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The Payoff

How Changing The Way We Pay Changes Everything

Goddfried Leibbrandt and Natasha De Teran

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A tourist checks into a small hotel in an island resort and pays, in advance, with $100 bill. The hotelier gives the $100 bill to the butcher to settle his meat bill. The butcher uses it to pay his debt to the farmer. The farmer uses it to pay the mechanic for fixing his tractor. The mechanis gives it to the hotelier for hosting his daughter's wedding. Then the tourist changes his mind, so the hotelier refunds him the $100 note.

Credit cards based on'four corners': the cardholder, the cardholder's bank, the merchant and the merchant's bank. The financial foundation was the interchange fee. Mastercard and Visa run the 2 interchange networks. The cardholdermakes a $100 purchase. The issuing bank takes a 2% fee and passes on $98 to the merchant's bank. The merchant's bank takes a 1% fee and passes on $97 to the merchant.

The actual costs of the interchange are a lot less than 2%, and the margin allows the bank to offer incentives to cardholder - air miles or cashbacks etc.

The net effect of the interchange fee is to make transaction seem costless, or even profitable, to the cardholder, while passing all costs on to the merchant. He accepts that cost bc he believes he gets more sales than if he had to rely on cash sales.

Future of money very hard to predict: 10 years ago, who wd have thought that two Chinese super apps would control the majority of payments? Or that mobile phones starting in Kenya, could give the developing world access to banks?

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