Unreasonably high card fees continue to be borne by retailers and ultimately by consumers. Merchants are paying billions of dollars to have issuers process their debit and credit card transactions. The high transaction fees issuers charge retailers is despite the 42 percent cost reduction card issuers have achieved over the past five years. Another issue afflicting retailers is the high cost of upgrading their payment terminals.
These new terminals enable retailers to accept debit and credit cards with new security chips. Retailers complain that they have had to spend billions to upgrade their payment terminals. Ironically, the new credit cards with security chips are no more secure, because they do not require a PIN. Fortunately, innovations driven by Bitcoin and its underlying blockchain technology can help to reduce card processing costs and bank fees, while providing more security and faster payment speed.
Debit and Credit Card Fees Are Exorbitant
Banks and card issuing companies, like Visa and MasterCard, charge interchange fees for processing their credit and debit cards. Merchants must instantaneously pay the interchange fee upon accepting a credit or debit card.
During the past five years, banks and card issuers have been able to reduce the costs involved in interchange processes. These cost reductions are due to economies of scale, given the increased usage of debit cards and technology improvements. For merchants, however, “there have been no coinciding changes to existing debit fee regulations,” according to a Merchant Advisory Group’s (MAG) white paper on debit card costs.
In the U.S., payment card networks processed 53.7 billion debit and general-use prepaid card transactions, valued at US$2.07 trillion in 2013. And, during the period between 2012 and 2013, the total transaction volume grew by 6.8 percent, according to a report released by the Federal Reserve.
In 2014, merchants paid US$61 billion in interchange fees, says David Robertson, publisher of the Nilson Report.
As a result, to compensate for the interchange fees, merchants feel obligated to increase the price of their goods and services. Ultimately, the consumer is the one who bears the cost of these exorbitant fees.
Credit Cards with Chips Are Still Vulnerable
Many wonder why in the U.S. PINs are not required for the credit cards with chips, as this combination would improve security. In Europe and Canada, credit cards have been protected by security chip and PIN for a long time.
The New York Times recently published an article titled “Chip Credit Cards Give Retailers Another Grievance Against Banks.” This article describes retailers’ complaints about the requirement to upgrade their payment terminals: “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.”
Unfortunately, all these added expenses are for nothing if the new cards are not PIN-authenticated. The new cards require chips and signatures. They do not require PINs.
The new cards without PINs will not improve card security. In this regard, Mark Horwedel, CEO of the MAG, says, “But unless U.S. card issuers deploy EMV-compliant chip cards that require PINs for transaction authentication, little progress will be made in fighting card fraud.”
This security control weakness has attracted the attention of law enforcement officials as well as merchants. For example, Attorneys General of several states, including Connecticut, Illinois, New York, and Washington, have urged banks and card issuers to implement the use of PINs in the new cards.
Specifically, in November, these AGs sent a letter to banks and card issuers, requesting the following: “In order to better protect consumers the chip-enabled cards issued in this country must be reinforced with the requirement that consumers enter a PIN to verify the transaction. Unlike signatures, PIN numbers can be changed easily and as frequently as needed by the consumer. Absent this additional protection, your customers and our citizens will be more vulnerable to damaging data breaches.”
Bitcoin is Safer, Faster and Cheaper
Fortunately, merchants and consumers now have the choice of faster, cheaper and more secure transactions by using Bitcoin and the blockchain technology behind it.
Bitcoin can significantly lower the cost of financial transactions, offering fast, secure and borderless transactions. Indeed, most of the fees charged by banks and card issuers can be avoided using bitcoin.
Interestingly, in October, the European Court of Justice ruled that the exchange of traditional currencies for units of the bitcoin virtual currency is exempt from Value Added Tax (VAT). So, if you are a retailer who is frustrated with card security issues and interchange fees, consider accepting bitcoin.
On the other hand, if you are a consumer doing business with merchants who do not yet accept bitcoins, you may wish to consider the advantages of obtaining a Bitcoin based debit card. Many startup companies offer these cards, such as ANX, Shift, SpectroCoin, WageCan, and Xapo. Many of these companies promise near instantaneous transaction speeds. According to some of their websites, to obtain a card, no bank account and no credit check are required. At least one of these companies does not charge monthly service fees if the card balance is at zero.
Disclaimer: Bitcoin.com is not associated with any of the Bitcoin based debit card companies mentioned above and is not responsible for their products and/or services.
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