ScarletHeartbreaking: Trusted major news organisation confidently reports incredible misconceptions about the industry you're an expert in as fact.
I guess “this is all because of the Visa/Mastercard duopoly” is easier to explain than “this is the result of a complex regulatory environment and incentives that are largely driven by government policy, which is broadly better for society at the margins than the direct alternative”.
The same piece confidently described interchange fees as going to the networks, which again is totally wrong. Also compared US *acquirer* fees directly to EU *interchange* fees without mentioning that the EU regulated interchange and that this is a policy choice with economic tradeoffs. 🙃
“credit card acceptance fees have gone up in the US since the pandemic” and the reason is fascinating!
It's not Visa/Mastercard being greedy, it's an arms race by banks to produce higher tier and more exclusive cards to capture more interchange revenue and fund more generous rewards programs! (See: Chase Sapphire Reserve, which got an entirely new card tier added to the interchange rate table so Chase could compete with Amex's US rewards program.)
Spending in the US is broadly concentrating around the top maybe 10% of consumers, who are the only ones left in the economy with disposable income. This means for a lot of merchants that higher percentages of their transaction value is coming from those higher tiers of cards, which attract higher interchange fees on the rate table. As that average interchange fee paid drifts up, acquirers increase their fees to merchants at contract renewal to compensate for that.
A random observation I will make here is that there are two ends of the market that are expensive to serve in banking, the very top end and the very bottom end.
At the top end, customers are expensive to serve but bring in revenue. At the bottom end, customers are expensive to serve and, despite what you might think, often don't bring in enough revenue to pay for that service.
That customer in the lower end of the market has often been subsidised by the middle and upper classes, which I think is a broadly good thing. The middle class tends to be cheap to serve and brings in reasonable revenue to cover the costs of serving the lower end of the market that banks are often required by law to serve at a loss.
The problem comes when that middle segment of the economy slowly disappears and banks have an extreme U shape in customers who are expensive to serve. That bank has to raise even more revenue out of the upper segment to pay for their obligations to serve the lower segment or worse, start squeezing the lower segment for revenue, contributing to the problem.
As a society, we shouldn't want this to happen and for people to leave the regulated banking industry. The alternative is, well, “alternative finance”, which means the lower end of the economy pays extortionate fees to what rounds to payday lenders and cheque cashing businesses with extra layers.
When money leaves the regulated banking industry, society bares the cost of increased difficulty tackling financial crime and tax evasion. This is why the UK and EU has universal basic banking.
The agreement between most governments and banks has roughly been “Okay, we will let you continue to make a healthy profit on the middle class, but in return you have to accept these unprofitable lower segment customers”.
This saves the government money by being able to do direct depositing of benefits instead of handing out cash at the Post Office, allows companies to adopt computerised payroll which makes tax easier to collect, and customers using cards in shops reduces tax evasion at retail.
People often forget that before universal basic banking, one had to be “introduced” to the bank. This was often done by an employer when starting a well-paying job. Pretty much everyone else was locked out of the system, taking home envelopes of cash (or cheques that had to be cashed somehow).
Stepping back to the U shape of the economy, you can repeat these observations across so many domains.
More people qualifying for free/reduced bus travel → More government subsidy required → More taxation, but that doesn't quite cover it so the regular fares paid by commuters go up → Increased burden on the remaining middle class → Either the middle class earn more and move upwards or their spending power/disposable income degrades and they become eligible for free/reduced bus travel → Repeat.
One thing that terrifies me about AI is that it's probably going to be the final death blow for the European and American middle class. We put so much of our economy into desk jobs that have just become about $10 of LLM tokens for the average daily output of an employee at the same or better quality these days with the frontier models.
Businesses are way over-incentivised to leap at that given they've spent the last 5–10 years getting absolutely squeezed for employer tax/pension contributions.
Lunaphied@Lunaphied I'm mixing US and UK/EU here, admittedly.
Certainly in the UK, employer side taxes are getting pushed up both in terms of literal percentages and in relative terms by not increasing boundaries with inflation.