"merchants are paying around 2-3% of every transaction as a tax levied by those incumbents, who add little value in return."
How about fraud protection (on both ends)? I'm old enough to remember people being afraid to use credit cards online. It would be great if things like Dwolla were more ubiquitous, but until then...
This is the key issue. I often hear people outside of the payments industry suggesting that interchange is broken, and I explain time and again that the amount of money they think is in play is not correct. Take a look at http://www.cardfellow.com/blog/credit-card-processing-fees/
If you look through that, you'll see that the typical fees assessed by Visa and Mastercard are on the order of 25 basis points (a quarter of a percent). The rest of that 2-3% is going to price transaction risk (in both directions). No matter what you do in technology, if you're not talking about a better risk management system, the most you're going to be able to reduce interchange is about a quarter of a percent. It may not be obvious if you don't understand finances, but Apple is actually targeting the risk issue.
You're correct that Visa/MC take a very small portion but wrong that most of the rest goes to txn risk. In fact, much of it goes to support loyalty/rewards programs (which can easily cost issuers more than 1%).
I didn't go into rewards programs because that's an entirely more complex issue. In fact, rewards programs are a business hack upon the risk model.
At some point, someone noticed that they were accepting all of this risk money per transaction, and that they could make a tidy profit if they took only the low risk users, so that they could make profit on the risk model. Well, how do you attract the low risk users? You offer them a cut of the transaction.
Over time, as you pull more and more low risk users into the rewards pool [edit for clarity: there are only high risk users in the default pool], the cost of doing business as usual goes up, and you have to start raising your risk charges. Well, higher risk charges means more money available for rewards... and so on and so forth. Durbin should help to restore balance, but it will take some time.
The credit card companies don't do fraud protection - they practically encourage it with how little of checks they provide.
When customers issue a chargeback, they almost always side with the customer, leaving with the merchant with very little recourse. As a merchant, you just lose the money.
How about fraud protection (on both ends)? I'm old enough to remember people being afraid to use credit cards online. It would be great if things like Dwolla were more ubiquitous, but until then...