[AnthonyMouse]

> This is actually accounted for in the merchant interchange rate. It varies by MCC and potentially merchant to merchant and the frequency of chargebacks is built into how much the merchant pays for processing.

But the number of chargebacks is as much related to the frequency of buyer fraud in that industry rather than anything the merchant can control. If it's all buyer fraud then the rate is high, but how do you solve that other than by moving the liability back to the buyer?

> Merchants may offer cash or other payment method discounts, so in a sense, what you're asking for already exists.

It exists in person, but where's the equivalent that allows you to pay cash over the internet? Cryptocurrency, maybe, and now we're back to monopolies and market share because you can't really accept something people aren't familiar with and don't know how to use.

> If someone has a number of chargebacks, the customer is investigated and has their account suspended or charged with fraud.

One of the most common sources of chargebacks is identity theft. Someone makes a purchase on a stolen card and then the real cardholder gets the bill and disputes the charge. The merchant in that case did nothing wrong but has to eat the loss, even when the identity theft was enabled by the cardholder's negligence. Then we get more such negligence, and lose the demand-side market pressure for higher security like two factor authentication and replacing credit card numbers with public keys that could have prevented the fraud, which increases costs for everyone.

But investigating the customer whose name is on the account does you no good in that case, because even if it was proximately their fault, it wasn't them who actually committed the fraud and it won't be their name on the account next time when some other negligent customer carelessly gives all their information to a fraudster because it costs them nothing to do so.

> Again, merchants and buyers are aligned in this case, both make money on greater transaction volume, this feature increases transaction volume, that's why it's there, otherwise it wouldn't be there.

It's there because the credit card companies don't give customers the choice.

> Also, paying per-transaction isn't really insurance as it leads to massive adverse selection risk.

All insurance leads to adverse risk selection. That's the nature of insurance. It's why you can't buy life insurance when you're 114 years old. Should we force them to sell it anyway and then make everyone else pay for it?

> The most helpful chargeback for me personally was a two thousand dollar chargeback against Expedia where they refused to refund a refundable ticket. I filed a chargeback and I got the money back within a few days.

And you would have otherwise had to take them to small claims court, which would have been more inconvenient.

Meanwhile if you paid 3% more on purchases totaling $200,000 over the last decade due to the increased buyer fraud, have you really come out ahead?

> It's a good thing, unless you've got data to back your case.

We would have the data if we gave people the choice.

[arcticbull]

> But the number of chargebacks is as much related to the frequency of buyer fraud in that industry rather than anything the merchant can control. If it's all buyer fraud then the rate is high, but how do you solve that other than by moving the liability back to the buyer?

You are. Retail price is adjusted to account for interchange which is adjusted to account for risk. Merchants can offer cash discounts.

> It's there because the credit card companies don't give customers the choice.

Again processors make money when transaction volume is higher. If this reduced transaction volume why would they do it?

> Meanwhile if you paid 3% more on purchases totaling $200,000 over the last decade due to the increased buyer fraud, have you really come out ahead?

Average merchant interchange is around 3% and there are 2% cash back cards, so it’s 1% net, meaning I’d be out $2000, so break even. Not to mention the interest-free one month loans, car rental insurance, loss insurance, warranty extensions and so on.

> We would have the data if we gave people the choice.

So you’re speculating in spite of the fact interests are currently aligned. And setting aside that the choice specifically exists for all brick and mortar merchants - so is there some reason they’re a poor sample?

[AnthonyMouse]

> You are. Retail price is adjusted to account for interchange which is adjusted to account for risk. Merchants can offer cash discounts.

That's not moving the liability the buyer, that's just part of the insurance cost. It doesn't cause the buyer to be less careless or care more about security. And there is still currently no plausible cash-equivalent over the internet.

> Again processors make money when transaction volume is higher. If this reduced transaction volume why would they do it?

Insurance companies make more money when everybody has to buy insurance. How is that an argument for forcing everybody to buy insurance? "Middlemen make more profit" is an argument against.

> Average merchant interchange is around 3% and there are 2% cash back cards, so it’s 1% net, meaning I’d be out $2000, so break even.

You're using peak cash back and average interchange fees. The cards with 2% cash back aren't the cards with 3% interchange fees. And you're not accounting for the merchant losses from the chargeback itself which causes them to have to charge higher prices. Meanwhile a legitimate $2000 chargeback is atypically large.

Those numbers go even further south for people with bad credit who can't get a cash back card and then have to shop at low income merchants who suffer a high customer fraud rate, meanwhile they won't be making a large legitimate chargeback because they can't afford purchases that large to begin with.

> Not to mention the interest-free one month loans, car rental insurance, loss insurance, warranty extensions and so on.

Marketing gimmicks that purposely sound valuable but aren't worth very much in practice.

> So you’re speculating in spite of the fact interests are currently aligned.

You're asking for data so I'm asking to run the experiment. How else do you get better data?

And your claim that the interests are aligned ignores the cost of the insurance. If you can get a discount for waiving your right to a chargeback for a merchant you trust, it's basically free money, and your interests are both aligned in not paying for insurance you don't need. If the fee is then high to have a right to do a chargeback against the shady merchant you don't trust, maybe there is good reason for that.

> And setting aside that the choice specifically exists for all brick and mortar merchants - so is there some reason they’re a poor sample?

The sample is confounded because many merchants don't offer a cash discount but many credit cards still offer cash back, and cash is slower, so many customers prefer credit cards for reasons outside of the ability to refuse charges later.

But even then, many people nonetheless pay cash, especially when the discount actually exists. If the value of being able to do a chargeback was so great, why would anybody ever do that? More importantly, why shouldn't they be able to, including over the internet?

[arcticbull]

> That's not moving the liability the buyer, that's just part of the insurance cost. It doesn't cause the buyer to be less careless or care more about security. And there is still currently no plausible cash-equivalent over the internet.

Right, which drives up transaction volume which in turn means the payment network and the seller get more volume and more money. The risk is accounted for in interchange.

> Insurance companies make more money when everybody has to buy insurance. How is that an argument for forcing everybody to buy insurance? "Middlemen make more profit" is an argument against.

The bigger your risk pool the lower your cost. That's how insurance works. The more people you can socialize big losses over, the less you have to charge each person. Your margin on top is a function of your business goals. It's not strictly true that more people equals more money, you can always pass on the costs. Depends on where you make your money. A 501(c)(3) that offers insurance for instance would just charge less.

> You're using peak cash back and average interchange fees. The cards with 2% cash back aren't the cards with 3% interchange fees. And you're not accounting for the merchant losses from the chargeback itself which causes them to have to charge higher prices.

3% for card present is actually really high, I was using a blended average of the ~2.5ish% charged for card-present, 3ish% charged for online and 3.5ish% charged for card-not-present transactions at the point of sale to small and medium sized businesses. You can expect this to be 1% lower for merchants of substantial scale.

I'm not sure what you're suggesting is true. If we look at markets that cap interchange fees, they charge 0.3% [1]. Therefore, I think it's safe to assume that 0.3% is typical to cover the cost of loan origination and fraud. The rest is returned to consumers via rewards programs, plus a little cream due to lack of regulation. Further Visa interchange on that 2% cash back card is no more than 2.4% meaning I'm not out of the ballpark with my 2% rewards + 0.3% loan origination costs + 0.1% cream/chargebacks/misc insurances/etc. [2]

> Meanwhile a legitimate $2000 chargeback is atypically large.

Hey, you asked for mine, I gave it to you.

> Those numbers go even further south for people with bad credit who can't get a cash back card and then have to shop at low income merchants who suffer a high customer fraud rate, meanwhile they won't be making a large legitimate chargeback because they can't afford purchases that large to begin with.

Again, see [2].

> Marketing gimmicks that purposely sound valuable but aren't worth very much in practice.

In what way is my getting a one-month-free loan a gimmick? It's the foundation on which I structure my personal finances, secure in the knowledge if someone defrauds me I don't have to pay until it's resolved. I've also taken advantage of the loss protection.

> You're asking for data so I'm asking to run the experiment. How else do you get better data? And your claim that the interests are aligned ignores the cost of the insurance. If you can get a discount for waiving your right to a chargeback for a merchant you trust, it's basically free money, and your interests are both aligned in not paying for insurance you don't need. If the fee is then high to have a right to do a chargeback against the shady merchant you don't trust, maybe there is good reason for that.

If you start letting people waive the cost of insurance adverse selection kicks in so now only the people who plan to abuse the system pay for the insurance making it prohibitively expensive. This is why you don't allow people whose houses are on fire to buy fire insurance. Or why until recently you couldn't get health care in the individual market that covered pre-existing conditions. Why on earth wouldn't you not get cover until you needed it then buy it? Because that's not how insurance works.

> The sample is confounded because many merchants don't offer a cash discount but many credit cards still offer cash back, and cash is slower, so many customers prefer credit cards for reasons outside of the ability to refuse charges later.

Debit cards?

> But even then, many people nonetheless pay cash, especially when the discount actually exists. If the value of being able to do a chargeback was so great, why would anybody ever do that? More importantly, why shouldn't they be able to, including over the internet?

I'm saying the value you're suggesting doesn't exist. If it did, it'd be an option. And that that's not how insurance works.

I don't know, you keep making un-founded assertions as though they were fact then demanding an opportunity to prove them. I don't understand why you're suggesting that this is some big money-making scam when it's far more profitable for these companies to increase transaction volume than to skim 'chargeback insurances' which just aren't that big a portion of interchange.

Let me ask this: how much do you think chargebacks actually cost and do you have data to back this up.

[1] https://www.adyen.com/blog/all-you-need-to-know-about-the-eu...

[2] https://squareup.com/guides/credit-card-processing-fees-and-...

[AnthonyMouse]

Part 2 because "that comment was too long":

> In what way is my getting a one-month-free loan a gimmick?

The thing that actually pays for that is the "oops" that regularly happens at scale when busy people trying to maximize their "free loan period" miss the deadline for the late fee and then get whacked with a charge high enough to subsidize "free loans" for everybody else.

Notice that most banks have an auto-pay option for making the minimum payment every month or some other fixed amount, but not one for automatically making a payment in exactly the amount that you owe that month, on the last day that you owe it.

It's also a bit of sleight of hand to begin with, because the bank has extremely low borrowing costs on one hand (the money in your account doesn't physically exist and they're only required to keep a small fraction of it in reserve), and on the other hand the risk of non-repayment is already priced into the nature of the credit card whether it's one day or thirty, so their cost is negligible. But that also implies that they could still do it even if you couldn't issue a chargeback to the merchant, and make their money in the same way (late fees and high interest charges).

> It's the foundation on which I structure my personal finances, secure in the knowledge if someone defrauds me I don't have to pay until it's resolved.

Then you would pay for the insurance anyway, as would other people like you, so what does that do to your argument that it would become unaffordable?

Though even you probably don't need it for <$100 purchases.

> If you start letting people waive the cost of insurance adverse selection kicks in so now only the people who plan to abuse the system pay for the insurance making it prohibitively expensive. This is why you don't allow people whose houses are on fire to buy fire insurance. Or why until recently you couldn't get health care in the individual market that covered pre-existing conditions. Why on earth wouldn't you not get cover until you needed it then buy it? Because that's not how insurance works.

But that's not how this would work either. You can't wait until after the merchant defrauds you and then buy the insurance. You have to do it at the time of purchase.

Then basically nobody would do it for small purchases from trustworthy merchants, but there is no reason to do it in that case, and that's the point. Meanwhile if you're going to spend $2000 for a refundable ticket you want to make sure is actually refundable, go ahead and pay the extra few percent. But don't do it for the non-refundable ticket and waste the money for nothing, because disputing the charge in that case would be fraud and paying a premium for the ability to is not very valuable.

And yes, the cost of the insurance would be a bit higher because everyone who plans to burn down their house for the insurance money is first going to buy fire insurance, and not requiring everyone else to buy fire insurance means the cost of the arson has to be spread over fewer people. But that doesn't cause fire insurance to be unviable -- and if you want it to cost less, the answer is not to force everybody else to subsidize arson, it's to reduce the amount of arson. But forcing insurance on everyone only creates more of them, because you cause there to be more people in a position to make money by collecting an insurance payout from insurance they wouldn't have bought but were forced to anyway. (The analog here being e.g. people with buyer's remorse wrongfully disputing credit card charges.)

> Debit cards?

Debit cards use different rules than credit cards but they still allow chargebacks under many circumstances. They also typically have fees but not rewards, so people avoid them.

> I'm saying the value you're suggesting doesn't exist. If it did, it'd be an option. And that that's not how insurance works.

Part of the reason it doesn't exist is that laws don't really allow it. It's not a free market outcome. But the credit card companies are largely the ones who control those laws, so it's still completely reasonable to blame them for it.

> I don't understand why you're suggesting that this is some big money-making scam when it's far more profitable for these companies to increase transaction volume than to skim 'chargeback insurances' which just aren't that big a portion of interchange.

The insurers get their vig on every transaction. That's why they want to maximize volume. But "maximize volume" doesn't actually help everybody else -- adding a million more transactions when 20% of them are fraudulent helps the payment processors because they get paid their full fee to process a million more transactions. But the fraud costs everyone else more than the value of those additional transactions. And the existence of insurance for transactions that would otherwise be trustworthy enough to conduct without it induces fraud, because there are many types of fraud only work against an insurer who doesn't know who to believe and not an honest counter-party who well knows whether they've provided you with goods and services or not.

The big cost isn't transaction profits, it's the cost of the fraud itself, which the payment processors are foisting onto everyone else.

> Let me ask this: how much do you think chargebacks actually cost and do you have data to back this up.

If you're just looking for numbers:

https://chargebacks911.com/chargeback-stats/

"All totaled, fraud costs the average merchant 1.47% of their total revenue."

But that's not including the destruction of businesses. When Best Buy eats the cost of fraud, they raise prices and you pay more. But what happens to anything controversial? Their chargeback rate gets above some threshold as a result of trolls and spouses questioning charges the other spouse doesn't want to admit to, and they get cut off by the payment processor and go out of business. What's the cost of that?

[AnthonyMouse]

> Right, which drives up transaction volume which in turn means the payment network and the seller get more volume and more money.

It only drives up transaction volume for high risk transactions, which is bad because those are the ones that increase the amount of fraud.

> The risk is accounted for in interchange.

The risk is magnified from fraud taking advantage of the insurance. You have to pay more because the insurance is a deep pocket to steal from with weak ability to protect itself because the actual parties are no longer vested in preventing it. Or the cost of the "insurance payout" is paid by the merchant who knows that they're innocent but the payment processor has no way to know that.

> The bigger your risk pool the lower your cost. That's how insurance works. The more people you can socialize big losses over, the less you have to charge each person.

That's not how insurance works at all. You buy insurance because you and some other people each have a 0.1% risk of losing $100,000 and you would each rather pay $100 with 100% probability than $100,000 with 0.1% probability. For this to work it makes no difference whether there are a million other people or a billion. It only matters if you get down to something like 1000 people and even then your expected value is still the same, but there is a greater chance that your premium ends up as either $200 or $0 instead of $100. But we're not talking about population numbers that low here anyway.

And the socialized losses are the issue, because that's a moral hazard. Once you're insured you take bad risks and rely on the insurance to eat it, which raises costs for everybody.

When you have to insure a $100K+ loss you can't afford to suffer, you're willing to eat that overhead. But to insure a $100 loss? It makes no sense. You're going to make enough $100 purchases yourself that you can "self insure" cheaper than an insurance company with bureaucratic overhead and moral hazard can do it for you. It costs less to lose your modest purchase price a small percentage of the time than to pay a higher than that percentage for the insurance. And the amount you lose buying the insurance is inherently more than the amount you lose of your own on average unless the insurance company is losing money.

> Your margin on top is a function of your business goals. It's not strictly true that more people equals more money, you can always pass on the costs. Depends on where you make your money. A 501(c)(3) that offers insurance for instance would just charge less.

If your net margins per transaction as an insurer are a given percentage, you make more money by processing more transactions unless that percentage is zero or negative. A non-profit may purposely have zero margins, but then in what sense is it "in their interest" to have greater volume? (And how many non-profit major banks are you aware of?)

> 3% for card present is actually really high, I was using a blended average of the ~2.5ish% charged for card-present, 3ish% charged for online and 3.5ish% charged for card-not-present transactions at the point of sale to small and medium sized businesses. You can expect this to be 1% lower for merchants of substantial scale.

You're implying that "merchants of substantial scale" are paying an average of around 2%, or around 1.5% for card present transactions, for cards paying 2% cash back. That seems a bit fishy, doesn't it?

Square is using "let us mush all this together and average it out for you" pricing, but that only really works if they reject merchants with high chargeback rates etc., and still requires them to raise their rates if cards that give higher rewards by charging higher fees become more popular.

Meanwhile most other payment processors are going to impose chargeback fees on top of that, which is what we're really trying to avoid here -- plus the major cost that isn't in any of these numbers which is the cost of lost merchandise and labor when there is a fraudulent chargeback for goods and services already rendered.

> Again, see [2].

Right, so the merchant is paying 2.9% to Square, but the poor customer has a 0% cash back card because with their credit history it's all they can do to get a credit card offer at all. Then too many of the merchant's other low income customers commit fraud and they get kicked off of Square and have to suffer the high end of "between 2.87 percent and 4.35 percent" from whichever of Square's competitors will take them.

This customer might be quite pleased to precommit to not doing a chargeback with a trustworthy merchant in exchange for a ~4% discount.

[b1daly]

I’m not quite following you here. Are you suggesting that there is an alternative to the current system that allows buyers and sellers to opt out of the ~2% fee built into prices to cover the cost of fraud?

And that this system is currently precluded by law?

As I understand it, merchants are now allowed to offer a lower price for cash purchases. The fact that so many merchants use credit card systems seems to speak to their marginal value.

My off-the-cuff analysis is that there is a certain amount of fraud that is inevitable with any non-cash transaction, especially those that allow chargebacks.

The credit card companies have tried to enforce the lack of a cash discount because it enables them to spread the costs across virtually the entire system of users. Without the ability to do this, I don’t see how a system as widely adopted as Visa and MasterCard could have got off the ground. This is what makes it work.

If we assume the cost of fraud is independent of the structures that determine who bears the cost (a big assumption) then the argument is going to be about how that cost is apportioned among users.

Since the system has been adopted, overwhelmingly, by both buyers and sellers, it seems reasonable to conclude that it has been a (huge) value add to the whole economic system.

If you allowed participants to use the system but opt out of paying what is essentially the insurance policy against fraud, the total cost of fraud in the system can’t go down without the gross level of transactions going down.

You seem to be saying that there should be a tiered, opt out system of fees. Buyers wanting to use their card in high risk (of fraud or chargebacks) industries, like porn, should bear the cost of providing the fraud insurance buy paying higher fees?

It begs the question why such a service is not being provided by the market. Essentially, credit card companies have come to the conclusion of providing such a service is not profitable.

In a sense, they are offering an “opt out” for the extreme cases like porn, by making it hard for the porn providers to offer credit card services at all.

Forcing a universal fee structure on everyone provides two huge advantages:

It facilitates the build-out of the network itself, which provides tremendous value to all users.

And it lowers the total cost of determining what the actual cost of fraud insurance should be. This cost would fall across all parties.

The card providers would have to build the industrial infrastructure to understand the costs at a more granular level. It would require both capital investment and ongoing costs to manage such a system. It would also incentivize non-productive activity around trying to “game” the system. Essentially it would be a new attack surface.

It would also move some of the costs of evaluating the risk of a given purchase onto the consumer. This would result in a large net increase in total costs as individuals who lack the skill and scale to properly do this would be forced into it. This would also result in a massive “duplication of effort.”

Intuitively, I think this would result in a large decline in overall economic activity, as it simply would not be worth the investment to make certain kinds of purchases.

The current system puts the costs of fraud mitigation into the entity who can provide it at the lowest cost.

There is also of course the simple argument that the credit card system is opt-in. It is possible to conduct business with cash or check. I use a tech who repairs speakers that I collect. He adds 3% to use Paypal. I opt to send him a check.

You can also send cash through the mail. In this instance, a transaction where the seller won’t release the product until they receive the funds provides the kind of transaction you want, where the entire risk of fraud (or loss) is borne by the buyer.

I think most small businesses at least would accept cash in person or the mail.

It’s not ideal, but my guess is that how the net cost of fraud protection with electronic transactions is distributed is pretty close to ideal.

This is just one of the many problems that render crypto-currency systems to be hopelessly expensive. The lack of ability to build in “socialized fraud protection cost” will prevent mass adoption.

They also suffer from the problem that the cost of securing the network should rise in a system lacking inflation as the total value of transactions increase.

The game theoretical costs of providing the minimum of security a proof-of-work system offers are hard to parse. But the current cost of bitcoin transactions is outrageously high, when accounting for mining cost.

IMO, the bitcoin system is being supported by a combination of outright fraud, speculative investment, and money laundering.

The real costs land in a very disproportionate manner, for example, when exchanges go belly up, or when an individual is scammed out a large sum.