Many fingers in the pie
If we pay with cash, there are only a few parties involved in the transaction.
- There is you, the payer.
- There is the payee, which is the person or company that receives the money.
- And there is the state that minted the money and paid for that (on the people’s behalf).
When you use the physical coins or bank notes, no other parties are involved and no further charges are applied.
In the world of credit cards and online payment, the story is completely different. There are several parties involved as middle-men in every transaction, to make online payment using credit cards both efficient and secure internationally. These ‘stakeholders’ all have some business interest at stake and there are hundreds of companies in this business, including banks, credit card companies and Internet payment sites. The primary business model for stakeholders is that they take a cut of each transaction.
The main categories of stakeholders who derive fees (either directly or indirectly) from the online payments using credit cards are:
- The credit card companies (Visa, MasterCard, American Express), who typically also run a payment network and for each transaction charge a fee for processing the payment across their international networks.
- The payment gateway that validates the payment and passes the payment onto the payment network. This can be a bank, a credit card company, or modern-day online providers such as Paypal. The gateways collect the largest portion of the transaction fee.
- The cardholder’s bank provides temporary credit, but will of course collect interest from the cardholder if appropriate.
- The online merchant’s bank will typically collect account management fees.
The specific fees charged by stakeholders varies considerably across online merchants and transactions, see for instance the charging policy of payment gateway Paypal. The average transaction fees for an online credit card payment in the UK is about 2.5%: for a £100 purchase online the merchant will receive £97.50 and the payment processing stakeholders will receive £2.50 between them. The largest part goes to the payment gateway provider, because fees for the payment network provider are capped Europe-wide at 0.3%. The banks derive additional fees from the payment in interest fees charged on the cardholder’s balance at the end of the month and account management fees levied on the merchant’s bank account. Even though card companies only take a couple of percent, and other middle men may take as little as a penny per pound, this amounts to a multi-billion pound business.
In 2014, for the first time cashless payments overtook cash payment in the UK. This was caused in part by the rise of contactless payment, a technology we will look at more in Step 2.17. It is possible that governments welcome this development because printing money is costly and possibly also because cash money is also hard to trace.
© Newcastle University