People at big companies don’t care about much about anything.
The people who built the company are usually long gone, having grown tired of the bureaucracy.
The prevailing ethos then becomes do the bare minimum, but don’t get fired.
Riding that fine line between incompetence and unemployed.
It’s hard work, that is.
And if you think it’s bad at large companies that face competition, the bar is even that. much. lower. at monopolies.
Enter Visa and Mastercard.
Everyone in the payments industry knows that people head for the networks when they’re tired.
Golf every day?
Work at a monopoly.
4-6 hours of “work” per week?
Work at a monopoly.
Your projects are make-believe, will never matter to P&L, can – and will – be entirely dog shit, and exist just to throw regulators off your scent?
Work at a monopoly.
As PIX has proven, V/MA can be run for a few million dollars a year, meaning they are 99.9996% margin companies.
Which is why the card schemes outsource just about every part of their business when possible.
Because if it has to get done, it ain’t going to happen inside the four walls of a monopoly.
Of particular interest is the card scheme stance on surcharging/dual pricing.
Quick history: retailers sued the card schemes to give themselves the right to pass the costs of credit acceptance to consumers. After a long battle, retailers won. Over the past few years, however, Visa and Mastercard have been lowering the rate that retailers can surcharge.
The card schemes say that retailers (but really their processors) are turning surcharges/dual pricing into a profit center at the expense of the reputations of the card duopolies, and this is not the intent of the judicial rulings.
Meanwhile, everyone with a brain says, “huh?”
Statistically, consumers on average are way smarter than merchants, but there is a subset of the consumer population (i.e. the merchants themselves in their personal lives) that are as dumb as merchants: they can’t do math, and as a consequence have no idea about the financial ramifications of surcharges.
Hell, these people will gladly eat a 50% surcharge and retort “Wooooow momma, look at all them card points I’m a gettin’!”
We’d bet the card schemes never undertook the data science to prove that surcharges caused cardholder churn.
Which is what the duopolies want you to believe, of course, but we don’t believe the analysis even exists.
Because again, why undertake the analysis when you can golf every day, spend a few hours a week in some meaningless meetings, and pretend what you do matters?
What the card schemes have done to “combat” non-compliant surcharging is as milk-toothed as it gets: outsourced “compliance” to secret shoppers and then give processors like, 5 billion strikes before fining anyone.
What a farce.
If the card schemes actually gave shit about anything, this is how they would fix the problem.
Step 1: Open Bounty
Turn every payment bro into a nark overnight.
How? Let them submit evidence of merchants breaking surcharging/dual pricing guidelines.
So many payments agents can’t sell into merchants because the merchants are locked into payment processing by their software provider.
But most softwares have no idea how payments work.
Look at how much money Toast has raised and how large they have become. Clearly they’re one of the most sophisticated software providers with locked-in payments.
Yet there’s ample evidence that they had no idea how to properly implement surcharging. In fact, it took them up until mid-2024 to get their act together.
The same can be said for Shopify: they had an anemic 14% payments penetration rate a few years after launching their payments product; ultimately, Shopify had to hire a consultant to help them reposition the line of business.
And if you think it’s bad for sophisticated softwares, it’s way worse for smaller softwares.
Since payment bros can’t sell into these merchant accounts, they want these merchants to leave their existing software provider for one that’s open to third party (.i.e. the payment bro’s) payments.
And if the merchant can’t or won’t?
Payment bros love a healthy dose of spite.
They’ll submit the shit out of non-compliant merchants.
The faster the merchant goes under, the faster a new merchant takes its place, offering an opportunity for the payments bro to sell an account.
Ah, the circle of life.
Step 2: Validation
The card schemes would need to rapidly validate the non-compliant merchants at-scale. This would actually be the perfect application for a fine-tuned LLM that the networks self-host.
This does have an actual cost, but it would be very, very small relative to the monies the card schemes stand to generate.
We’d estimate that the card schemes could hire a third party to build such a model in 3-6 months for around $1M. The ongoing costs would be pretty trivial – let’s call in $1M annually for conversational math.
Anecdotally, we see 7/10 SMB merchants implementing either surcharging or cash discounting.
There are 33M small businesses in the US; let’s be super conservative and say only 10% (3.3M) of these businesses are relevant.
Of these 3.3M businesses, let’s further assume half (1.6M) surcharge or dual price.
Of these 1.6M, we’d bet 30% of them (500,000) are non-compliantly surcharging/dual pricing.
If you opened up the bounty program to the market, you’d ensnare 100K of these merchants in, probably, 6 months.
Even if the penalty was a trivial $100, the math would mean that the card schemes would generate $10M in revenue ($9M of EBITDA before paying out the narks) for doing nothing (which could not possibly be any more consistent than what the networks already do in their day-to-day).
Note that the current “penalty” assessed by the card schemes for non-compliance is a nominal $5,000 after the preliminary warning, growing to $25,000 if the merchant still hasn’t taken corrective action. These fees are assessed to the processor/acquiring bank, which is logistically the most expeditious way to recoup any non-compliance fees, as then the processor can recoup their fees from the merchant by withholding the fee amount from the payment stream.
Keep in mind these are super conservative values: you could easily charge more, or expand the estimated number of non-compliant merchants to reach 9-10 figures of EBITDA.
For example, changing the fee to $5,000 from $100 results in $499M of EBITDA, and if you assume that the number of relevant SMBs is 25% of the 33M, then you’re talking about $1.249B.
Of EBITDA.
$12B in enterprise value has never been created faster.
Eat your hearts out, finance bros.
Step 3: Penalties
We already shared the existing penalties from the card schemes, but frankly they seem too high to us given the sheer number of non-compliant merchants that are truly out there.
If you asked us to draw up a penalties framework, here’s how we’d do it.
We’d start by eliminating the grace period or “warning notice” from the card schemes.
Merchant acquirers have very, very, very little work to do given the amount they earn, and there’s no excuse why their merchants can’t comply with the (totally arbitrary) network pricing rules.
99%+ of the time if a merchant is non-compliant, it’s because their acquirer has convinced them to crank the dial as far as it will go so the acquirer can maximize their income.
Given this, there’s zero reason to offer them a way off the hook.
If a merchant is violating the guidelines, fine them.
No warning.
We’d dial back the initial fee to $500. Of this, the nark would make $100. Hell, we’d bet merchants would turn in their competitors if you offered something well designed.
Gamify it.
Make an anonymous nark leaderboard and pay out the monthly leader an extra $10,000.
Even retired payment bros wouldn’t be able to help themselves at the free money.
If the merchant hasn’t corrected their pricing in 30 days, crank up that second fee to $1,500 and pay the informer $300.
Still not corrected by day 60? Then we’d go to the full $5,000 and pay out $1,000 to our squealer.
If the merchant hasn’t corrected it after 90 days then we would fine them $5,000 per month until they comply… but we’d need a graduated scale as a percentage of merchant volume to give the penalty meaningful teeth.
Let us show you precisely why you need such upward discretion.
Imagine that a merchant that does $100M in annual gross processing volume.
Their payment bro acquirer convinces them to surcharge 4%, violating the (totally capricious) 3% cap set by the card schemes. Assume the merchant’s interchange is 2%, so the acquirer is netting 200 bps (let’s call it $2M just for simple math) per year.
Well, at $5,000 in monthly fines, the acquirer is laughing all the way to the bank.
$60K a year in network compliance fees to make $1.94M in EBTIDA? Where do I sign?!
Clearly the incentives are misaligned.
In these instances we would need to make the fines punitive to correct the behavior.
Without a doubt there would be merchant accounts where the card schemes stand to earn millions of dollars a month in EBITDA by rightsizing the penalties for non-compliance.
And so long as you offered to pay out a percentage of the fined amount, it would be an absolute bonanza.
But, you know, this level of foresight eludes everyone who works at the card schemes because you don’t go there to solve problems.
Even those of your own making.
Aren’t monopolies swell?
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