A Stratechery post covering Facebook’s cryptocurrency launch mentions that credit card merchant fees are generally a flat $0.29 fee plus 1.5~3.5% of the transaction. The argument is that the market is efficient and if there was a way to drop them one of the credit card providers would have to gain an advantage.

I don’t buy this argument. I don’t have the history of merchant fees but my suspicion is that they changed minimally, if at all, over the past few decades despite the massive amount of data being collected and the processing capability to go with it. The rates could be much lower but there’s limited incentive to get there since credit card companies can charge on both the consumer and merchant side. There’s a big incentive to optimize on the consumer side since they’re the ones spending the money and understanding the default and fraud risk are major drivers of profitability. On the merchant side it’s a stable rate with little reason to change it.

Yet there’s a big opportunity to be more intelligent here. Imagine if the rate varied over time based on customer behavior. If I’m selling a subscription service to a small and loyal audience the default rate will be low and my merchant fee should reflect that. Similarly, companies likely have higher credit worthiness than individuals and it makes sense to charge lower merchant fees for commercial purchases.

It’s possible and likely that this approach would be abused and may lead to punitive rates for some merchants but there should be a way that’s fair and intelligent. The existing credit card companies may not have any incentive to improve the merchant side but it will happen.