in that it exists and in that it actually still works :), but it does not cost 3% to run.

Much of that goes back to cardholders in the form of cash backs. That is evidently friction not necessary to run the system.

The amount it costs to run is irrelevant. The marginal cost of adding one user to a SaaS product is incredibly low, the marginal cost of allowing somebody to install your software product is almost $0, but I think we all understand that those factors aren’t what drives the pricing of the products.

But here we do understand more than with the typical SaaS product provided by a single supplier:

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.

That’s not my point, my point is that the cost of goods (which is itself only one factor that influences pricing) is not exclusively determined by the cost of operating the network. Implementing the kind of payment network that the cards brands have is incredibly costly upfront, which requires developing all the IP, implementing all the systems, and establishing business relationships with millions and millions of parties to get the network in place. Now that they’ve committed to all that upfront cost, where does the moral authority to impose price controls on them come from? It costs Adobe close to $0 to allow me to install creative suite, so why should the price to me not also be close to $0?

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.

Oh, that's all things I'd roll into "costs of operating the network". Maybe my usage of network is slightly confusing here; I usually mean it to include the "scheme" and "brand" parts too.

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.

So is email, yet email is free

Putting aside the fact that email is not free, if you think the complexity of a system that sends an email is comparable to the complexity of a system that processes real time payments, then you're kinda showing how little you understand payment systems (but I suspect this was just a flippant comment). Email doesn't require a globally consistent state to be maintained, it doesn't require cross-border settlement, there is no financial liability if an email is lost, it doesn't require a different set of KYC/AML/reporting regulations to be followed in every jurisdiction, or many other things that payment systems do.

You say all this.

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.

I think AMEX able to have higher fee because they're underdog in that market. For the same reason a lot of places in EU / UK dont like to take AMEX.

Amex get away with it because their customer base is a niche of higher income earners. Merchants would rather not accept Amex, but a lot of them want to attract that demographic as their customers. So they each make their own decision about how to balance those concerns.

Of course, the value of the system is that it's a global payment network. If the card brands started cutting out over regulated markets then the system would decrease in value for customers in it's main profit centres. The outcome is just that the rest of the world ends up subsiding European payment networks. The negative impact of policies like this isn't that the payment networks will start exiting markets, it's that they just won't innovate. Which is why most of the innovation in the payment industry recently has been in EMIs and in-app payment systems, which are both more expensive and worse for consumers.

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.

That’s largely because the widely-reported 0.3% are the issuer’s takeaway, while the 3.5% are the (average? maximum?) cost to the merchant, so it’s not even an apples to apples comparison.

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.