Taking Credit When Due

I just discovered possibly the fourth or fifth thing online in the last week which is dealing with transferring money from one person to another. This is a big thing online, and there are quite a few startups which are tackling it, it seems like. Mostly because there is a pain point on the internet right now, and that pain point is actually paying for things.

Right now, everyone uses PayPal. This is because they have the kind of market share that everyone dreams of, with a huge amount of people with accounts already setup, and the ability to pay into an account without needing one of your own. Of course, once you have an account, you can’t just pay someone without logging in yourself, you have to login and use your account. Everyone also hates how much money PayPal is taking from each transaction, and how they use somewhat shady methods to avoid being called a bank so that they don’t have to abide by the rules that normal banks do, even though they technically have a lot of cash in accounts. They also randomly could just shut down your account because they think it’s shady, or decide that you can’t take donations randomly because you aren’t selling something, or cause your violin to be destroyed because of stupidity.

So lots of people want to get around PayPal, for reasons which are completely understandable. This feels similar to the thing where everyone started to hate on Godaddy recently because of their support of SOPA. Honestly I think that it was just a tipping point, because I’ve been off of Godaddy for so long because they were just annoying to work with. However, domain names are easy to technically route around. Money is not so much. The obvious solution is to just make something that’s “PayPal but not PayPal”. This is the approach taken by Moneybookers, which is accepted in some places, but every place it is, it seems a bit shady to me. That’s not the connotation that you want floating around when you are putting your money in an account.

The emergence of smartphones has kickstarted another set of ideas with this. Square is the one that everyone brings up when you start talking about it. That’s the little square thing that scans the magnetic stripe of the credit cards. The solution is pretty good because the magstripe actually has more information, and verifies that the card itself was present. I’ve been seeing it a little more lately, most recently at a trip to RollerDome. In the same line is Card.io, which is another credit card processing solution, but just uses the camera on your phone instead of requiring a stripe. I don’t know how they’re getting around needing the extra digits. Both of those solutions enable using just a credit card number as well.

I really like the credit card solution for paying people, because it has what PayPal has in the consumer’s mind: security. Technically, you could take a picture of someone else’s card using card.io, with only access to their card for a few seconds, for example, when they are off in the bathroom at a restaurant or something. That means that there is low security, right? That’s not right though, because everyone checks their credit statement for stuff that they haven’t charged for, and they know what to do - they call the credit card company and get it taken off. It’s called a Chargeback, and it’s fairly uncommon, because the person who made the charge has to pay. It’s like a bounced check with the opposite penalty.

This fact that everyone knows what to do with a misplaced credit charge means that we can technically make the actual payment point much easier than we previously had. In the past, people didn’t know what to do with credit cards, so they imprinted a copy of it, and checked your ID completely, and did a bunch of other stuff to make sure you were you. Nowadays we live with these plastic cards all over the place, so a simple swipe in a grocery store or at a fast food restaurant will most likely get you your stuff without even having to sign it. Joe Schmoe at the drive-thru has no idea if you are the person on that card, but you know what to do if someone charges on your card, so they don’t have to care. It’s why I’m not worried about NFC or RFID chips in cards, or other types of insta-pay methods wreaking havoc on the financial system - in fact, it’s probably better for everyone when you can pay in less time with less hassle.

Of course, this added layer of convenience is actually costing us a ton of money every year in increased prices because the credit companies make money on every transaction, even when you don’t pay a cent in card fees or interest every year. Each transaction on any of these services will cost the retailer a percentage of the cost plus a flat fee, in addition to any fees that you have to pay when you don’t pay it all off at once. It’s a hidden cost that is just part of doing business, and it’s being passed onto the customer.

In the olden days of imprinting cards and sending mail off to get processed by a real live human being, this type of payment model made sense, but it doesn’t really now - the profit margin on being a clearinghouse for all of these transactions is just obscene. The problem is, Joe’s Credit needs to be accepted everywhere. When networks as large and established as Discover and American Express are having issues being accepted everywhere, it’s the definition of a high cost of entry. It’s one of the things that I point at pretty early on in free market conversations.

However, I really do give credit where due - the mindshare of the credit card is amazing in America. The electronic money system is here, and it’s owned by Visa and MasterCard. Solutions like Stripe are making it easier every day to route around the PayPal pain point using the existing networks, so there might be a light at the end of the tunnel.