Visa, Plaid, networks, and jobs

https://stratechery.com/2020/visa-plaid-networks-and-jobs/

by i_am_not_elon • 7 years ago

178 107 7 years ago

“He had three girls working on Burroughs bookkeeping machines, each handling 1,000 to 1,500 accounts. I looked at the size of the accounts: $4.58. $12.82. And he was sending out monthly bills on these accounts. Then the customers paid him maybe three or four months later. Think of what this man was spending on postage, labor, envelopes, stationery! His accounts receivables were dragging him under.”

I never got why credit cards were such a big deal for merchants, until reading this.

I never got why credit cards were such a big deal for consumers, until I heard this: https://www.npr.org/2019/06/26/736352315/episode-922-the-cos...

What a week of learning about credit cards it has been!

MBCook2• 7 years ago

Isn’t it crazy to think that so many stores used to run their own credit books and have to do all that accounting and servicing by themselves? Every pharmacy, hardware store, grocery store... anywhere that wanted to accept credit had to do it all.

derefr2• 7 years ago

What was the reason to “accept credit” in the first place, in an era when anyone with stable employment could have applied for a line of credit (i.e. a personal long-term loan) from their local bank, such that they could then pay these services with cash?

I can understand credit as a natural extension of “running a tab” at a hotel or restaurant—you order now, and settle your account later, for various definitions of “later.” But why would a retailer be interested in offering private/internal credit that they had to manage and settle? Sounds negative-ROI to me.

pavlov• 7 years ago

I was born in 1980, and do remember our family having a credit account at the local grocery store. This was in Helsinki, Finland.

I think our account number was 14? Simple enough for a child to remember.

Around age 9 I was using the account on my own to buy food after school. I'd state the account number, and the cashier would write the credit down with a pen into a special notepad they kept under the cash register.

csunbird2• 7 years ago

We also had a similar system in Turkey too, with local grocery shops. The owner would have two notebooks per customer, one would stay at the store and one would be given to customer. Whenever you needed to buy something but you wanted to pay later, the merchant would put the transaction on his notebook with a copy on your notebook, so at the end of the month you would simply bring your notebook and cross reference the transactions and pay your debt.

Semaphor2• 7 years ago

I’m having something like this for a copy-shop in a pop 200k city. In 2020. Not an account number, and essentially a manual debit account. The owner has a book with balances of people who pre-paid, when you print something, he looks you up in his book, edits in the new balance and then edits the balance on a piece of paper I have :)

mzi• 7 years ago

I saw a smiliar but totally different scenario in a Stockholm suburb a couple of years ago (I guess the practice is still there): An old lady was in front of me in the line at the grocery store and paid with her card, and the clerk took out his notebook and entered the pin code. It was like the two keys to a vault. Neither of them could do the transaction without the other. I hope the notebook didn't keep the code together with an identifier, but I found it really cute.

With contactless today I guess you can solve it with just one person, but I really liked the two-factor.

And the community service, of course.

somberi• 7 years ago

Still common in largely Jewish-centric grocery stores in NYC. While you are waiting your turn at the checkout isle, you can hear little kids buying food after school and the primary phone number is the account ID.

A recent observation:

Shop to a little girl: What's your Numbra?

Little Girl: 718-.....

Owner comes by: That's Sharon and Jacob's account. You are not his daughter.

Little girls freezes.

Owner continues: Unless you are their niece from Upstate who has come for Christmas.

Little girl visibly relaxes and the grocer bags her items.

throwaway555542• 7 years ago

Good grief! Why didn't she send a $1 first to make sure she had the right person!?

adambard• 7 years ago

Why do people make mistakes at all? Everything would be much easier if people would just be less fallable.

cushychicken3• 7 years ago

I don't know, but I know I've never thought of that.

Pocketing this technique for future use!

kelnos2• 7 years ago

I never got why credit cards were such a big deal for consumers...

For me, it's always been about that buffer between my actual money and the merchant. Sure, credit card rewards programs have been great, but having a middleman who is more or less on my side in all financial transactions is a game changer.

If I use my debit card, the money is out of my possession; it's possible to get it back, but it's not certain, and while I'm waiting for that to happen, I don't have access to that money. (And if I use cash, I pretty much just have to accept that the money is gone the second it leaves my hands.)

If I use a credit card, I still have the money, and can dispute the charge. Even if I don't notice the problem until after I pay my credit card bill, I still have a single entity (who, again, is more or less on my side) who will refund my money if I have a valid complaint, even if the merchant isn't playing ball or is a fraudster.

xur173• 7 years ago

My problem is that I'm effectively paying 2-3% in fees on every transaction for this privilege. If there was a way to pay (not cash) that removed this fee, and let me keep the savings, I'd do it for most transactions, even if it removed my ability to charge back transactions.

isoskeles• 7 years ago

When I first read this several hours ago, I was surprised and in agreement with the conclusion of that quote, that this would "drag down" the business. As those numbers seem very low for the costs associated with getting payment.

But it should be pointed out that those numbers are in the context of a quote from ~1958. Back then, postage was $0.04. Also, $4.58 and $12.82 (as examples) would be worth $40.52 and $113.41 today. So I'm not actually sure if a 6% charge on sales would be worth it here. I don't know what the cost of labor would have been back then (assume minimum wage in that area in 1958 maybe). Anyway, the point is the numbers don't seem as alarming and obvious to me after looking up postage and inflation at the time.

_xnmw• 7 years ago

Huh. And all this time, as a person who uses credit cards heavily, but never paid a penny on interest for years, but used all my card benefits, I thought I was cheating the banks. This is the first time I learned that they make money on each transaction regardless of interest or late payment fees. That’s a revelation.

yash1th• 7 years ago

They do. some places in United states and India you have to do a minimum amount of purchase for them to accept any kind of card

derefr2• 7 years ago

IIRC Visa (at least) has a rule stating that a business can’t charge more for Visa card transactions than cash transactions, nor can they have a minimum purchase for Visa card transactions (unless they also have the same minimum purchase for cash transactions.) If they find out a business is doing these things, they’ll stop allowing the business to accept Visa (even through intermediaries like payment processors).

southphillyman• 7 years ago

The reason why some places don't accept AMEX is because their transaction fees are higher. I haven't paid a cent in interest in probably over a decade but AMEX incentivizes me to use my card for everything with rewards and make money off the fees.

wastedhours• 7 years ago

It's also the reason why credit card benefits are worse in Europe, as I believe there are restrictions on what the card companies can charge for transaction fees.

t3rabytes• 7 years ago

This isn't necessarily true anymore. AMEX has lowered rates over the last few years, and also only charges one rate for all of their cards (from no annual fee up to Platinum & Centurion cards). Visa on the other hand charges different fees depending on the tier of card (Platinum, Signature, Infinite), with the higher tier fees being higher than AMEX IIRC. In fact, some retailers (Hello, Kroger) have gone to bat with Visa over the high fees and stopped accepting their cards (even if temporarily) recently.

basch5• 7 years ago

That 3% is also baked into the price of goods at this point, so youre paying it even when using cash.

However, some people think the credit card companies are inflating the price of goods with rewards, without taking into account how expensive cash is to deal with. To count, to detect counterfeiting, to lock up, to trust employees, to move. Processing cash isnt cheap, and can involve considerable risk, including increased IRS scrutiny.

Handling money is a cost, like rent and electricity, built into everything we do. Credit card networks are much more efficient than existing alternatives.

nordsieck3• 7 years ago

That 3% is also baked into the price of goods at this point, so youre paying it even when using cash.

Every once in a while, I'll run into places that do a cash discount, usually smaller businesses. It's super common at gas stations - even big chains.

imglorp2• 7 years ago

Credit card networks are much more efficient than existing alternatives.

That, plus user transaction data is hugely valuable as its own product: tracking users and their spending habits and selling the signal. Cash takes away from that revenue stream.

csdreamer7• 7 years ago

There is also chargeback fraud and merchant equipment and maintenance. The owner of a chain of gas stations in Florida sued Visa for refusing to certify his new chip installation when chip transfers were coming around. Without being able to take chip cards he would be liable for every fraudulent card swipe where as liability for chip transactions are with Visa under their new rules.

But otherwise you are right. Plus register employees need cash bonds I believe for insurance.

konschubert• 7 years ago

Basically, the credit card networks are bribing customers to become complicit in extorting a sales tax from merchants.

kevindong• 7 years ago

Different cards have different business models. For example, high end premium credit cards (think Amex Platinum, Chase Sapphire Reserve, Citi Prestige, etc.) tend to make most of their money from betting that cardholders won't make back more than they pay annually in annual fees (which is possible considering the annual fees on high end premium cards can easily exceed $500).

guelo2• 7 years ago

that same Treasury report highlighted the fact that the United Kingdom and European Union have initiatives requiring API access to bank accounts, but recommended a private solution.

This is the Trump government failing us and gifting the next generation's financing needs to the next generation of rent-seekers.

DataGata• 7 years ago

Definitely not a "Trump" problem. Obama wouldn't have started it either. There is no stomach on either part of the parties to upset the banks.

guelo2• 7 years ago

Yes, Obama failed us and now Trump is failing us.

RickS• 7 years ago

I have a mixed position on this. Considered in isolation, the UK's API regulations are a spectacular boon for customers.

Considered in the context of the rest of the UK's regulatory environment (porn filters, etc), it seems plausible that the UK gov's push for bank APIs is less about being kind to their citizens and more about undermining cash and pushing all financial activity onto infrastructure that's easily accessible to a surveillance state.

I'd like to have tech like this in America, but I don't think we have the spine on any front. We aren't willing to hardball businesses on timeline/featureset (for example: the partial and late rollout of chip/pin in the US), and we aren't willing to write legislation that protects citizens from abuse and creates punitive structures that make abuse of citizen data by companies an economically irrational act.

In light of that, I wonder if shitty APIs are the lesser of two evils.

rswail3• 7 years ago

Minor quibble, US has chip/signature, not chip/pin. This is because the US banking system is stupid (technical term).

rahimnathwani5• 7 years ago

"At first glance, open banking might seem to be a problem for Plaid, but ... developers will still prefer to use one well-built API that abstracts away thousands of financial institutions"

This type of centralisation makes me sad, but it's probably true for most startups. By using Plaid or an Open Banking service from another party (e.g. Experian) you'll pay fees to get information you can get for free if you integrate directly with the banks.

Even though the open banking APIs are uniform, any company wishing to use them still has to register with each and every bank, and test the integration works with each one. Until you've done it once, it's hard to know whether it will be easy (you write the code once, and it works flawlessly for all banks) or you have edge cases (e.g. some banks have funny timeout issues). So if you're a developer on a deadline, you will likely prefer to use a single API.

imglorp2• 7 years ago

Banking dinosaurs brought this pressure for middle services on themselves by pretending they're not interchangeable services with limited means to tell them apart otherwise.

If they'd all support a standard API, plaid would vaporize overnight.

rahimnathwani5• 7 years ago

"If they'd all support a standard API, plaid would vaporize overnight."

In the UK, the banks already support a standard API, but it's still easier for developers to use an intermediary to access those APIs. Because using Plaid or Experian they don't need per-bank credentials and tests.

fatbob3• 7 years ago

This is the government's job - to make a working market. They should be forcing banks, through their existing bank regulation powers, to allow interoperation.

floatingatoll• 7 years ago

I’d rather each bank purchases an API provider who has the appropriate security certifications to integrate with the bank’s backoffice systems, than have each bank attempt to implement OAuth themselves and fail in all the usual catastrophic ways. Their specialty is banking, not OAuth, and they already pay vendors for many other services that aren’t their specialty.

This also hints that a not-Visa competitor will appear in the credit union space, since credit unions often have a shared provider for banking websites (and bill pay, and etc.) and would presumably set up their own competitive API provider on top of that.

cushychicken3• 7 years ago

By using Plaid or an Open Banking service from another party (e.g. Experian) you'll pay fees to get information you can get for free if you integrate directly with the banks.

...which suggests you're not necessarily paying for the integration with a free service - you're paying for the integration at a grand scale. I.E. - paying to not have to do all that work yourself.

nemothekid• 7 years ago

you'll pay fees to get information you can get for free if you integrate directly with the banks

For the data Plaid was providing, this isn't really true at all in the US. Last I checked, the big banks were very guarded in their API access and you either had to have (1) a large payment (2) a high minimum balance and (3) pay for an audit from their auditor of choice.

I think Europe is different in this regard but the US players really had no incentive to do anything Plaid offered.

mbesto• 7 years ago

If you want to truly use most bank API's you have to be audited heavily by them first.

rahimnathwani5• 7 years ago

"For the data Plaid was providing, this isn't really true at all in the US."

Right, I'm talking specifically about open banking, which isn't a thing in the US.

te_chris• 7 years ago

They have competitors though, Yodlee and Salt Edge to name but two. Have had some 'fun' recently in the UK when the FCA introduced open banking without actually allowing foreign companies any way to particiapte. This broke the budgeting app that I use (Pocketsmith https://www.pocketsmith.com) because Yodlee, the bank feed provider they used, isn't a UK company and neither are they, thus they didn't comply with the regulations.

Pocketsmith got around this by adding feeds from Salt Edge, thankfully. I've actually become quite dependent on having proper cashflow, balance sheet and P + L statements for my personal finances.

snowAbstraction• 7 years ago

There is the Swedish company Tink in this space too.

https://tink.com/

jka2• 7 years ago

The narrative here is internally consistent but there are a few pieces that I don't quite understand when it meets reality:

* It's suggested is that Visa will 'fix' the security concerns that Plaid introduces (the use of username & password collection), but it seems unclear how Visa would be able to change the fundamentals of the Plaid<->bank interactions?

* It's also theorized that European banks will prefer to use Plaid rather than a privately recommended solution (not referenced in the article) to achieve EU open banking compliance. Do Plaid have strong relationships with EU banks at present, and would it not be more likely that Plaid would implement against the existing EU open banking APIs (single implementation, no lobbying) than that Plaid would implement their own alternative (requiring per-institution implementation, and also lobbying to ensure their approach is accepted both by banks and EU regulators)?

MBCook2• 7 years ago

On #1 I assume it’s simply the fact that Visa is big enough and stable/reliable enough that banks would be willing to do the integration to them to get the benefits instead of doing hundreds of bespoke integrations for little apps/services.

jka2• 7 years ago

The trusted, widespread brand angle does make sense there as a reason for banks to choose to integrate with Visa, agreed.

But does that then imply that users authenticate with their bank via Visa (i.e. Visa becoming an identity provider -- not totally unimaginable given their association with customer-issued cards)? Or instead that banks would implicitly offer this data to Plaid/Visa under their card issuance ToS, without user authentication required?

(I'm not really asking for answers, I don't think we can really know at this point. It just leads to questions like this and I'm curious)

psoots• 7 years ago

And then it all falls apart when Plaid gets hacked and millions of people's _actual bank account usernames and password_ get stolen. That is not a safe premise to start a business (or to acquire one).

milofeynman• 7 years ago

And because most companies that use plaid don't even show the Plaid logo, you don't know who is directly integrated with a bank and who is using Plaid

annexrichmond• 7 years ago

Some companies[1] indicate their Plaid dependency in their Privacy Policy, just like it is common to do when they use Google Analytics. But yeah, it's unfortunately not a standard.

[1] https://zerodown.com/privacy

cowpig• 7 years ago

Ben Thompson talks a lot about networks and platforms in his blog, and it's always from the perspective of the capitalist: here's a great way to capture value and make a profit.

When he does consider the perspective of the user or consumer, it's still indirectly from the perspective of the capitalist: users/consumers will behave in X way, get Y value, etc, which is why [megacorp] should do Z.

I'd really like to see him take a broader view. Could he imagine a set of rules/regulations that would result in a better outcome for the public?

I've long been thinking about this problem:

- we all much prefer a single platform/network

- but if there's a single platform/network, then there aren't good market incentives on the side of the provider

This seems like such a fundamental problem in a space he writes so much about. Ben Thompson, please think and write about this!

fatbob3• 7 years ago

Right! Banks are already regulated by the government and this seems like an opportunity for them to improve the retail banking market by requiring interoperation. Maybe it wouldn't work but it would be interesting to hear from him on this topic - can the government make this market work better?

gigatexal• 7 years ago

I recall a podcast a Plaid tech person did for Software Engineering Daily where it was alluded that Plaid had moved away from using screen scraping to something much better — it sounded like they had paid for connections to the bigger banks — perhaps a one off API access only for Plaid or were leveraging some other way to get around the problematic screen scraping approach.

szhu• 7 years ago

I had no idea how recently modern credit cards were invented until reading that first paragraph. Wild.

https://en.m.wikipedia.org/wiki/Visa_Inc.

Visa, Plaid, networks, and jobs

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