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EconomicsELI5 How do companies like Klarna and Afterpay make money without charging interest?(self.explainlikeimfive)
I see these companies offering installment payment options for online purchases but they don't charg...
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They don't necessarily negotiate, they'll come in and offer a "deal", particularly when you're already using a competitor. But you don't have leverage without big numbers.
That's literally a negotiation.
People really don't understand what the word leverage means. They think it's like some arbitrary score or amount of points from a videogame.
The only real leverage anyone has is a willingness to walk away from the transaction. In this day and age, as a business you NEED to accept VISA and Mastercard because your customers demand it, therefore they no longer negotiate. Mastercard has a published schedule of interchange rates right on their website, take it or leave it.
With that said, while they want to expand their customer base by offering it, none of them need* afterpay for their business model. Klarna/Afterpay are also not Visa/Mastercard, they **need to market their product to various companies. Therefore both sides have leverage, because both sides have a cost analysis where making an agreement is profitable, yet it's not a true necessity that this deal goes through for either party.
A company offering you a sale price instead of full price isn't a negotiation unless that price is able to be further changed.
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How can I be sure about a question?
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That isn’t strictly true. Yes for 95% of merchants the interchange rate is what it is. Take it or leave it. And for the majority of merchants, you pay fees on top of that too.
When you’re processing billions of dollars though, that changes. You’re big enough to negotiate directly with Visa and Mastercard. Look at Costco. They take Visa exclusively. They are paying much less than interchange rate to accept Visa. The other massive retailers definitely have similar arrangements.
Correct, but it's still not a negotiation if they're not listening
There is definitely negotiation in processing. We negotiate our contract every year by shopping and presenting the best rates to our current processor. Square and stripe are not likely to offer good rates or move much, it card pointe/card connect has been pretty good and we don’t do huge numbers, like $30k/month.