I’m not quite following you here. Are you suggesting that there is an alternative to the current system that allows buyers and sellers to opt out of the ~2% fee built into prices to cover the cost of fraud?

And that this system is currently precluded by law?

As I understand it, merchants are now allowed to offer a lower price for cash purchases. The fact that so many merchants use credit card systems seems to speak to their marginal value.

My off-the-cuff analysis is that there is a certain amount of fraud that is inevitable with any non-cash transaction, especially those that allow chargebacks.

The credit card companies have tried to enforce the lack of a cash discount because it enables them to spread the costs across virtually the entire system of users. Without the ability to do this, I don’t see how a system as widely adopted as Visa and MasterCard could have got off the ground. This is what makes it work.

If we assume the cost of fraud is independent of the structures that determine who bears the cost (a big assumption) then the argument is going to be about how that cost is apportioned among users.

Since the system has been adopted, overwhelmingly, by both buyers and sellers, it seems reasonable to conclude that it has been a (huge) value add to the whole economic system.

If you allowed participants to use the system but opt out of paying what is essentially the insurance policy against fraud, the total cost of fraud in the system can’t go down without the gross level of transactions going down.

You seem to be saying that there should be a tiered, opt out system of fees. Buyers wanting to use their card in high risk (of fraud or chargebacks) industries, like porn, should bear the cost of providing the fraud insurance buy paying higher fees?

It begs the question why such a service is not being provided by the market. Essentially, credit card companies have come to the conclusion of providing such a service is not profitable.

In a sense, they are offering an “opt out” for the extreme cases like porn, by making it hard for the porn providers to offer credit card services at all.

Forcing a universal fee structure on everyone provides two huge advantages:

It facilitates the build-out of the network itself, which provides tremendous value to all users.

And it lowers the total cost of determining what the actual cost of fraud insurance should be. This cost would fall across all parties.

The card providers would have to build the industrial infrastructure to understand the costs at a more granular level. It would require both capital investment and ongoing costs to manage such a system. It would also incentivize non-productive activity around trying to “game” the system. Essentially it would be a new attack surface.

It would also move some of the costs of evaluating the risk of a given purchase onto the consumer. This would result in a large net increase in total costs as individuals who lack the skill and scale to properly do this would be forced into it. This would also result in a massive “duplication of effort.”

Intuitively, I think this would result in a large decline in overall economic activity, as it simply would not be worth the investment to make certain kinds of purchases.

The current system puts the costs of fraud mitigation into the entity who can provide it at the lowest cost.

There is also of course the simple argument that the credit card system is opt-in. It is possible to conduct business with cash or check. I use a tech who repairs speakers that I collect. He adds 3% to use Paypal. I opt to send him a check.

You can also send cash through the mail. In this instance, a transaction where the seller won’t release the product until they receive the funds provides the kind of transaction you want, where the entire risk of fraud (or loss) is borne by the buyer.

I think most small businesses at least would accept cash in person or the mail.

It’s not ideal, but my guess is that how the net cost of fraud protection with electronic transactions is distributed is pretty close to ideal.

This is just one of the many problems that render crypto-currency systems to be hopelessly expensive. The lack of ability to build in “socialized fraud protection cost” will prevent mass adoption.

They also suffer from the problem that the cost of securing the network should rise in a system lacking inflation as the total value of transactions increase.

The game theoretical costs of providing the minimum of security a proof-of-work system offers are hard to parse. But the current cost of bitcoin transactions is outrageously high, when accounting for mining cost.

IMO, the bitcoin system is being supported by a combination of outright fraud, speculative investment, and money laundering.

The real costs land in a very disproportionate manner, for example, when exchanges go belly up, or when an individual is scammed out a large sum.