How Blockchains and Cryptocurrency Will Disrupt MDR1
Ken Mages kmages@hamiltons.cash www.hamiltons.cash
The US payment system includes technology, services, products, and programs that ease the electronic exchange of funds between financial institutions, merchants, consumers, and governments. Visa's (as an example) primary form of profit comes from fees generated from payment flow on its VisaNet network. VisaNet is a network that does NOT intersect with any other network (including the Internet).
Visa and Mastercard set the rules that allow these financial transactions to occur over their payment rails, with Visa providing reliability and security at a cost.2
These payment networks and gateways are essential to the US government, but at what cost?
Without a subpoena, the IRS (in the USA) can use your card and other electronic payments for auditing your tax returns. Are you shocked? Well, the government, as a means of appreciation, allows card companies to “charge” merchants for this data in the form of another tax called interchange.
The USA invents and innovates this industry and charges citizens a premium supported by law.
No industry is riper for disruption than US payments. Fortunately, our government realized this disparity between US and non-US payment interchange rates and passed laws to level the playing field.
How much interchange? Who pays the tax? We all do! How do we change this? The Durbin Amendment was added to the Dodd-Frank Wall Street Consumer and Protection Act of 2010, allowing merchants and consumers to lower the fees charged on the credit card payment gateway rails.
Sponsored by Illinois Democratic Senator Dick Durbin, this amendment was an extension of the Dodd-Frank Act. That act permitted the Federal Reserve to cap the interchange fees charged to merchants every time they swiped a debit card. The amendment was able to lower per-transaction debit interchange fees with the hope that this would spur economic growth. After all, if card processing companies weren’t charging merchants high interchange fees, they could drop their prices, which would entice customers to spend more.
Before the Durbin Amendment, banks were charging retailers 44 cents per transaction. According to the Federal Reserve, these banks collected approximately $350 billion annually on interchange fees to cover fraud prevention and administrative costs. When the amendment went into effect in October 2011, these charges were capped at 12 cents.
There were also additional provisions in the Durbin Amendment that affected regulated and unregulated debit.
“The Durbin Amendment has established two ratings for banks based on their assets. If the card-issuing bank is regulated, also known as an exempt bank, its assets equal more than $10 billion. However, if the card-issuing bank is non-regulated, aka a non-exempt bank, they have assets under $10 billion.”
Durbin means that merchants will have to pay a different fee based on the bank that issued the debit card. For instance, the regulated debit fee is 0.05% + $0.21, while the unregulated is 1.60% + $0.05. Before the Durbin Amendment, the fee was 1.190% + $0.10/.
Supporters of the Durbin Amendment, which includes retail trade groups like the Merchant Payments Coalition and the Association for Convenience and Fuel Retailing, have claimed that the amendment has lowered bank fees on debit-card transactions for debit cards businesses, they’ve been able to lower prices and pass those discounts to customers.4
The Durbin amendment legally separated payment transactions into three paths:
Credit (essentially unchanged)
Debit (massive changes)
ACH (payment by digital check with low fees)
These disparate payment options have associated benefits and risks. The real opportunity for disruption is to use the low-cost debit rail to run low-cost or free transactions using blockchain technology. This path has been untapped because of the slow TPS (transactions per second) from Bitcoin architecture. Using Hedera, we can run transactions outside the private gateway on a public gateway/ledger system as fast as VisaNet and nearly free with nominal energy use.
The MDR fee collected by the merchant bank is then split with the bank that issued the credit card, the payment network (Visa, Mastercard, etc.), and the bank that provided the POS terminal or device.5
How Merchant Fees are Determined:
The following factors are usually necessary when merchant processors determine their pricing:
General risk of the industry
Mode of card payment processing – internet, terminals, etc.
Annual credit selling volumes6
The magic is to connect a consumer directly to a merchant through the payment gateway and avoid all intermediaries. Hamilton’s is the exploit that allows for the inevitable disruption. Hamilton’s business model is to issue a debit card that offers credit benefits using the speedy Hedera Hashgraph to make transactions imperceptibly different from those happening. Using the debit network to route transactions to our public network intelligently, we demand zero change in merchant or consumer behavior. Cards will work as always, and merchants won’t need to invest in new hardware or cash registers. This disruption is as inevitable as was the removal of dispatchers, medallions, and city taxes in the taxi business. Merchants and consumers save money and time, cash settles faster, and like Uber connects the rider directly to the passenger, Hamilton’s connects the consumer directly to the merchant by using the existing private VisaNet network to “trigger” a signal to move the transaction away from the private network onto our public infrastructure with some simple APIs.
Hamilton’s provides the best of both worlds. It gives the government the transparency it needs for the IRS and can easily net 10-20% of the net margin on every sale to a merchant's bottom line. It also affords the potential for lower credit rates to consumers and more flexible payment options—all at a fraction of today’s cost.
Hamilton’s Reserve business model is disintermediating MDR. MDR is currently 350B USD in the USA annually. In contrast, total taxi fares last year were 35B USD. And the math works:
Uber now has a market cap of 70B USD on 35B revenue, Visa, MasterCard, Discover, and American Express (which do 10X more business, 350B) have a combined market cap of 1T USD.7
Endnotes
1.
Work Cited
Barone, Adam, and Thomas J. Catalano. “Merchant Discount Rate Definition - Credit Cards.” Investopedia, https://www.investopedia.com/terms/m/merchant-discount-rate.asp
Work Cited
“Merchant Discount Rate (MDR) - Overview, How It Works, Importance.” Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/deals/merchant-discount-rate-mdr/
2.
Work Cited
Ahern, Dave. “The Fascinating History of Visa and the Credit Card Industry.” Investing for Beginners 101, 28 September 2021, https://einvestingforbeginners.com/the-history-of-visa-daah/
3.
Work Cited
“IRS to Track Credit and Debit Card Purchases More Closely.” Accounting Today, 18 August 2011, https://www.accountingtoday.com/news/irs-to-track-credit-and-debit-card-purchases-more-closely
4.
Work Cited
Costarella, Renzo. “Understanding the Durbin Amendment and How It Impacts Your Business.” Due, 8 March 2022, https://due.com/blog/understanding-the-durbin-amendment-and-how-it-impacts-your-business/
5.
Work Cited
“Merchant Discount Rate (MDR) - Overview, How It Works, Importance.” Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/deals/merchant-discount-rate-mdr/
6.
Work Cited
“Merchant Discount Rate (MDR) - Overview, How It Works, Importance.” Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/deals/merchant-discount-rate-mdr/
7. Work Cited
“World Top Credit Cards Companies List by Market Cap.” Value. Today, https://www.value.today/company-products/credit-cards