[marshray]

Merchant account providers are not in the insurance business.

And why not? They could at least be obligated to obtain such insurance. Seriously, what else are they doing with that 3% of all those transactions?

Primarily because we accept the status quo because the merchant is in such a weak bargaining position. Let us not forget that merchants and consumers form the basis of our economy whereas payment and banking systems are just plumbing.

If the financial industry had more incentive to increase the security of payment systems, then maybe we wouldn't have the absurdly insecure systems that we have now. Inter-bank ACH is fundamentally an honor system. Credit/debit networks are basically a shared secret between you and everyone you've ever spent money with.

I'm not saying merchants should be immune from all chargebacks. I'm just saying that the lack of competition in payment systems is effectively disallowing the benefits of an LLC to the little guy.

[tptacek]

And why not?

Because I was joking; the cost to ensure businesses that risk thousands of chargebacks would be stratospheric.

[marshray]

But the cost of fraud is already bourne by the economy. It gets bourne by the taxpayers, the consumers, and the merchants. And yes it is stratospheric, but so is the revenue of the current payment industry.

What I'm suggesting is:

A. It makes the little sense for the personal savings of an entrepreneur to be the underwriter of last resort.

B. If the financial industry wasn't so easily able to push the risk off on others, we might find that they become interested in real security improvements that result in an overall decrease of fraud.

Win-win.

[tptacek]

The fraud/abuse we're talking about in this case is perpetrated by the merchants themselves. Want to see what a system of "real security improvements" looks like for a payment processor that doesn't require your personal credit staked to your account?

It's called Paypal.

[marshray]

The fraud/abuse we're talking about in this case is perpetrated by the merchants themselves.

But the merchant account issuer doesn't distinguish fraudulent merchants from losses due to stolen cards, fraudulent customer chargebacks, etc. So currently in the US, essentially all fraud costs tend to be passed on to the merchant (and for small entrepreneurs, their kids' college savings).

It's called Paypal.

Note that most of the criticisms people level against Paypal aren't against their policies and mechanisms that are a rational defense against risk. It's things like the destroyed antique violin, banning merchant accounts for "editorial" reasons, outright hostile customer relations, and (last but not least) a penchant for holding on to other people's money for as long as possible for completely unjustified reasons.

Hopefully we can agree that the root cause here is the prevalence of fraud itself. A more secure transaction system could make things nicer for everyone. The problem is that the payment networks are the only ones who can institute meaningful change and the current system (that enables them to pass the costs on to merchants) suits them just fine.