[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.