One of the small advantages of riding in the front seat of a Cuenca taxi, apart from the superior view of traffic misdemeanors and roadside drama, is that the dashboard functions as an unexpectedly reliable indicator of financial evolution. Permits, guardian saints, and, increasingly, a tidy arrangement of QR payment stickers: Deuna, JEP, Jardín Azuayo.
I asked a driver recently what commission he paid on these electronic payments, expecting a familiar complaint about percentages nibbling away at his fares. He replied that the service was free. No charge.
“Free,” being one of those words that benefits from cautious handling, did not mean that no cost existed anywhere in the system, but rather that nothing obvious was being deducted from his end of the transaction as far as he could see. From the driver’s perspective, and that of many small merchants in Cuenca, the arrangement works well enough to feel costless.
This contrasts rather sharply with the card-dominated economies of the United States and Canada, and these days also the UK, where Visa, Mastercard, and sometimes American Express form the invisible scaffolding of everyday spending. Tap a card, tap a phone, walk away. The experience is undeniably convenient, reassuringly fast, and backed by formidable fraud protections. Yet convenience, like most luxuries, carries a price that is often poorly understood.
Visa and Mastercard remain marvels of global financial engineering, but they are no longer cheap marvels. The steady upward drift of processing costs has become a topic of increasing conversation among merchants who must either absorb the expense or pass it along in ways customers eventually notice.
When merchants complain about “four percent,” customers sometimes imagine this as a minor administrative nuisance absorbed somewhere in the vast machinery of commerce. The mathematics tell a more interesting story.
Consider a simplified example. A merchant purchases an item for $100 and sells it for $150. The gross profit is $50. If the card processing cost is 4 percent of the sale price, the fee amounts to $6. That $6 is not 4 percent of the profit; it is 12 percent of the merchant’s margin. The calculation becomes even less forgiving once sales tax enters the picture. In Ecuador, where 15 percent IVA is included in the price, card fees are applied to the full amount, meaning the merchant pays processing charges not only on their own revenue but also on the portion destined for the tax authorities, thus creating a kind of tax on a tax that is paid by the merchant. In the United Kingdom and other VAT-based economies, where rates may reach 20 percent, the same arithmetic applies, (although the same would apply at a lower level to state sales taxes in the US.)
Margins, particularly in retail and hospitality, are rarely as generous as customers might suppose. A café, a small restaurant, a taxi driver, or a neighbourhood shop may already be juggling rent, wages, utilities, taxes, spoilage, and the perpetual uncertainty of demand on rainy days. Under such conditions, a few percentage points extracted from each transaction cease to be trivial and begin to resemble a tax on survival.
From the consumer’s viewpoint, card payments feel almost magical. There is no visible deduction labelled “interchange,” no helpful annotation explaining that part of the purchase price has been diverted through issuing banks, acquiring banks, processors, and global card networks whose logos convey stability but whose economics are designed, quite reasonably, to generate profits at your expense. This is made even handier for the consumer if they have ApplePay or GooglePay which are really overlays to credit and debit cards.
In Ecuador, by contrast, many digital payments bypass that elaborate international system of tolls or trolls, depending on your point of view. Systems such as Deuna operate largely as account-to-account transfers, typically initiated by scanning a QR code and confirmed within a mobile banking application.
... continue reading