Contents

12.12. DD 12: Exchange Fee Configuration

Note

This document is a draft.

12.12.1. Summary

This design document discusses considerations for configuring the fee structure of an Exchange from different points of view (Exchange operators, buyers/users, and sellers/merchants).

12.12.2. Background

Fees are necessary for covering costs that non-governmental Exchange operators bear for offering their services established in-house or outsourced to a data center: variable costs (e.g. electricity and wire fees for every wired transfer to bank accounts) and fixed-cost expenditures for hardware, company assets, marketing and staff, and so forth. Fees enable operators to pass on these costs to users.

The Taler protocol offers different types of fees for the different operations performed by the exchange. This enables the Exchange operator to adapt fees to closely relate to operational expenses. Fee types and their underlying metrics not only to cover operational expenses, but also to provide incentives to users to adopt economic behaviours. In particular, they can be used to ensure that attackers which try to overwhelm the Exchange infrastructure with unusually large numbers of transactions proportionally contribute to the Exchange’s infrastructure budget.

There are six fee types available for configuration by the Exchange operator:

  1. Withdraw: For each successful withdrawal from the checking account, per coin

  2. Deposit: For spending, per coin

  3. Refresh: Per coin for

    1. Refresh transactions for receiving change

    2. Refresh of coins at the end of their validity

    3. Abort of transactions due to network failure

    4. Refund

  4. Refund: For refunds or in case of contract cancellation by seller, per coin

  5. Wire: For aggregated amounts wired by the Exchange to the merchant’s checking account, per wire transfer

  6. Closing: In case a withdraw process did not complete (the user’s wallet did not withdraw the value from the reserve) or could not complete because the user specified an invalid wire transfer subject, this fee is charged per wire transfer from the Exchange’s escrow account to the account of origin

When withdrawing coins, withdraw fees are deducted from the respective reserve. When a coin is deposited, refreshed or refunded, the respective fees are deducted from the coin’s value depending on the type of operation that was performed. The wire and closing fees are deducted from the total amount that is being wired.

Exchange operators must configure a combination of fee amounts for each denomination type and each supported wire method. For each denomination type, the operator must configure the four fee amounts for the per coin operations. These denomination fees are valid for the lifetime of the denomination type: The protocol does not allow retroactive changes for denomination keys that have already been announced. This protects buyers against fee hikes for coins they already withdrew. Additionally, the wire and closing fees that apply per wire transfer must be configured for each wire method. These fees are typically defined per calendar year.

For deposit, withdraw, refresh and refund operations, fees are charged per coin. The number of coins per operation increases logarithmically with the amount transacted. The fees set for a denomination may differ depending on the time of issuance of a coin (that is, whenever the public key changes) and may also depend on the specific value of a coin.

Once an Exchange operator has configured specific fees, the Taler implementation will communicate the fees to new users upon withdrawal and henceforth charge fees on those newly withdrawn coins automatically.

Most fees are covered directly by the buyers, with two exceptions. For deposit fees, sellers may offer to cover deposit fees. For this, the seller can configure (per sale) a maximum amount of deposit fees the seller is willing to cover. Those deposit fees are then deducted from the seller’s income from the sale by the exchange. Additionally, sellers cover the full wire fee, as the wire fee is subtracted from the aggregated amounts wired to a seller.

For the wire fee, we note that deposits are aggregated by the exchange and wired to the receiving checking account of the seller in larger bulk wire transfers. Sellers can set the frequency by which these aggregated amounts are wired. Every wire transfer imposes costs on the Exchange operator collected by the operator’s bank for having the amount wired. Therefore, the Exchange operator will tend to charge the Wire fee to the sellers for this transaction type, as the sellers are the ones causing the aggregated transfer and not the buyers.

If from a seller’s point of view an Exchange operator has set the wire fee too high, the seller again impose a limit and ask buyers to cover the difference. Given that typically multiple purchases will be aggregated into one wire transfer, the seller can specify a so-called amortization factor to divide the (excessive) wire fee amongst a number of buyers using the same (expensive) Exchange.

During the withdraw process, the wallet shows to the buyer the complete fee schedule and indicates the Wire and closing fees. However, if a seller takes over the wire fee charge instead of the buyers, the buyers’ wallets will no longer show a wire fee for that seller. These sellers thus render the fee schedule clearer for their buyers, but certainly will have the wire fee calculated with their sales prices.

Note

The ‘Recoup’ operation does not allow Exchange operators to set any fee amount, because reimbursing funds from an Exchange that is about to cease its activity is not an action initiated or controlled by the user, and thus the Taler designers decided that it must always be at zero cost to the user.

12.12.3. Motivation

Choosing a fee structure for an Exchange needs to satisfy several conflicting criteria:

  • Fees chosen by Exchange operators have to be explained to the users in the terms of service of the Exchange. Thus, any proposed solution should consider its impact on usability and comprehension.

  • The refresh transaction is automatically triggered by the wallet software 3 months before the end of the validity of a coin. Especially if Exchange operators charge refresh fees, the fact that a fee may automatically be charged in the background without user interaction is likely particularly difficult to explain.

  • Fees should deter abusive behavior by malicious parties that simply run transactions to increase transaction costs at the Exchange or to impact availability for normal users. The most effective operation for such attacks are refresh operations, especially if those do not have a fee.

  • From a marketing perspective, it is unwise that buyers see fees. In particular, withdraw fees are likely to be the biggest deterrent as they appear before the buyer actually uses the system to make a payment. Only deposit and wire fees can be made “invisible” to buyers as the protocol allows sellers to fully or partially cover those fees.

  • The protocol does not allow an Exchange operator to retroactively change fees. Thus, adaptations to changing conditions cannot always be done in a timely fashion.

The potential for abuse for the different operations involving the exchange differs:

  • Abuse due to withdraw operations is unlikely as the costs of wire transfers are borne by the bank account holders and not the Exchange operators or sellers.

  • Abuse due to deposit operations is unlikely we basically always recommend that an Exchange operator should charge deposit fees on every denomination to generate income to cover costs.

  • Abuse due to refresh operations is likely and requires a differentiated treatment: The normal case for refresh operations is given anytime when wallets obtain fresh coins as change for a spent coin of higher denomination than the amount to be paid. refresh operations can also happen if coins are about to expire or if transactions failed, say due to network outages between buyer, seller and exchange. Because refresh operations happen completely anonymously, and because refresh operations without a fee basically output a coin that can serve as input into a subsequent refresh operation, they can easily be abused by any adversary to increase the load on the exchange. Thus, when an exchange suffers from an excessive number of refresh operations, the Exchange operator may need to charge refresh fees to cover its costs.

  • Abuse due to refund transactions involves sellers that refund an excessive fraction of purchases. This can be limited by introducing or increasing the refund fees. However, refund fees are charged to consumers, who may then no longer receive a full refund as a result.

  • Abuse due to wire transfers can theoretically affect an Exchange operator when sellers increase the frequency of aggregated wire transfers from his exchange to their banking accounts. A reason for frequently actuated wire transfers may be a seller’s urgent need for immediate liquidity from sales revenues. Some sellers might also want to generate profit from interest rates for their sales revenues before they pay for their merchandise already sold. In any of these cases, IBAN wire transfers can be costly. Thus, we recommend for Exchange operators to always charge a wire fee.

  • Abuse due to closing transactions and the accompanying wire transfer of remittances back to the originating accounts burdens the Exchange operator with costs for wire transfers. This abuse is again unlikely as the costs of wire transfers to the exchange are borne by the bank account holders and not the Exchange operators or sellers. Nevertheless, the Exchange operator could introduce a closing fee to cover such costs.

We now consider each of the fee types, viewed from the perspective of the buyer, the Exchange operator, and the seller, in detail.

12.12.3.1. Withdraw fee for buyers

Anyone who wants to load Taler wallets with coins must initiate a wire transfer from their own checking account to the Exchange operator’s escrow account to let the Exchange fund a reserve which can be subsequently withdrawn by the wallet. Costs for the wire transfer may be incurred according to the user’s contract with the bank. In addition to these potentially incurred costs, the withdraw fee could be charged for each coin withdrawn into the wallet. Even though many bank customers are already accustomed to wire transfer charges, the withdraw fee acts like a loss of purchasing power even before intended transactions take place. Buyers are made aware of this loss when being shown all fee types at withdrawal. Once buyers become aware that they will have to pay the cost for each coin generated, they might prefer to have as few high-denomination coins as possible withdrawn into their wallets.

We note that there are other reasons why rational wallets already always withdraw high-denomination coins, such as reducing computational, storage and bandwidth demands as well as refresh fees. Thus, there does not seem to be a need to provide an additional incentive in the form of withdraw fees here.

12.12.3.2. Withdraw fee for the Exchange operator

A fee on each coin generated would indeed affect all electronic coins withdrawn from an Exchange operator and allocate costs necessary for their generation over all coins signed for the first time. withdraw fees thus have the advantage that the Exchange operator does not have to wait until the consumer spends the coin. In case there are no refresh fees, consumers may choose to hoard digital cash, which may create a legal and (negative) interest liability for the operator. Introducing a withdraw fee may help an Exchange operator collect revenue up-front.

12.12.3.3. Withdraw fee for sellers

While withdraw fees do not burden sellers, withdraw fees are imposing a psychological barrier for their buyers to use Taler. Sellers may thus prefer to include the costs of generating coins in their selling prices and hide this cost from buyers.

12.12.3.4. Deposit fee for buyers

Deposit fees are split between buyer and seller, the seller offering to cover a certain total amount in fees (as part of the commercial offer) and the buyer having to cover the remaining amount in full. It is expected that merchants will offer to cover the full typical range of deposit fees for competitive Exchange operators. Thus, deposit fees are only relevant for buyers if they choose an expensive Exchange operator.

Deposit fees are thus a good candidate to cover all or most expenses that Exchange operators have to bear.

12.12.3.5. Deposit fee for Exchange operators

All reasonable uses of the Taler payment system regularly involve deposit operations. Other fees, such as refund, wire and refresh fees could be almost entirely avoided by certain groups of users, such as those withdrawing coins that match precisely the amounts they will spend (no refresh), sellers that never grant refunds and that configure their aggregated wire transfers to happen rarely (like once per year). Thus, an Exchange operator that wants regular income from regular users must charge either deposit or withdraw fees.

12.12.3.6. Deposit fee for sellers

As an Exchange operator could charge high deposit fees, sellers can protect themselves against excessive fees by refusing to cover fees. Sellers determine the default maximum amount they want to bear by setting the variable default_max_deposit_fee. This default can be overridden on a per-purchase basis. Deposit fees exceeding this maximum are borne by the buyer.

Sellers are expected to cover deposit fees to a similar degree that they cover such expenses with other payment systems.

12.12.3.7. Refresh fee for buyers

Refresh fees are mostly caused by the generation of fresh coins as change for a coin of higher denomination that was redeemed for a smaller price that had to be paid: The payment amount was paid with a coin of a higher denomination, subsequently the wallet receives coins with denominations that add up to the difference. The refresh fee for the change booking is therefore only ever charged for one coin used and should be marginal from the buyer’s point of view.

Refresh also occurs together with refund transactions (a refresh transaction will always be triggered subsequently to discounting or a cancellation of purchase contracts). Less common should be refresh transactions due to the expiration of coins or because of transaction aborts after network or equipment failures. The refresh fee is charged to buyers per coin.

Buyers are expected to consider this fee as an unexpected nuisance. They may complain about it, just like they are more particularly inclined to complain about negative interest rates. We expect that they will often not understand when or why it is charged, especially since fees for getting change are very uncommon in other payment systems.

12.12.3.8. Refresh fee for Exchange operators

As long as there is no abuse with refresh transactions, the Exchange operator has to consider whether to pass on the costs for refreshes directly to buyers or to cover these costs with another type of fee. Using the refresh fee to cover costs means that the originators of excessive refreshes requests also bear their excessive cost.

12.12.3.9. Refresh fee for sellers

Refresh operations do not directly affect sellers.

12.12.3.10. Refund fee for buyers

In contrast to the refresh fees, the sellers – and not the buyers – trigger refunds. If an Exchange charges refund fees, the already deposited coins of the buyers would be charged with this fee in case of a partial or full refund. If a refund fee is charged for a coin, the respective deposit fee is waived.

From the buyers’ point of view, therefore, the sellers should legitimately bear this fee, alas this is not possible given that sellers do not inherently have any money to pay with, and also allowing sellers to give coins to buyers would violate our income transparency principle.

Given that buyers would likely perceive it as unfair if they have to pay the refund fee, we generally recommend that Exchange operators should simply avoid using refund fees.

12.12.3.11. Refund fee for Exchange operators

Exchange operators should not disable refunds, as this is a frequently legally required operation for sellers.

Sellers who excessively trigger refunds can be identified. So instead of charging a refund fee, an Exchange operator may have a clause in its Terms of Service that allows it to take special measures against sellers that abuse the refund feature. We note that the Taler protocol does not allow the Exchange to automatically communicate such a clause to the sellers, and that the sellers do not have to explicitly agree to the Exchange’s terms of service. Thus, such a clause needs to be worded to simply specify what the Exchange operator’s may do in the case of criminal behavior. For this, refund abuse would have to happen to a degree that can basically be categorized as a denial-of-service attack, giving the exchange operator a legal argument for refusing to continue to do business with the abusive seller.

12.12.3.12. Refund fee for sellers

In the event of a seller refunding a purchase, the buyer bears the cost of the refund and refresh fees. While deposit fees are waved in case of refunds, these other fees may apply for the buyer. Furthermore, the seller cannot cover any of those fees.

Thus, sellers cannot guarantee a 100% refund (including fees) should an Exchange charge refund or refresh fees. refresh fees are slightly less problematic, as they can happen in the background to coin owners anyway, and are typically expected to be very low. An exchange should be cautious when charging refund fees, as this may create probems for retailers that are legally obliged to refund 100% of the buyer’s expenses (including banking costs).

12.12.3.13. Wire fee for buyers

This fee is to be paid by the sellers (i.e. sellers or generally all recipients of coins). The wire fee directly affects buyers only in the following case: The protocol allows sellers to partially pass on the cost of the wire fee to buyers if the Exchange operator that signed buyers’ coins sets the wire fee above the value that each seller can define in the seller backend via max_wire_fee.

Given that sellers can specify the wire transfer frequency, wire fees are unlikely to be a driver for Exchange profits. Thus, Exchanges are likely to charge competitive rates, and sellers are likely to be happy to cover the entire wire fee. Thus, wire fees should in practice rarely matter for buyers.

12.12.3.14. Wire fee for Exchange operators

Exchange operators may charge wire fees in order to cover their expenses for wiring the value of coins to the beneficiaries. The wire fee passes on the cost of wire transfers from the Exchange’s escrow account to the receiving banking accounts, and for this usually banks charge handling fees. Buyers are only shown the wire fee upon withdrawal and if the seller does not bear them to the full extent.

For Exchange operators, opting out of the wire fee would be tantamount to giving sellers carte blanche to trigger an aggregated booking of their sales revenue as often as possible. (Except that refunds are not possible after the wire transfer has been initiated by the exchange, but some sellers may never make use of refunds.)

If, on the other hand, the Exchange operator charges the wire fee, this will cause the sellers to adjust the frequency of the aggregated wire transfer as they need it for their business and want to afford the fee for it. Thus, setting wire fees slightly above operational costs for wire transfers should result in an optimal wire transfer frequency.

12.12.3.15. Wire fee for sellers

Sellers want to register their sales as quickly and often as possible. Timely revenue recognition improves their liquidity and generates interest income if sales revenues are received earlier than payments to suppliers. They are therefore forced to decide whether they would rather bear higher absolute costs due to the wire fee or forego liquidity. However, as wire fees are expected to be relatively low, sellers are likely to primarily set their aggregation periods based on the needs for refunds.

12.12.3.16. Closing fee for buyers

The closing fee is triggered by users of the payment system if, after a successful wire transfer to an Exchange’s escrow account, they do not drain the reserve in a timely fashion. This could be the case when for example the wallet could not connect to the Taler exchange within 14 days.

Costs incur to the Exchange for the wire transfer back to the originating account. This is done by remitting the original amount minus the closing fee. The closing fee is expected to be rarely charged and should be meet with understanding from most users. Still, an Exchange operator is unlikely to depend on income from such a fee, and not having a closing fee will simplify the terms of service and could be a cheap way to produce or maintain consumer goodwill.

12.12.3.17. Closing fee for Exchange operators

Costs for the closing of a reserve are incurred by the Exchange operator due to irregular user behavior (withdrawing to the wallet failed within the given time frame, the Exchange has to wire the funds back to the originating account). Thus, Exchange operators may charge a closing fee to cover these costs.

The closing fee is likely dispensable, especially as abuse is expected to not be a problem: malicious parties wiring funds to the Exchange to trigger closing operations would need to have spare liquidiy, would still have to cover their own banking costs, and would also be easily identified.

12.12.3.18. Closing fee for sellers

The closing fee does not affect sellers in any way.

12.12.4. Proposed Solution

12.12.4.1. Fee levels if abuse is low

By default, we suggest that the Exchange should amortize its costs and create a profit using only deposit and wire fees. This minimizes the psychological barriers during the critical withdraw phase, and allows all regular fees to be fully covered by merchants.

Specifically, an exchange should pick a smallest currency unit it is willing to transact in, say 0.005 EUR. For coins of that denomination, the deposit fee should be 100%, that is the entire value of the coin. Further denominations should be created at powers of two from this currency unit, so in our example 0.01 EUR, 0.02 EUR, 0.04 EUR, 0.08 EUR, 0.16 EUR, etc. For the next 4 powers of two, we suggest that the fee remains at the unit currency. Then, the deposit fee should double at 2^4 times the unit currency, so at 0.08 EUR the deposit fee (per coin) should be 0.01 EUR. At 2^8 times the unit currency (1.28 EUR), the deposit fee should triple, rising to 0.015 EUR. At 2^12 times the unit currency, the deposit fee would quadruple, so for a 20.48 EUR coin, the deposit fee would rise to 0.02 EUR.

Note that for a typical transaction, the number of coins is logarithmic to the amount. So with the above fee structure, paying amounts around 10 EUR would on average involve about 6 coins with 1/3rd fees at 0.005, 1/3rd fees at 0.01 and 1/3rd fees at 0.015, resulting in an expected total transaction cost in deposit fees of 0.03 EUR. In contrast, paying 0.50 cents would require on average 4 coins cost less than 0.02 EUR in deposit fees. As a result of this fee structure, microtransactions with Taler have a higher fee in terms of percentage, while larger transactions are still highly competitive.

This fee structure becomes problematic if attackers begin to abuse it, say by excessively refreshing coins or constantly depositing and refunding the same coin.

12.12.4.2. Fee levels in case of abuse

If such transactions are triggered anonymously in excessive ways by malicious parties, the Exchange operators may need to configure refresh, refund or closing fees. We believe nominal refresh fees are most likely needed in case of malicious activity. Excessive refunds are easily attributed to merchants and thus less likely to be a problem. closing fees imply that the attacker performs wire transfers at an equal cost to the attacker. Thus, we believe closing fees will most likely never be needed.

In all cases, these fees should be set to deter, not to make a profit. Hence, likely the smallest configured currency unit should suffice for refresh and refund fees, and the actual wire transfer cost would be an appropriate closing fee.

12.12.5. Alternatives

Another way for Exchange operators to cover costs or generate income would be to set all of the above fees to zero and use income from the forfeiture of users’ funds on the escrow account. Some voucher distributors even already use this income source as a normal business model. This solution might possibly be a “best case”, since without confusing the users with a complex fee schedule and/or a range of fees. However, these revenues are discontinuous and unpredictable and therefore not really suitable for sustainable financing.

12.12.6. Drawbacks

  • Not charging refresh and refund fees all the time exposes an exchange operator to potential losses for a period of time until such fees can be introduced, which may be weeks or months depending on the denomination key rotation frequency. Still, it would seem that a simplified, more understandable fee structure will help the system grow, which is likely more important than this risk.

  • The fee structure does not result in a flat percentage being charged on all transactions. Such a flat percentage may be easier to comprehend than the logarithmic structure prescribed in this document. However, a flat percentage structure cannot technically be achieved for the unit denomination (where the fee basically has to be zero or 100%), and would not reflect the market position of Taler, where low fees are more important for larger transactions that are well supported by competing systems on offer today.

  • The proposed fee structure tries to balance income with system growth, setting fees below current market rates to drive adoption. Given the privacy features, one could justify charging above market rate fees. However, our goal is to grow and become the dominant payment system, and given low per-transaction operational costs, long-term survival depends more on growth than on early income. Given the actual per-transaction costs, it would also be conceivable to charge lower fees to supercharge growth. However, we do have limited funding and a need to show investors that the market is willing to pay for our payment system product. Thus, using fees that might even with significant growth not be able to cover operational costs for many years is also not a good option. Thus, the unit denomination should likely be in the 0.25 to 1 cent range, with the linear growth at factors between 2^2 and 2^6.

12.12.7. Discussion / Q&A

Other documents regarding fee specifications:

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12.13. DD 13: Wallet-to-Wallet Payments