On Wednesday, May 28, 2003, at 12:22 PM, Patrick Chkoreff wrote:
... I think the solution, if there is any, will in effect BE a credit card. In other words, the issuer will maintain the credit risk, suffering the occasional default ...
James Ray wrote:
If a system is repudiable, they are going to have high fees. This is because they need to be not-only a payment system but a dispute resolution center as well, when repudiation-time comes. ...
Yes, and unfortunately in my post I emphasized the credit aspect of the system but failed to discuss the repudiation aspect. They might even be orthogonal issues, though I don't see how an issuer could make any money with a repudiable payment system that did NOT involve credit. It seems like you would need the ability to collect interest charges.
But just looking at repudiation, the issuer is faced with the following two risks:
1. Customer pays for merchandise and then claims that he didn't receive it.
2. Customer claims that he did not authorize a particular payment and demands a refund.
You, the issuer, have to judge these claims and act accordingly. In the first case, you might have to remove funds from the merchant account and return them to the customer's account. In the second case, you might have to reimburse the customer from your own funds and eat the loss (actually pass it along to other customers).
This sounds like an ugly, thankless job. I would think the only way you could handle this would be to (1) charge merchants 3 - 5% fees and (2) charge customers 19% interest rates on balances. Hmm, sounds kind of like the credit card business.
The arguments I've seen for repudiable payment systems seem to be:
1. Customers want to make impulse purchases and don't want to bother understanding or funding a DGC account (and don't want to pay ANY fee to do so).
2. Customers don't trust certain merchants (e.g. at an auction site) and want to recover their funds in case a merchant doesn't deliver.
I don't know what to say about the category 1 people -- are they just whiney, lazy losers? These are the same people who are perfectly capable of opening a bank account, providing state-issued ids, paying bank fees, paying credit card interest charges, and indirectly paying merchant account fees (I know, merchants no longer offer cash discounts).
As for (2), I suppose that can be a valid concern and Jim Ray just says "use a credit card" in those cases. Again, I don't see how you could make any money going up against MBNA et al in that messy, thankless business.
-- Patrick
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