MasterCard Labs’ Clever Crowd-sourcing Credit Line
Creates a “Tab” (Think Bar Tab, Not Internet Tab) to avoid merchant account fees for small transactions
Hey there, this is my first post on Medium. I will be using Medium to post info that doesn't quite fit at eCommerceBytes,Bitcoin Magazine and Lets Talk Bitcoin!
MasterCard Labs, launched back in 2010 , just had a clever patent application posted by the United States Patent and Trademark Office. Patent Application 20130297485 or “ Crowd-Sourced Credit Rating and Debt Tracking System to Facilitate Small Purchases on Trust Based Credit.”
Here is an abstract of the Patent:
“ Systems and methods are provided for facilitating transactions between consumers and merchants on trust based credit. The systems and methods described herein enable a series of operations whereby a purchaser can initiate a transaction and instead of paying using a credit card or cash, the consumer can use trust based credit “tab” with the merchant and pay its bill at a later time. Based on this selection, a credit transaction request (identifying the consumer, the merchant and the credit amount) can be transmitted to the system server. In response, the system server can generate a report with the consumer’s credit transaction history and credit profile and transmit the information back to the merchant. The merchant can elect to approve and finalize the credit transaction or decline. The consumer’s transaction history can be updated with the transaction and all necessary adjustments to the consumer’s credit profile can be made.”
One of the major advantages of the cryptocurrency Bitcoin is that there are zero to negligible transaction fees associated with a bitcoin transaction. Bitcoin has been hailed as the holy grail for micro-transactions and transactions less than $10 because legacy systems (e.g. MasterCard) fees take a large chunk in fees relative to the overall transaction. This is why you often see stores put a sign up by their register which states that you must spend at least $10 to use a credit card at their store. This is explained in the patent:
Purchasing with credit/debit cards eliminates the requirement to carry cash. However, as merchants are charged fees for processing credit/debit card transactions the fee charged can reduce or even outweigh the profit made from the sale, especially in the case of small transactions. As such, many merchants impose a lower bound on credit/debit card transactions, accept credit/debit card transactions and incur a loss, or refuse credit/debit card transactions outright (for example, merchants for whom the majority of transactions are small). In addition, the input of a credit/debit card can be inconvenient as it may require the holder to enter personal or credit/debit card identification numbers and to verify their identity.
Some Merchants resorted to charging fees for their customers to process these type of transactions and there was a change adopted by the major players earlier this year: “Visa, MasterCard Agree To Let Merchants Add Surcharges To Credit Card Purchases”
The patent application also includes a screen-grab from MasterCard Labs which specifically shows the $10 threshold in action:
The patent application further details how this would work:
It can be appreciated that from the consumer’s standpoint there is a demand for a system that removes the inconvenience of carrying cash for small, daily purchases; reduces the acceptance barrier for making purchases on credit; facilitates the processing of transactions below a merchant’s lower bound on credit/debit card transactions; allows the consumer to leverage trust established with particular merchants with others; and/or increases the visibility of purchases as the system tracks the consumer’s purchases with each merchant.
It is also desirable from the merchant’s standpoint for a system that allows the offering of credit based on a widely and often sampled rating of a consumers credit; allows the cost-effective processing of transactions below the merchant’s lower bound on credit/debit card transactions, as consumers can pay their tab periodically; improves the relationship with the customer by offering credit based on trust of that customer and by automatically gathering data on the purchasing habits of that consumer; increases the likelihood of customer retention as the consumer feels trusted by the merchant; provides an incentive for consumers to purchase goods/services from the merchant as this credit is available from the merchant based on the trust established by the consumer with other merchants; and/or allows setting the level of credit extended to consumers, based on their credit rating, to a level the merchant is willing to accept.
While a patent application doesn’t necessarily indicate that there is an product that is ready to be released in the wild. With Bitcoin gaining wider acceptance it is interesting to see legacy financial institutions such as MasterCard finally address the small transaction problem through technological innovation rather than though litigation.
MasterCard has been known to blog about Bitcoin in their Insights Blog and I suspect as Bitcoin gains adoption that MasterCard Labs will continue to innovate to provide some healthy competition.
