Want To Make A Quick $100 Billion? One Word: Plastic

Imagine if there was a medium of exchange where it was quick and easy for the consumer, no risk of fraud or loss to the merchant, and no third party sticking its finger in the middle to pull out a few points for doing nothing?  If only someone could come up with such a thing.  Maybe they could call it, I dunno, cash?

From the New York Times:

“That is the crux of the matter,” said David Robertson, publisher of The Nilson Report, a payments industry publication. “The real savings is not about fraud, the real savings is about interchange.” Last year, merchants paid about $61 billion in interchange fees, Mr. Robertson said, compared with about $30 billion in fraud losses.

Let’s pull out the old Texas Instruments calculator: $61 billion, plus $30, and all of a sudden you’re talking real money.  The second, smaller number, is what gets lost to fraud, which is sold to the public as if it’s just a bunch of banks being really thoughtful about protecting them. It’s nonsense. It protects the credit card issuers, who are responsible for fraudulent use of their card. 

But cards are easy, fun, prestigious (got that gold card? Platinum?  Black?  You must be really important).  And if there was ever any doubt that the public is stupid enough to buy anything, there are debit cards, where the banks have sold people on the joys of eliminating your monthly float by deducting funds immediately from your bank accounts, enjoying their monthly float before having to pay the merchant.  What did you think happens to that money they take from you, hold for a month, and only then pay out to merchants? Less their piece of the take, from 2 to 4 %.

This all arises as America shifts from old school plastic to new school plastic with a computer chip.

The fight involves new payment cards, issued over the last year, that come with a small square security chip that can help make in-person transactions more secure. Retailers complain that they have spent billions of dollars upgrading their payment terminals to accommodate a system that cuts down only on the fraud shouldered by banks, not merchants. Chip and PIN, long the standard in Europe, would help retailers verify not just the card, but the person using it.

In Europe, waiters walk around with little handheld devices, where you stick a card in one end, punch in a PIN, and voilà, payment is made.  They’ve done it this way for a while, though in the land of iToys, it had yet to be seen.

When it comes to eliminating fraud, this double system, chip plus PIN, is far more effective than chip alone. But here, it was decided that it was too much trouble, so they went with chip alone.  The fear was that making people input a PIN would be too hard for Americans, too time-consuming, too much of a hassle. The fear is that we would figure out that this annoyance to us of having to jump through hoops for the benefit of credit and debit card issuers wasn’t worth it.

The emptiness of the banks’ argument is revealed in their response to some states’ attorney generals, complaining about the implementation of the new chip protocol without the PIN:

Unfortunately, certain merchant lobbying groups have been spreading an outdated narrative that mandating the use of PINs could eliminate fraud and singlehandedly secure the electronic payments system. Such a narrative is dangerous. Focusing on just one technology bestows a false sense of security at a cost that everyone bears. It also conflates credit card fraud and data breaches. As discussed below, PINs would not have prevented any of the recent data breaches at so-called “Big Box” retailers.

The argument that “such a narrative is dangerous” is so facially ridiculous as to reveal their craven purposes. How could it possibly be “dangerous” to use a two-prong security protocol rather than one? But when it comes to stupid arguments, credit cards issuers are masters. It’s what keeps them alive, and sitting atop their $61 billion earnings.

The irony is that the secondary concern, data breaches, is just another outgrowth of the use of credit cards. While it’s true that neither chips, PINs nor both will prevent data breaches, if people didn’t use cards at all, there would be no data breaches at all. Problem solved!

For merchants, the issue arises from the cost of updating their card terminals to accommodate the new chip technology.  It’s not an inexpensive problem, and for small businesses, it’s just another new cost being dumped on them.

While large retailers have spent billions of dollars upgrading their equipment, small businesses also say that the new cards are overly burdensome without adding enough protections. Jared Scheeler, who sits on the board of the National Association of Convenience Stores, testified in front of the House Small Business Committee last month. He said, “It does not appear that the card companies took into consideration the realities of operating a small business when they came up with their transition plans.”

Mr. Scheeler testified that it cost the average convenience store $26,000 to upgrade its gas pumps and point-of-sale terminals; average annual profit at convenience stores is about $47,000.

But because of “exorbitant” swipe fees and other liabilities, Mr. Scheeler said, merchants will end up bearing “far more than 100 percent of the cost of fraud.”

Either somebody pays these costs, in the form of higher prices for goods and services, or businesses go out of business, which isn’t good for them or anyone else.

It’s not that credit cards are a new-fangled idea. Diners Club has been around since 1950, when it was primarily used by traveling businessmen who preferred not to carry as much cash as they might need, or needed the ability to be able to spend more than the cash they had on hand.  Aside from them, people really had no use for credit cards.

But then came the push to eradicate the use of cash, which allowed an underground economy that could avoid paying sales tax. With credit cards, the government could also follow your purchases, not to mention your whereabouts. And later came civil forfeiture of cash, because only drug dealers still used it (as far as the government was concerned).

For the credit card companies, it required a test of our mettle, because the whole idea was so monumentally good for them and bad for us that only a fool would stop using cash, immune from fraud and without the need to suck $61 billion out of the economy for the dead use of banks.  But they pulled it off. We bought it.

And now, it’s happening again, except this time, we’re so inured to a world of plastic that it doesn’t even dawn on people that nearly $100 billion is lost to a productive economy for no better reason than it makes the banks money, the government happy, and us feel important by being a “member since 1985.”

 

41 thoughts on “Want To Make A Quick $100 Billion? One Word: Plastic

  1. delurking

    My time is worth a lot to me. The salary, insurance, paperwork, etc. associated with paying the guy running the cash register to make change costs a lot. The running back and forth from the bank to get rolls of coins and stacks of $1 and $5 bills in order to be able to make change costs a lot, especially if you do enough business that you have to pay an armored car service to do it for you.

    How much, you ask? Well, it depends on the details of the particular situation. However, it isn’t as if the costs of the technology required to keep the credit card system operating aren’t offset by some reductions in the cost of running a business and time spent by consumers paying for things. Some business might be better off with an all cash system, some might be better off with the recent status quo, and some might be better off under the new chip-card system. The fact that the businesses with the most political pull got the regulations shifted slightly in their favor is just a general problem with our government.

    1. SHG Post author

      No doubt it is very hard for a business to anticipate its currency/coin needs and have sufficient rolls of dimes on hand. So many really hard things to think about. Who could handle such hard business stress?

      As for the cost of a person running the cash register and making change, it doesn’t seem to vary whether he’s shoving plastic in a slot (and waiting, waiting, waiting, for the computer to smile) or counting pennies. But that’s just from the perspective of the customer, standing there the same length of time regardless.

      1. delurking

        It is not hard, but it does cost money.

        In my experience, credit card transactions are much faster that cash transactions. You must have really slow credit card machines near you. Furthermore, at my supermarket and Home Depot, there are teller-free customer-checkout lanes, which clearly saves employee costs and customer time and money.

        I didn’t give an exhaustive list, by the way. Don’t forget the reduction in taxpayer money going to the Bureau of Engraving and Printing to create and distribute all the cash (and the collection and disposal of old cash) that would be required in the absence of credit cards. Don’t forget to compare the credit card fraud losses to the cash theft losses. All this is basically impossible, which is why we let the market sort it out.

        1. SHG Post author

          Sigh. You know, I try being a nice guy, responding to stupid comments relatively nicely, and yet sometimes a commenter feels compelled to insist on replying, despite having only more idiotic things to say. So here’s what comes of it.

          Do you think to yourself, “nobody but me has ever gone to a checkout line, so anyone else reading SJ needs to know all about my experience because my experience is so much more valuable than anyone else’s, and they’re such fucking idiots that they will look at my experience and say to themselves, ‘well, if that’s what delurking’s experience is, that changes everything’?” Seriously, think before you need to dig that fucking hole deeper.

          And as for engraving, they still make currency. Yes, there’s a cost to make more, but nowhere near the cost of $100 billion. There’s also a cost of loss of tax revenue to the government. So what? Unless you had a point to make that the $100 billion lost is less than the cost of the alternative, it’s pointless. Now, you happy you had to push this point? Was it really worth it?

          1. delurking

            In a bad mood today, eh? You berate me for offering a personal experience in response to your personal experience.

            I think you’ve missed the points I am making, which are:
            1. That it is nowhere near obvious that society as a whole does not get more than $100B in benefits from credit card use.
            2. That it is very difficult to account for all of the costs and benefits.
            3. The market has landed where it is today, and markets are pretty good at making decentralized cost-benefit decisions that in aggregate yield a net benefit, so therefore it is likely that the $100B is less than the cost of the alternative.

            1. SHG Post author

              And so, after my last comment, you still want to dig? I just don’t get it? No, you wrote a comment about your experience, to which I replied. You repeated yourself, reiterated your experience, to which I tried to make it clear that you had pushed yourself too far. So the best idea that popped into your head is to argue further? Fucking nuts.

              No, I didn’t “miss your points.” I don’t find them at all persuasive. Repeating yourself doesn’t make them more persuasive, but does make me wonder what sort of asshole you are. Am I getting through to you at all? Or are you one of those blithering idiots who thinks if he just keeps writing the same stupid shit over and over, the world will suddenly recognize his brilliance and bow to him?

            2. Myles

              It must be that Scott’s in a bad mood. It couldn’t possibly have something to do with what you wrote.

            3. Tom

              I have to offer a personal experience to delurking’s personal experience.

              I was traveling recently and struck up a conversation with the guy next to me who happened to be the owner of the restaurant (along with 12 others in Michigan). I paid cash and we got to talking about CC fees. He told me that CC fees cost him twice as much as it did to cover the costs of his employees health insurance.

              I also have to add that I’m not completely comfortable with markets making all societal decentralized cost-benefit decisions.

          2. Jay

            Meh….sometimes you have an argument, sometimes you give up and start yelling. The blog owner “wins” nonetheless.

            1. SHG Post author

              I’ve explained how this works before. Comments often aren’t as fascinating to me as they are to the commenter, and the commenter’s desire to keep arguing isn’t shared by me. Most commenters, like you apparently, don’t grasp how this fits together, which is why I’ve tried to explain it. It changes nothing for me.

              I deal with all the comments, including the ones you never see, and many are utterly fucking idiotic. Especially the non-lawyer and n00b comments, but the non-lawyers and n00bs don’t grasp why they’re idiotic. Others see it very clearly.

              And frankly, your “meh” really isn’t relevant. If my handling of comments doesn’t suit your taste, then go elsewhere. Bye.

        1. SHG Post author

          What could 100 million small business owners know about running a business anyway? What could 300 million small business users know about how much time it takes to pay for a purchase? What could one commenter know about saying his piece and letting its persuasiveness speak for itself?

          Are you right?

        2. Myles

          And it’s not like lawyers are small business owners, and represent small business owners, and counsel small business owners.

          1. SHG Post author

            Well, we don’t tend to have cash registers at checkout, but like pretty much every person alive, we know how it works. Checkout isn’t rocket science.

  2. Keith

    If only someone could come up with such a thing. Maybe they could call it, I dunno, bitcoin?

    The idea of better security isn’t a new-fangled idea either. Diner’s club may have been around since 1950, but it was BofA that upped the ante when they dropped 60k cards in mailboxes all over Fresno California. The industry loved it; people got credit, used it and they profited. But after 5 million cards were dropped on Chicago, the most logical thing ever happened: corrupt postal workers, felons & wannabe criminals started to steal cards people didn’t even know existed and trashed credit reports of housewives all over the midwest.

    So Congress made up 15 U.S. Code § 1643.

    With liability the responsibility of the card issuers instead of the merchants and customers, the levels of fraud receded. Maybe, just maybe, banks were able to figure out how to stop the problem when it was in their financial best interest.

    And that’s the answer here. We need to change who is responsible for paying the $30 Billion. Because I don’t know how to stop fraud & making me pay it won’t fix this. But Visa does.

      1. Keith

        I’ll chalk it up to a lack of sleep (and seeing what I wanted to see). But my first line was relevant.

        “Imagine if there was a medium of exchange where it was quick and easy for the consumer, no risk of fraud or loss to the merchant, and no third party sticking its finger in the middle to pull out a few points for doing nothing?”

        I’d call it bitcoin or whatever is going to replace it. It’s a great way to keep what’s good about electronic payments (cash isn’t so handy for internet sales coming from China via Amazon), while eliminating the man in the middle pinching pennies via interchange (and other) fees.

        1. SHG Post author

          I’m fascinated by Bitcoin as a means of exchange fabricated out of absolutely nothing. No precious metal. No other thing of value. No national debt to be paid by a tax base. Nothing. It’s just a virtual concept, and people accept it as a means of exchange. How cool is that?

          1. Keith

            I thought of it that way also at first. But I’ve come to agree that it’s more than a means of exchange. It has a lot of possibilities.

            And as far as “no other thing of value”, that’s not entirely accurate. It does have value, just not what we traditionally associate with fiat currency. First off, it’s based on computational capacity, which has associated costs (the mining is, in classical economic terms, a kind of capital derived from labor).

            But it may also have legal implications for contracts, also. Since the blockchain can be traced, the transfer of bitcoin resembles a transfer of rights as opposed to a simple transfer of currency. It wouldn’t be a tremendous leap to see them as a mechanism of transfer attached to real property or some other item.

            I’m not sold that it will take off, but I’m cautiously optimistic.

  3. JBD

    Yeah, preach it, brother. I’m a proud citizen of a crimson-shaded state. We all hate government interference and corporate surveillance. OH LOOK! I saved three nickels on this fatback because I’m a member of the store’s rewards program! Sure am glad I remembered my social security number – I had to enter it because I forgot my rewards card.

    1. SHG Post author

      Ah, the old “we need your phone number, your date of birth, your first born child and social security number” to sell you this pack of gum. And amazingly, people give it. Because reasons.

  4. Nigel Declan

    I wonder if the banks have switched all their vaults to a single-pronged security system, such that someone with a chip-enhanced piece of plastic can just walk in. It would avoid the “dangerous mindset” that the old multi-layered security model, which might include a number of redundancies, inspired in us.

  5. paul

    Chip and pin has been circumvented by organized crime in europe already. It isnt easy, but its doable. Furthermore it only reduces “card present” fraud. Naturally when europe went chip and pin “card not present” fraud jumped accordingly.

    Cash isnt a perfect system. There is real cost in printing, movement, storage, etc…but probably not nearly 100 billion in cost.

    Fraudsters are going to take advantage of whatever system exists – funny money, scrubbing checks, card swiping and because someone mentioned bitcoin…blockchain weaknesses. Fish gonna swim…fraudsters gonna fraud.

    Whats good for banks isnt always bad for people. Ecommerce would be very different in a cash only world. And i know you asserted otherwise…but lines always take ages longer for me when people pay with cash.

    1. SHG Post author

      Ecommerce is an obvious problem, but I’m not suggesting we do away with any form of electronic payments, but that our all plastic economy has a multitude of costs that are unseen but paid for. Sure, funny money happens, but it’s nothing compared with cc fraud.

      And as for lines, the only time I find it to be a problem is at the supermarket, and that’s because shoppers get done checking out and appear stunned to learn they than have to pay for it, waiting until the end to first begin considering their part of the payment process. But frankly, the five minutes they spend looking through their purse for plastic isn’t a whole lot different than the five and a half minutes they spend counting out pennies to make exact change.

    2. JR

      Not a lawyer, but have been reading the site for some time.

      Just to help out a bit on something I deal with daily, security.

      In my world we say two-factor authentication, not two pronged security. Two-factor is easy to understand. Pick two of these three categories.

      Something you know
      Something you have
      Something you are.

      The chip and PIN system uses the “you know” and the “you have” factors.

      It is my understanding that banking regs in the US have required that online banking use two-factor, however most banks use double one-factor. For example, you have password, plus they show you some picture with caption that you set. Both are something you know. In order to do it right, the banks would have to send you some card, RSA key fob, and that costs money they don’t want to spend.

      As a another commenter said, the EU chip and PIN has been hacked. Part of the reason it was hacked was not paying attention to the details when they designed the system. Just as our host has pointed out that people that “play” with knowing the law don’t get all the fine details and make a big mess of things, the same is true when others play with security engineering. The core issue is that the chip doesn’t remember anything about being asked for the PIN. One can have your own fake chip answer the PIN question from the payment terminal, and then have a stolen chip provide the auth for the money transaction.

      The US DoD has been using two-factor, chip in a card plus PIN for over a decade in the CAC (Common Access Card) system. Having worked with CACs and knowing some of the infrastructure required to make them work, I would say they have covered all the based. Two-factor can be done correctly.

      1. SHG Post author

        It’s funny, I was going to use two-factor authentication, but then I wondered whether I would be misusing it as I’ve never heard it used in relation to anything other than online ID. Guess I was wrong. Thanks for clearing that up.

  6. John Barleycorn

    Lawyers pay 2%-4%?

    Really, really? That almost pleases me in a very wrongful way.

    I guess its not going to do you any good to ratchet up the transaction volume to obtain the holy grail of .75%-1.2% jerk off status now will it? Hell, who would have ever guessed a lawyer breaking up her transactions might come with math!

    Well, thanks for carrying more than your weight to make the world go round.

    P.S. How much fraud does the average CDL’s office encounter BTW, and is it mostly pre arraignment or post?

    1. John Barleycorn

      And just what the heck do you do about those drunk people that dispute the generosity of their tip and charge back the entire transaction just to make it look legit? You have the help notarize that shit or what?

        1. John Barleycorn

          You are totally fucked on the transactions fees either way. The math just don’t add up.

          However, if you were to start reporting your tips you might come out the other end a little more whole if you were able to establish an industry standard. Regardless of the numbers on the bank statement believe it or not.

          EFTPS semi monthly instead of quarterly goes a long way even if your tits are sagging.

          P.S. How much you think Uncle Sam pays to roll the 941 transactions?

      1. Levi

        I know of some acquirers who won’t take on attorneys that include bankruptcies in their practice as merchants for just this sort of issue. Plus many have to make special arrangements to deal with trust accounts, and it makes acquirers nervous if they can’t take money back from the same account they deposited it if there’s a dispute.

  7. John Barleycorn

    Not to be cogent but I don’t think you have strayed this far off the reservation since you walked out of the dentist or doctors office because they insisted you sign in?

    Speaking of which, you should check in with your editor about that Atkins deal. Trade off time is here for you… Tough luck!

    But just saying, I think you need to consider the benefits of the smashed bagel now and then even if bacon goes pretty well with every meal.

  8. Marc R

    Mr. Robinson didn’t want to share the future billions with Ben so he had his wife and daughter distract the college grad Slackoise to cut the latter out of the market.

  9. Grock

    Unfortunately there are banks STILL don’t use two-factor authentication for their online banking services. Some attempt to store a cookie on your computer for e-authentication the next time you sign in and only ask for secondary authentication if the IPs don’t match from your last successful sign-on attempt. Unfortunately that kind of security is ridiculously easy to circumvent, especially if the user regularly uses a VPN. Two factor authentication such as email, password, + special 6 digit pin sent to the mobile phone registered to the account, are much more effective.

    As for the chip+PIN in the US, the reality is the banks and the VISA/MC/AMEX exchange have no incentive to use a PIN or other two-factor authentication because the terms of service place the responsibility for the loss back on the merchant for not asking for an independent ID (Drivers License, etc.) during checkout at the point of sale. Which by default increases check out time which is not in the merchant’s best interest. Result, merchant loses regardless and passes costs on to consumers.

    As far as the government tracking purchases, add to that the fact many use a loyalty card and it’s no surprise how much information is gathered on consumers and aggregated into consumer databases at Acxiom, LexisNexis and others. In fact if you really want a look at just how much information is collected about you, and hence available not only to marketers, but law enforcement, private investigators, etc., just request your LexisNexis consumer file.

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