Is the widespread adoption of Venmo, etc., inflationary?
July 17, 2023 9:58 PM Subscribe
Does running more and more transactions through services that take a credit-plus cut lead to increases in price-to-consumer?
Some prices are set by what makes the deal profitable for the producer, right? Small businesses, un-status-goods, etc? So the increasing use of services that charge the seller must lead them to raise the prices they charge customers. And if everyone does that...
Some prices are set by what makes the deal profitable for the producer, right? Small businesses, un-status-goods, etc? So the increasing use of services that charge the seller must lead them to raise the prices they charge customers. And if everyone does that...
Businesses have always been charged credit card processing fees even with regular POS systems, no? Recently I’ve seen 1 or 2 businesses offer a “cash or debit discount” which feels like basically what you’re describing, but I wouldn’t say it’s directly associated with 3rd party transfer apps like Venmo, if that’s what you mean by “etc”. This is all of course distinct from discounts you get when paying cash-only, which are presumably the business passing some of the savings from underreporting their taxes on to the consumer.
posted by btfreek at 10:10 PM on July 17, 2023 [2 favorites]
posted by btfreek at 10:10 PM on July 17, 2023 [2 favorites]
It depends on the size of the charge, I suspect.
No transaction is free - checks cost money, card transactions cost money, even moving cash around costs money. PayPal has been around for a long time at this point and it has its means of taking a cut, so new style payment systems are not even all that new.
Aside from that, if the charge of preferred payment systems (like Venmo, say) is higher than it used to be), is that cost increasing over time or does it remain the same? If it's 5% when previously one might pay 2%, then there is a 3% inflation in the price you pay (or some loss in profit, but that's unlikely), but it's not 3% a year - it's a one time 3%, and it only comes into play spread over the transition period where, in the worst case, everyone switches to using the most expensive method. It's not 3% a year, every year, and it's not 3% last year (because most transactions are done the same way they always were, so it's 3% times the proportion of transactions done a more expensive way). I'm assuming, here, that you're not buying your inputs with Venmo, transforming them and selling them on with Venmo (where it would count twice), or at least that is very much outside the norm.
Of course, what can happen is that prices go up to reflect the most expensive way of receiving money (like today, where a vendor receives more money from a cash transaction than a credit card transaction but charges the same price and pockets the difference). That is arguably not Venmo causing the inflation, but Venmo excusing it.
posted by How much is that froggie in the window at 10:17 PM on July 17, 2023
No transaction is free - checks cost money, card transactions cost money, even moving cash around costs money. PayPal has been around for a long time at this point and it has its means of taking a cut, so new style payment systems are not even all that new.
Aside from that, if the charge of preferred payment systems (like Venmo, say) is higher than it used to be), is that cost increasing over time or does it remain the same? If it's 5% when previously one might pay 2%, then there is a 3% inflation in the price you pay (or some loss in profit, but that's unlikely), but it's not 3% a year - it's a one time 3%, and it only comes into play spread over the transition period where, in the worst case, everyone switches to using the most expensive method. It's not 3% a year, every year, and it's not 3% last year (because most transactions are done the same way they always were, so it's 3% times the proportion of transactions done a more expensive way). I'm assuming, here, that you're not buying your inputs with Venmo, transforming them and selling them on with Venmo (where it would count twice), or at least that is very much outside the norm.
Of course, what can happen is that prices go up to reflect the most expensive way of receiving money (like today, where a vendor receives more money from a cash transaction than a credit card transaction but charges the same price and pockets the difference). That is arguably not Venmo causing the inflation, but Venmo excusing it.
posted by How much is that froggie in the window at 10:17 PM on July 17, 2023
So the increasing use of services that charge the seller must lead them to raise the prices they charge customers.
I'm confused. How are you distinguishing this from regular credit cards, where the processor most surely charges the merchant?
posted by praemunire at 10:20 PM on July 17, 2023 [3 favorites]
I'm confused. How are you distinguishing this from regular credit cards, where the processor most surely charges the merchant?
posted by praemunire at 10:20 PM on July 17, 2023 [3 favorites]
Agreed that Venmo charges are not that different from credit card processing fees, and as far as that goes I believe a lot of the newer POS systems cost *less* overall than credit card processing system of say 20 years ago, at least at the micro-to-small business level. Setup and equipment costs, in particular, are lower than they used to be (e.g. the cost to rent a credit card processing machine of 20-30 years ago vs. the cost of a tablet-based system or something like Venmo where if you already have a phone there are basically no setup costs).
In a lot of cases that means that a small business that used to be cash-only now accepts cards (or Venmo or whatever) and they and their customers must pay for the privilege, so arguably there is an increased cost in that case. But as someone else pointed out above, even cash has its costs - you have to pay your employees to count out their registers (and you still have to pay for some kind of a register or cashbox + ledger), you have to pay someone to take the cash to the bank, there's more danger of petty or major theft, etc.
The business may also be able to make up the cost of the credit card fees on volume, since people tend to be willing to spend more with cards/electronic payments than they do with cash (if I go to my corner store for a quart of milk and I only bring $2 cash, I can't be tempted to buy a candy bar or an ice cream or a magazine, whereas if I bring my credit card I can buy anything in the store).
posted by mskyle at 11:09 PM on July 17, 2023 [2 favorites]
In a lot of cases that means that a small business that used to be cash-only now accepts cards (or Venmo or whatever) and they and their customers must pay for the privilege, so arguably there is an increased cost in that case. But as someone else pointed out above, even cash has its costs - you have to pay your employees to count out their registers (and you still have to pay for some kind of a register or cashbox + ledger), you have to pay someone to take the cash to the bank, there's more danger of petty or major theft, etc.
The business may also be able to make up the cost of the credit card fees on volume, since people tend to be willing to spend more with cards/electronic payments than they do with cash (if I go to my corner store for a quart of milk and I only bring $2 cash, I can't be tempted to buy a candy bar or an ice cream or a magazine, whereas if I bring my credit card I can buy anything in the store).
posted by mskyle at 11:09 PM on July 17, 2023 [2 favorites]
Venmo is cheaper for the vendor than a lot of popular card processors used by small businesses.
All kinds of card processing are generally cheaper for the merchant than cash, if you take into account staff time, bank costs (banks charge businesses to handle cash), not to mention the risk of theft.
So the answer to your question is: no, quite the opposite! Unless it's the kind of one person business where the owner just pockets the cash and uses it themselves directly, since their sales volumes are so small.
posted by quacks like a duck at 12:57 AM on July 18, 2023 [1 favorite]
All kinds of card processing are generally cheaper for the merchant than cash, if you take into account staff time, bank costs (banks charge businesses to handle cash), not to mention the risk of theft.
So the answer to your question is: no, quite the opposite! Unless it's the kind of one person business where the owner just pockets the cash and uses it themselves directly, since their sales volumes are so small.
posted by quacks like a duck at 12:57 AM on July 18, 2023 [1 favorite]
Best answer: Wow. Do you want an economics lecture? Because the question you've asked could produce a number of essays covering different angles of it!
The micro question you're interested in is covered by a topic called Tax Incidence (wikipedia link).
You can see the "cut" the payments processer takes as a form of tax on the transaction between the retailer and customer. Economists have long studied this phenomenon because it has real world implications.
For example, if rents rise steeply, leading to windfall profits to landlords, what if the government raises land taxes on investment properties as a way of clawing back some of that money? Does this tax come out of landlord profits as intended, or is it actually passed straight on to the renters in the form of increased rental costs, so it's actually the renters who are paying this additional landlord's tax for them?
Another example - besides income tax that employees pay, many governments also impose a "payroll tax" of roughly 5% of total salaries that is paid directly by the company. Where does this 5% come from? Does it come direct from the company profits, or do the companies simply pay employees lower wages, and use the money they saved to pay this 5% tax?
The short answer is that "who pays" is determined by the elasticity of demand or supply of the buyer and seller. You can think of it as a customer going - what are my alternatives? In an extreme case of a monopoly where there is only one seller, you will find the seller can push the entire Venmo cost to the buyer. In the other extreme case, a market with perfect competition - 10 retailers competing for the same set of customers - then you will find the sellers have to fully absorb this extra Venmo cost. The reality of most of these studies (land tax incidence, payroll tax incidence) is that the costs are often shared invisibly between the two parties, but skewed one way or another depending on their market power.
----
I think it's worth also worth talking about an assumption you've made. A self-interested retailer only will accept Venmo if it yields more profit. If it leads to losses, they wouldn't accept Venmo.
By that logic, accepting Venmo would actually give them more profits, which would allow them to lower prices!
And this is where that specific assumption breaks down - "increasing the use of services that charge a seller must lead them to raise the prices they charge customers". There isn't much of a link between cost to producer and price to customer. The business truism we use is Prices are determined by your Customer and Competition, while your Costs determine your Volumes.
Think of a really dumb example - you sell hotdogs for $3 each. You forget to put your latest batch of hotdogs in the freezer, ruining the batch, so you throw them out and buy more. Your Costs are now doubled. Does that mean you now sell your hotdogs for $6 each to your customers? Clearly not - your $3 price was determined by looking at your Customer's willingness to pay and benchmarking against what your Competition is offering. If you could make more money selling hotdogs at $6 each, you would have done so long ago, without waiting for the disaster that just happened. $3 is already your profit maximizing price, raising it to $6 would make you lose customers. Raising your prices to $6 now to "recoup" your losses would only lead you to lose even more money than if you had left them at $3.
---
Lastly, depending on how much of a purist you are, inflation is "generally" defined as changes in broad price levels in the economy. Typically, this is imagined to be the intersection of supply of goods against the supply of money.
Simplistically, if an island has 20 coconuts, and $20 on it, then each coconut is worth $1.
Changes in supply can affect price (you lose 10 coconuts, so now with only 10 remaining each coconut is worth $2)
Changes in supply of money (you print more money so you have $40 in total, so now each coconut is worth $4)
The sustained inflation we are seeing now is a combination of a supply side shock (reduced industrial output particularly automobiles and general goods during Covid) and also the money printing during the pandemic to deliver aid to people and businesses who could not work due to lockdowns. There are simply less goods available, so they will cost more.
Buying apples instead of oranges (causing the price of apples to go up) isn't inflation, it's just a shift of preferences.
Neither is buying a service like house cleaning or yard mowing, rather than goods like televisions or holidays.
Arguably, buying Venmo as a service (convenience) instead of some other good, by that definition cannot lead to inflation either.
posted by xdvesper at 12:58 AM on July 18, 2023 [21 favorites]
The micro question you're interested in is covered by a topic called Tax Incidence (wikipedia link).
You can see the "cut" the payments processer takes as a form of tax on the transaction between the retailer and customer. Economists have long studied this phenomenon because it has real world implications.
For example, if rents rise steeply, leading to windfall profits to landlords, what if the government raises land taxes on investment properties as a way of clawing back some of that money? Does this tax come out of landlord profits as intended, or is it actually passed straight on to the renters in the form of increased rental costs, so it's actually the renters who are paying this additional landlord's tax for them?
Another example - besides income tax that employees pay, many governments also impose a "payroll tax" of roughly 5% of total salaries that is paid directly by the company. Where does this 5% come from? Does it come direct from the company profits, or do the companies simply pay employees lower wages, and use the money they saved to pay this 5% tax?
The short answer is that "who pays" is determined by the elasticity of demand or supply of the buyer and seller. You can think of it as a customer going - what are my alternatives? In an extreme case of a monopoly where there is only one seller, you will find the seller can push the entire Venmo cost to the buyer. In the other extreme case, a market with perfect competition - 10 retailers competing for the same set of customers - then you will find the sellers have to fully absorb this extra Venmo cost. The reality of most of these studies (land tax incidence, payroll tax incidence) is that the costs are often shared invisibly between the two parties, but skewed one way or another depending on their market power.
----
I think it's worth also worth talking about an assumption you've made. A self-interested retailer only will accept Venmo if it yields more profit. If it leads to losses, they wouldn't accept Venmo.
By that logic, accepting Venmo would actually give them more profits, which would allow them to lower prices!
And this is where that specific assumption breaks down - "increasing the use of services that charge a seller must lead them to raise the prices they charge customers". There isn't much of a link between cost to producer and price to customer. The business truism we use is Prices are determined by your Customer and Competition, while your Costs determine your Volumes.
Think of a really dumb example - you sell hotdogs for $3 each. You forget to put your latest batch of hotdogs in the freezer, ruining the batch, so you throw them out and buy more. Your Costs are now doubled. Does that mean you now sell your hotdogs for $6 each to your customers? Clearly not - your $3 price was determined by looking at your Customer's willingness to pay and benchmarking against what your Competition is offering. If you could make more money selling hotdogs at $6 each, you would have done so long ago, without waiting for the disaster that just happened. $3 is already your profit maximizing price, raising it to $6 would make you lose customers. Raising your prices to $6 now to "recoup" your losses would only lead you to lose even more money than if you had left them at $3.
---
Lastly, depending on how much of a purist you are, inflation is "generally" defined as changes in broad price levels in the economy. Typically, this is imagined to be the intersection of supply of goods against the supply of money.
Simplistically, if an island has 20 coconuts, and $20 on it, then each coconut is worth $1.
Changes in supply can affect price (you lose 10 coconuts, so now with only 10 remaining each coconut is worth $2)
Changes in supply of money (you print more money so you have $40 in total, so now each coconut is worth $4)
The sustained inflation we are seeing now is a combination of a supply side shock (reduced industrial output particularly automobiles and general goods during Covid) and also the money printing during the pandemic to deliver aid to people and businesses who could not work due to lockdowns. There are simply less goods available, so they will cost more.
Buying apples instead of oranges (causing the price of apples to go up) isn't inflation, it's just a shift of preferences.
Neither is buying a service like house cleaning or yard mowing, rather than goods like televisions or holidays.
Arguably, buying Venmo as a service (convenience) instead of some other good, by that definition cannot lead to inflation either.
posted by xdvesper at 12:58 AM on July 18, 2023 [21 favorites]
It is recent with the increased technology and capabilities of payment systems that merchants have had the ability to pass on that fee as a fee rather than burying it in the total cost. To me, that is actually preventing some inflation as there is now an incentive in the form of no fee (lower price) to use cash where as before fees were buried in the price. The consumer, can buy down the cost by using cash.
Upon preview, what xdvesper said.
posted by JohnnyGunn at 1:02 AM on July 18, 2023
Upon preview, what xdvesper said.
posted by JohnnyGunn at 1:02 AM on July 18, 2023
Using cash isnt free for businesses, but costs may be harder to track than credit.
Counting the cash, taking it to the bank, getting different change from the bank all take time for someone who is or should be paid. Then theres theft, mistakes, counterfeit money.
Some newer businesses have gone electronic payment only to save on the costs of handling cash and just eat/pass on the fees.
Of course they forego the opportunity for your cash only tax evasion schemes which costs them as well.
posted by TheAdamist at 3:19 AM on July 18, 2023 [1 favorite]
Counting the cash, taking it to the bank, getting different change from the bank all take time for someone who is or should be paid. Then theres theft, mistakes, counterfeit money.
Some newer businesses have gone electronic payment only to save on the costs of handling cash and just eat/pass on the fees.
Of course they forego the opportunity for your cash only tax evasion schemes which costs them as well.
posted by TheAdamist at 3:19 AM on July 18, 2023 [1 favorite]
It stands to reason that cashbacks and points programs on credit cards have to be paid for, and that has to come from the consumer's pocket because no one else is putting money into the system. Now whether an economist would consider tthat inflation I don't know because that percentage has been a factor in pricing for a long time.
posted by SemiSalt at 5:07 AM on July 18, 2023 [1 favorite]
posted by SemiSalt at 5:07 AM on July 18, 2023 [1 favorite]
All transactions have costs. When I worked retail in the 1980s, the closing store manager spent about a half hour every night tallying up checks and filling out a deposit form before proceeding to the bank to make a physical deposit. Venmo and credit card transactions have a cost, but they also save other costs. Non-cash transactions also allow people to spend money that they don't have, physically, in their pockets, which likely increases impulse purchases and overall sales. So it's really not a simple, one-variable problem.
posted by Winnie the Proust at 5:13 AM on July 18, 2023 [4 favorites]
posted by Winnie the Proust at 5:13 AM on July 18, 2023 [4 favorites]
Response by poster: I did want a little lecture on economics, it turns out. Thank all y’all.
Is it fair to summarize that app-ifying pays a smaller group of people for the work of handling the transactions, but (in a competitive market) will reduce the work and therefore the overall cost?
Maybe I’ll also get the a little lecture from someone living where money transfers are built into the banking system better, so few transactions need another middleman? Pretty sure I’ve read people’s surprise that the US doesn’t use that yet.
posted by clew at 6:13 AM on July 18, 2023 [1 favorite]
Is it fair to summarize that app-ifying pays a smaller group of people for the work of handling the transactions, but (in a competitive market) will reduce the work and therefore the overall cost?
Maybe I’ll also get the a little lecture from someone living where money transfers are built into the banking system better, so few transactions need another middleman? Pretty sure I’ve read people’s surprise that the US doesn’t use that yet.
posted by clew at 6:13 AM on July 18, 2023 [1 favorite]
Best answer: If you want to focus on an inflection point in the payments industry that fundamentally changed the economics in the way you are looking for, I'd change your focus to Square entering the market in 2009, since that was a seismic change and just making ACH slightly more consumer friendly (which is all Venmo really is) barely compares.
I was in the payments industry during this transition, and I can tell you that Square's biggest innovation wasn't their little reader that plugged into a iPhone (they actually licensed that patent from us), but the innovation of offloading "risk" off the processor directly an putting it onto the processor's investors.
Pre-Square, our intake form was 10 pages long, and because ultimately the processor is responsible paying out chargebacks/fraud/whatever (not Visa/Mastercard, and certainly none of the banks involved) if the merchant couldn't do it, we blacklisted entire industries ("travel agent" was too risky), and we kept an extremely short leash on all our merchants. We fired any merchant that even gave the hint of doing something risky, like using their personal cards at their own business too often (because if you are "loaning" yourself liquid capital in that manner, your business is likely not long for this world).
Then Square comes a long, and not only is the intake like 5 fields, they heavily advertise that any asshole can use their processing for whatever they want. Garage sale? Sure. Just you and your friends fucking around and swiping each others cards for no reason? Hell yeah!
The rest of the industry had to adjust, because otherwise Square might just drive everyone out of business quicker than all their dumb decisions put them out of business. Which was the right move, because it was clear the VCs were going to shovel money into Square (or Block these days, lol) forever and ever amen.
Anyway, "any asshole can no process credit card payments" is where I would focus.
posted by Back At It Again At Krispy Kreme at 8:50 AM on July 18, 2023 [7 favorites]
I was in the payments industry during this transition, and I can tell you that Square's biggest innovation wasn't their little reader that plugged into a iPhone (they actually licensed that patent from us), but the innovation of offloading "risk" off the processor directly an putting it onto the processor's investors.
Pre-Square, our intake form was 10 pages long, and because ultimately the processor is responsible paying out chargebacks/fraud/whatever (not Visa/Mastercard, and certainly none of the banks involved) if the merchant couldn't do it, we blacklisted entire industries ("travel agent" was too risky), and we kept an extremely short leash on all our merchants. We fired any merchant that even gave the hint of doing something risky, like using their personal cards at their own business too often (because if you are "loaning" yourself liquid capital in that manner, your business is likely not long for this world).
Then Square comes a long, and not only is the intake like 5 fields, they heavily advertise that any asshole can use their processing for whatever they want. Garage sale? Sure. Just you and your friends fucking around and swiping each others cards for no reason? Hell yeah!
The rest of the industry had to adjust, because otherwise Square might just drive everyone out of business quicker than all their dumb decisions put them out of business. Which was the right move, because it was clear the VCs were going to shovel money into Square (or Block these days, lol) forever and ever amen.
Anyway, "any asshole can no process credit card payments" is where I would focus.
posted by Back At It Again At Krispy Kreme at 8:50 AM on July 18, 2023 [7 favorites]
Credit cards, venmo, square, all take a cut from the vendor, and then the credit card charges high interest, so inflationary at every point. In general, people using credit cards, esp. ones on a tablet, spend, more, probably tip more, and a tip screen is becoming standard. also inflationary.
I used to own a small retail business and it was not easy to get the credit card companies to investigate obvious fraud. The postmaster, however, gets involved pretty quickly. The cost of fraud is passed on to consumers and vendors. Bank, fraud, processing costs are all inflationary.
Banks are and other corporations seek higher & higher profits/ return on investment, and this is an inflation driver as well.
posted by theora55 at 9:38 AM on July 18, 2023
I used to own a small retail business and it was not easy to get the credit card companies to investigate obvious fraud. The postmaster, however, gets involved pretty quickly. The cost of fraud is passed on to consumers and vendors. Bank, fraud, processing costs are all inflationary.
Banks are and other corporations seek higher & higher profits/ return on investment, and this is an inflation driver as well.
posted by theora55 at 9:38 AM on July 18, 2023
A couple of things that I would note from my experience owning a retail store is that Venmo is owned by PayPal, and the rates charged by newer well-known online processors like Square and Stripe aren’t all that great compared to what you can get shopping around (but I can see how the ease-of-use of applying for and using them was a game-changer).
Because Stripe, et al usually charge a fixed percentage + swipe fee, you probably don’t see many of their merchants that don’t take American Express like you would for merchants with more traditional processors where they are paying rates that vary depending on the type of card used.
Another cost of cash handling that I haven’t seen mentioned is that some banks do charge for deposits over a certain threshold.
But the basic question of whether the costs to process transactions gets reflected in the prices charged, the answer is plainly yes. But I’m not sure that Venmo is something I would say has changed the inputs to those particular formulas much.
posted by jimw at 11:01 AM on July 18, 2023
Because Stripe, et al usually charge a fixed percentage + swipe fee, you probably don’t see many of their merchants that don’t take American Express like you would for merchants with more traditional processors where they are paying rates that vary depending on the type of card used.
Another cost of cash handling that I haven’t seen mentioned is that some banks do charge for deposits over a certain threshold.
But the basic question of whether the costs to process transactions gets reflected in the prices charged, the answer is plainly yes. But I’m not sure that Venmo is something I would say has changed the inputs to those particular formulas much.
posted by jimw at 11:01 AM on July 18, 2023
IMO, the answer is "not yet" because app-based payment is just not popular enough yet.
Also I'm not sure I agree that costs like that are transparent enough for buyers to feel they aren't buried in costs, or just paid differently. You can see this with gas prices in CA, which way too many stations have a cash price and a credit price, but the cash price is just as variable (between stations, not variable as in the price of gas) as the credit price is.
in other words, there are too many factors determining price for credit card fees to be called out as inflationary.
posted by The_Vegetables at 11:44 AM on July 18, 2023
Also I'm not sure I agree that costs like that are transparent enough for buyers to feel they aren't buried in costs, or just paid differently. You can see this with gas prices in CA, which way too many stations have a cash price and a credit price, but the cash price is just as variable (between stations, not variable as in the price of gas) as the credit price is.
in other words, there are too many factors determining price for credit card fees to be called out as inflationary.
posted by The_Vegetables at 11:44 AM on July 18, 2023
Response by poster: Could I get a ELI5 definition of “processor” here?
posted by clew at 11:45 AM on July 18, 2023
posted by clew at 11:45 AM on July 18, 2023
processor = you're a merchant who wants to accept credit cards, so you sign up with a processor who handles the process of letting you charge customers' cards and getting the money into your bank account. For small businesses, they provide the card readers/terminals (or for online transactions, APIs that let you connect your website to their system) and the software and servers that make them work. As noted above, signing up with a processor used to be a fairly involved process of application forms, working with salespeople, risk management, buying or leasing expensive equipment, getting a dedicated phone line installed for the credit card terminal, and so on, while companies like Square have now turned it into an extremely brief sign-up process with no or low-cost equipment options.
Some processors offer value-added services for specific industries, such as point of sale systems for the restaurant industry, integration with food delivery services, online storefronts for retail, appointment scheduling for personal service businesses, invoicing, etc...
Square and Stripe are examples of processors, but these services are also offered through traditional banks and large companies you may have never heard of that provide these kinds of services to huge businesses.
posted by zachlipton at 12:17 PM on July 18, 2023 [2 favorites]
Some processors offer value-added services for specific industries, such as point of sale systems for the restaurant industry, integration with food delivery services, online storefronts for retail, appointment scheduling for personal service businesses, invoicing, etc...
Square and Stripe are examples of processors, but these services are also offered through traditional banks and large companies you may have never heard of that provide these kinds of services to huge businesses.
posted by zachlipton at 12:17 PM on July 18, 2023 [2 favorites]
The short short version is that the processor is a vendor who the merchant (store/restaurant/hair salon) contracts with to process credit card payments - they sit in between the merchant and Visa/Mastercard/Discover/Amex (the payment networks).
This Nerdwallet article, What Is a Payment Processor? gets further into the weeds without getting super-technical about processors and also explains a lot of the costs that go into credit card processing in general.
posted by mskyle at 12:24 PM on July 18, 2023 [1 favorite]
This Nerdwallet article, What Is a Payment Processor? gets further into the weeds without getting super-technical about processors and also explains a lot of the costs that go into credit card processing in general.
posted by mskyle at 12:24 PM on July 18, 2023 [1 favorite]
Is it fair to summarize that app-ifying pays a smaller group of people for the work of handling the transactions, but (in a competitive market) will reduce the work and therefore the overall cost?
I don't think this is really a safe statement.
Venmo, CashApp, and to a lesser extent PayPal and Square, compete with the legacy credit card system, which consists of both processors and issuing banks. (The processor, as described above by zachlipton, is the entity who sells the credit-card acceptance service to merchants, while issuing banks basically sell credit cards and the associated line of credit to customers.)
Originally, credit cards were sold to businesses as a way to attract customers and potentially encourage higher spending ("maybe the customer wants to spend $500 but only has $80 in cash, do you really want them to walk out the door without a sale?"), and this was the justification for the ~3% cut that the merchant lost on all credit card sales. Also, as others have noted, handling personal checks or even cash isn't free—no payment mechanism is without cost to the merchant to some degree.
But for many years, the 3ish percent that merchants paid for electronic payments was extremely sticky. Despite a multitude of processors and issuing banks, which in theory should produce competition and drive down fees, that... never really seemed to happen. Some processors offer different rate plans to merchants that can result in savings based on transaction size and volume, but it's really tinkering around the edges.
The only serious alternative was the ATM networks, which offered "debit" transactions at a much more favorable rate to merchants... but customers (in the US, anyway) have not exactly flocked to this service. The credit card companies started offering "debit" cards of their own (which take money from your checking account but use the credit card network, and hit the merchant for the same fees as a regular CC) which muddied the waters, and consumers tend to like the points and rewards stuff that they get from using credit cards (which are paid for out of the merchant fees, by and large). Plus, credit card processors generally made businesses agree not to give cash or ATM-debit discounts to non-CC customers. (This is now increasingly prohibited.)
The value proposition of Venmo or CashApp to a merchant is that they get credit-card-like electronic payments ("no cash? no problem!") at lower fees than by accepting traditional credit cards.
Whether those companies achieve the ability to offer lower fees by being more efficient—by handling umpteen million transactions using X employees' labor while a traditional CC network requires X+N—is pretty questionable. Mostly because it's hard to say exactly how much labor is required to process a transaction in the legacy system. Because of the way the system is split up between the processors, network operators, issuing banks, etc., it's pretty opaque how many people's time is actually required to process one transaction. Doubtless the credit card companies would like you to think that 3% is just 'the cost of doing business' i.e. it's based on their underlying costs… but for a number of reasons (mostly the way that rate has been so stable over time despite general increases in efficiency in other sectors) I tend to doubt that a lot.
My guess is that CashApp and Venmo just aren't making the profit margin on merchant transactions that the legacy system does, and this is acceptable to them at the moment because they're structured (and their investors expect) growth rather than profits. At some point, they probably would like to get a big chunk of marketshare and then raise the rates on merchants as much as they can.
But would an economy-wide transition to "new payments" companies like CashApp and Venmo suddenly mean fewer people employed in finance across the economy? I think that's really hard to say. I'm skeptical: the legacy players have a lot of people employed to do stuff that you can kinda hand-wave away when you're a small fry (stuff like complex fraud investigation, or huge international regulatory compliance teams) but you end up having to take on if you become the big player. However, I tend to think that they're probably a net good to customers/merchants just by bringing some competition into an economic space that's been without it for so long.
posted by Kadin2048 at 5:36 PM on July 18, 2023 [1 favorite]
I don't think this is really a safe statement.
Venmo, CashApp, and to a lesser extent PayPal and Square, compete with the legacy credit card system, which consists of both processors and issuing banks. (The processor, as described above by zachlipton, is the entity who sells the credit-card acceptance service to merchants, while issuing banks basically sell credit cards and the associated line of credit to customers.)
Originally, credit cards were sold to businesses as a way to attract customers and potentially encourage higher spending ("maybe the customer wants to spend $500 but only has $80 in cash, do you really want them to walk out the door without a sale?"), and this was the justification for the ~3% cut that the merchant lost on all credit card sales. Also, as others have noted, handling personal checks or even cash isn't free—no payment mechanism is without cost to the merchant to some degree.
But for many years, the 3ish percent that merchants paid for electronic payments was extremely sticky. Despite a multitude of processors and issuing banks, which in theory should produce competition and drive down fees, that... never really seemed to happen. Some processors offer different rate plans to merchants that can result in savings based on transaction size and volume, but it's really tinkering around the edges.
The only serious alternative was the ATM networks, which offered "debit" transactions at a much more favorable rate to merchants... but customers (in the US, anyway) have not exactly flocked to this service. The credit card companies started offering "debit" cards of their own (which take money from your checking account but use the credit card network, and hit the merchant for the same fees as a regular CC) which muddied the waters, and consumers tend to like the points and rewards stuff that they get from using credit cards (which are paid for out of the merchant fees, by and large). Plus, credit card processors generally made businesses agree not to give cash or ATM-debit discounts to non-CC customers. (This is now increasingly prohibited.)
The value proposition of Venmo or CashApp to a merchant is that they get credit-card-like electronic payments ("no cash? no problem!") at lower fees than by accepting traditional credit cards.
Whether those companies achieve the ability to offer lower fees by being more efficient—by handling umpteen million transactions using X employees' labor while a traditional CC network requires X+N—is pretty questionable. Mostly because it's hard to say exactly how much labor is required to process a transaction in the legacy system. Because of the way the system is split up between the processors, network operators, issuing banks, etc., it's pretty opaque how many people's time is actually required to process one transaction. Doubtless the credit card companies would like you to think that 3% is just 'the cost of doing business' i.e. it's based on their underlying costs… but for a number of reasons (mostly the way that rate has been so stable over time despite general increases in efficiency in other sectors) I tend to doubt that a lot.
My guess is that CashApp and Venmo just aren't making the profit margin on merchant transactions that the legacy system does, and this is acceptable to them at the moment because they're structured (and their investors expect) growth rather than profits. At some point, they probably would like to get a big chunk of marketshare and then raise the rates on merchants as much as they can.
But would an economy-wide transition to "new payments" companies like CashApp and Venmo suddenly mean fewer people employed in finance across the economy? I think that's really hard to say. I'm skeptical: the legacy players have a lot of people employed to do stuff that you can kinda hand-wave away when you're a small fry (stuff like complex fraud investigation, or huge international regulatory compliance teams) but you end up having to take on if you become the big player. However, I tend to think that they're probably a net good to customers/merchants just by bringing some competition into an economic space that's been without it for so long.
posted by Kadin2048 at 5:36 PM on July 18, 2023 [1 favorite]
Best answer: The value proposition of Venmo or CashApp to a merchant is that they get credit-card-like electronic payments ("no cash? no problem!") at lower fees than by accepting traditional credit cards. // Doubtless the credit card companies would like you to think that 3% is just 'the cost of doing business'
And I think it's worth also noting that this is different to other parts of the world.
In China, the most popular payment method, WeChat Pay, has an average merchant processing fee of 0.6%.
In Australia, the RBA estimates the average merchant fee collected by Visa and Mastercard is between 1.0% and 1.5%.
Venmo charging 1.9% instead of 3.0% may lower costs and bring payments more in line with the rest of the world.
posted by xdvesper at 6:21 PM on July 18, 2023
And I think it's worth also noting that this is different to other parts of the world.
In China, the most popular payment method, WeChat Pay, has an average merchant processing fee of 0.6%.
In Australia, the RBA estimates the average merchant fee collected by Visa and Mastercard is between 1.0% and 1.5%.
Venmo charging 1.9% instead of 3.0% may lower costs and bring payments more in line with the rest of the world.
posted by xdvesper at 6:21 PM on July 18, 2023
Are Venmo and CashApp seeing significant uptake by merchants, though? I don’t see them much outside of farmers market or fair/festival sorts of situations, and when I’ve looked at offering it at our store there didn’t seem to be much of an API to integrate into a point-of-sale system.
(On edit, to relate it back to the question: I don’t see how these apps in particular would be shifting anything related to inflation without significant presence among merchants.)
posted by jimw at 9:41 PM on July 18, 2023
(On edit, to relate it back to the question: I don’t see how these apps in particular would be shifting anything related to inflation without significant presence among merchants.)
posted by jimw at 9:41 PM on July 18, 2023
Originally, credit cards were sold to businesses as a way to attract customers and potentially encourage higher spending ("maybe the customer wants to spend $500 but only has $80 in cash, do you really want them to walk out the door without a sale?"), and this was the justification for the ~3% cut that the merchant lost on all credit card sales. Also, as others have noted, handling personal checks or even cash isn't free—no payment mechanism is without cost to the merchant to some degree.
Um, maybe you mean credit cards as a physical product that someone found to be profitable and predictable enough to turn into a business, but credit has existed for thousands of years.
posted by The_Vegetables at 2:04 PM on July 19, 2023
Um, maybe you mean credit cards as a physical product that someone found to be profitable and predictable enough to turn into a business, but credit has existed for thousands of years.
posted by The_Vegetables at 2:04 PM on July 19, 2023
Response by poster: In case it’s useful to future readers of the thread, I’m getting recommendations for a book Payment Systems, Nacamuri — post 2008, diagnostic and descriptive?, but expensive!
posted by clew at 3:14 PM on July 24, 2023 [1 favorite]
posted by clew at 3:14 PM on July 24, 2023 [1 favorite]
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