I've looked at doing this in Europe before, interest-bearing completely changes the classification of the prepayment. I didn't dig too deeply, but the general gist was that regulation-wise it really wasn't worth doing for a relatively gimmick-level feature
I've heard about similar regulatory barriers especially in finance so this does not surprise me.
A long time ago I remember reading about banks that want to provide incentives for saving that amount to basically lottery tickets. The idea is that people aren't thrilled about a savings account that pays 2%, but if instead they offered a monthly 1 in 50 chance to get 100% return (same expected value, ignore compounding), people would like that a lot more. But this amounted to essentially a lottery and that's a state monopoly.
Ireland, like the UK, has a system of Prize Bonds that work exactly like this, administered by the state. The expected return on them is actually quite competitive, depending on your tax situation.
Everyone here seems to have got a present of €20 Prize Bonds for a 10th birthday from an aunt or grandmother, yet people from outside are always surprised that such a product can exist.
I think that is why Carolina Cloud pays the interest in credits (redeemable for their services), as opposed to cash. It is not much different how some business give you a discount if you pay the amount upfront or in a more convenient form of payment.
At scale, a decent number of commercial/business agreements have Net Discount provisions (or provisions to that effect); basically get a % discount if you pay within X days; or pay the full amount with no discount in Y days, so the general arrangement is far from unorthodox.
Which is a good thing. While it may seem strange to regulate these things for good faith actors, it's obvious why it's a great when thinking about bad faith actors.
In some regulations you can also be expected to declare and pay tax on the money you earned from the interest, which can be annoying to do for such small values.
Definitely annoying, and YMMV, but a lot of jurisdictions don't treat credits (that cannot be redeemed back to cash) as income.
In the same way signing up for $App and getting $100 in API credits isn't income; paying a bill early for a 3% discount isn't income; and frequent flyer points or cash back you get on our credit card isn't income.
This is interest on credits, not on cash. Once you start paying interest on cash you need a banking license. I think you'd be fine even in Europe paying interest on credits.
A "banking license" is typically for "taking deposits or other repayable funds". (There's other kinds of banking licenses, too.) That can be for 0% interest too, or even negative interest (e.g. taking fees into account).
Why would you think credits and cash would be treated differently? I am not a EU tax expert but it would be shocking if that’s the case because you could create some pretty interesting schemes if by turning cash into a “credit” meant it was treated entirely different.
Maybe that’s the case for the EU but it would be surprising.
Even with credits or tokens or whatever, it's not completely trivial to find the spot where you can accept customers payments in advance and not be subject to financial regulatory frameworks.
Absolutely agree. I imagine it almost all scenarios it gets tricky and at the very least puts a good bit of burden on the company to define that with regulatory frameworks.
The root of this thread was surprise over rules around interest. I am saying it’s not surprising because companies could then easily create weird schemes.
It's "ok" _because_ the credits can't be turned back into cash (thanks to their TOS).
If some business tried some clever scheme where they offer this "interest" on credits that _can_ be turned back into cash, they'd be breaking the law and would need a banking license, it's already covered.
I think you’re oversimplifying it. “They can’t be redeemed for cash” isn’t a universal legal test. Financial regulation generally looks at the substance of the product. Otherwise every company could sidestep banking and payments rules by calling customer balances “credits.”
Now let’s go full circle back to the original point. I don’t think it’s surprising that a company paying interest on credits may face more paperwork and rules for what is truly a gimmick that most large customers will never even care about. Which was my only point and I think the plot has gotten lost as this keeps going deeper.
I think there was an original "given" which was that in the US, (where I assume this is), these "credits" don't complicate anything nor create any regulatory burden.
That's not to say in the EU, or the UK (where I am) the case isn't different; but if it _were_ the same as the US, I can totally see why that's fine.
We have loyalty programs, a coffee shop gives you "credit" when you get stamps for your 6th coffee free etc, none of that seems to complicate matters... all because of the key point "it can't be turned back into cash".
EDIT: I would add, in the hope of further supporting my argument, that many places that offer loyalty and discount schemes, their ToS explicitly states that it's "not exchangeable" and "has no cash value", which would support my point (at least in the UK).
You started by telling me I was overcomplicating it, but I think you also missed the context of the thread. The original post was specifically about why they decided not to do this in the EU because it created additional regulatory overhead.
My only point from the beginning has been that this isn’t surprising. If paying interest on prepaid customer balances were legally trivial just because they’re called “credits” or have “no cash value,” companies could structure around those rules very easily. That’s why I questioned whether “can’t be redeemed for cash” was actually the legal test.
The loyalty points example is a different product entirely. Even for the linked company I imagine the only reason they do this is a fun marketing angle for winning a finance customer.
> The original post was specifically about why they decided not to do this in the EU because it created additional regulatory overhead
Yes, but I'm not convinced they mean what they're saying, I took that to mean they were trying to do this as _real_ interest.
> If paying interest on prepaid customer balances were legally trivial just because they’re called “credits” or have “no cash value,” companies could structure around those rules very easily
I still stand by my argument, I think it's only "interest" in name; from a banking or financial perspective it isn't. I don't see why it's any different to a company just setting a number in your account. Say I run a SaaS and give you £1000 credit, is that bound by the financial regulations? I don't think so.
If you put a single £10 credit on your balance and I offer to give you "10,000%" "interest" to top it up in credit for my service, I don't think that does either; the wording doesn't suddenly make it covered by financial regulation, it's whether it's _real_ money or not.
Credits on a service, whatever it is, isn't real money, and as long as the ToS doesn't let you turn it into real money, there's nothing complicated to worry about, but if the org _does_ let you turn it into real money, it suddenly becomes covered by financial regulation.
I'm just debating here, I'm not saying I know this to be true, I just think it make sense (to me).
It's the case because once you buy cloud credits you are in an entirely unregulated space. At Carolina Cloud, that means your cloud credits are nothing more than an audited and backed up DB entry. Therefore, we can do whatever we want with them. We could double them every 6mo if we wanted. We settled on something more reasonable (SOFR).
Not unlike the hyperscalers giving $100k+ to startups and it not counting as income for C-corp tax purposes. Totally unregulated space!
What is surprising? Paying interest on cash is effectively a financial instrument. Not sure what gold has to do with it. If you pay a business cash and they turn it into credits that pay interest that would not pass a smell test.
No customer would truly care about this and in most jurisdictions you would probably go through a lot more paperwork because of the interest payments.
I wonder if they see any material differences in their customers’ usage or spending habits on the platform, receiving this interest? My perception of most businesses is that prepaid plans are typically disincentivized compared to subscriptions that auto-renew.
Mentioning what SOFR is would be incredibly useful.
Gemini: The Secured Overnight Financing Rate (SOFR) is a broad measure and benchmark interest rate for U.S. dollar-denominated loans and derivatives, reflecting the cost of borrowing cash overnight backed by Treasury securities.
The first sentence of the first section entitled "The Rate" reads as follows
> The rate tracks SOFR (the Secured Overnight Financing Rate), the benchmark overnight interest rate published every business day by the Federal Reserve Bank of New York.
> The first sentence of the first section entitled "The Rate" reads as follows
That's nice. Though I won't read that far if I have no idea what this is going to be about. 1 paragraph is how much you get my attention for and if that's not enough then my attention goes elsewhere.
I think this is pretty great, though I’m sure hyperscalers will find a way to make sure such a scheme becomes as shitty for customers as frequent flier programs are today.
Think of it from a small hobbyist perspective: I want to host a few small workloads, but I don’t want to deal with reoccurring billing. Maybe I have money now, but can’t guarantee it later. With this scheme, I frontload with a substantial amount of prepaid credits - say, $150 - while only using $5 or $10 a month. In theory, if the interest rate is correct, I could earn more on interest faster than the prepaid credits get drawn down - thus having a perpetual instance for a one-time charge.
Personally? I think that’s a fair and reasonable arbitrage opportunity, because it also means the vendor can take that excess Capital and invest it themselves to create a return greater than the credits paid out. In practice, some greedy jerk C-Suite inevitably places caps on payouts or time limits on credits to ensure they capture more for themselves and leave less for their customers.
I guess what I’m saying is that I dig the idea, I’d love to see it implemented by more vendors, but I also know it’ll get rules-lawyered to death in nanoseconds under the current market incentives.
"I think this is pretty great, though I’m sure hyperscalers will find a way to make sure such a scheme becomes as shitty for customers as frequent flier programs are today."
Oh, that's not even a challenge. The reason to offer a scheme like this is basically to abuse the fact that a human customer will value this disproportionally to the cost of providing it. But if the customer perceives that value, that means you can take that surplus, which isn't real, and then extract that surplus from almost anything else that comes in the form of real money, and create something that humans value as much as the original service, but now with more money to the service provider. Converting the customer irrationality into money means you don't even need anything as obvious as a cap, which sounds scary. You just raise your other prices.
How many small hobbyists really want to front load $150, instead of paying $5 a month, and would only be swayed if they got interest/credits?
At 5% simple interest, your $150 would give you 62.5c per month. So you'd need closer to ~~$1200 to have a perpetual hosting machine; for a $5/month VPS or whatever.
You also now have an additional problem: $1200 of committed spend on a cloud provider; which could go out of business one day; for a $5/month workload.
I think for most people, the second problem is much bigger than "I don't wanna set up recurring billing".
I do appreciate you doing this btw, I find it nice and clever. I like how it democratizes a mechanism that enterprises have (net discounts, similar effective mechanisms) and makes it accessible to everyone.
I was replying to the parent comment, I'm just saying "prepay and commit thousands of credits so you get to run $5/month" isn't a good idea to me, but I do like your mechanism.
A long time ago I remember reading about banks that want to provide incentives for saving that amount to basically lottery tickets. The idea is that people aren't thrilled about a savings account that pays 2%, but if instead they offered a monthly 1 in 50 chance to get 100% return (same expected value, ignore compounding), people would like that a lot more. But this amounted to essentially a lottery and that's a state monopoly.
Everyone here seems to have got a present of €20 Prize Bonds for a 10th birthday from an aunt or grandmother, yet people from outside are always surprised that such a product can exist.
Opening it up to everyone is nice.
In the same way signing up for $App and getting $100 in API credits isn't income; paying a bill early for a 3% discount isn't income; and frequent flyer points or cash back you get on our credit card isn't income.
Maybe that’s the case for the EU but it would be surprising.
The root of this thread was surprise over rules around interest. I am saying it’s not surprising because companies could then easily create weird schemes.
It's "ok" _because_ the credits can't be turned back into cash (thanks to their TOS).
If some business tried some clever scheme where they offer this "interest" on credits that _can_ be turned back into cash, they'd be breaking the law and would need a banking license, it's already covered.
Now let’s go full circle back to the original point. I don’t think it’s surprising that a company paying interest on credits may face more paperwork and rules for what is truly a gimmick that most large customers will never even care about. Which was my only point and I think the plot has gotten lost as this keeps going deeper.
That's not to say in the EU, or the UK (where I am) the case isn't different; but if it _were_ the same as the US, I can totally see why that's fine.
We have loyalty programs, a coffee shop gives you "credit" when you get stamps for your 6th coffee free etc, none of that seems to complicate matters... all because of the key point "it can't be turned back into cash".
EDIT: I would add, in the hope of further supporting my argument, that many places that offer loyalty and discount schemes, their ToS explicitly states that it's "not exchangeable" and "has no cash value", which would support my point (at least in the UK).
My only point from the beginning has been that this isn’t surprising. If paying interest on prepaid customer balances were legally trivial just because they’re called “credits” or have “no cash value,” companies could structure around those rules very easily. That’s why I questioned whether “can’t be redeemed for cash” was actually the legal test.
The loyalty points example is a different product entirely. Even for the linked company I imagine the only reason they do this is a fun marketing angle for winning a finance customer.
Yes, but I'm not convinced they mean what they're saying, I took that to mean they were trying to do this as _real_ interest.
> If paying interest on prepaid customer balances were legally trivial just because they’re called “credits” or have “no cash value,” companies could structure around those rules very easily
I still stand by my argument, I think it's only "interest" in name; from a banking or financial perspective it isn't. I don't see why it's any different to a company just setting a number in your account. Say I run a SaaS and give you £1000 credit, is that bound by the financial regulations? I don't think so.
If you put a single £10 credit on your balance and I offer to give you "10,000%" "interest" to top it up in credit for my service, I don't think that does either; the wording doesn't suddenly make it covered by financial regulation, it's whether it's _real_ money or not.
Credits on a service, whatever it is, isn't real money, and as long as the ToS doesn't let you turn it into real money, there's nothing complicated to worry about, but if the org _does_ let you turn it into real money, it suddenly becomes covered by financial regulation.
I'm just debating here, I'm not saying I know this to be true, I just think it make sense (to me).
Also, how does it compare to say, accepting gold or treating a gold based ledger instead treating gold as a currency and similar ideas?
Also could this re-classification be ever useful too? For examples bonds being treated in such way?
Not unlike the hyperscalers giving $100k+ to startups and it not counting as income for C-corp tax purposes. Totally unregulated space!
No customer would truly care about this and in most jurisdictions you would probably go through a lot more paperwork because of the interest payments.
Gemini: The Secured Overnight Financing Rate (SOFR) is a broad measure and benchmark interest rate for U.S. dollar-denominated loans and derivatives, reflecting the cost of borrowing cash overnight backed by Treasury securities.
> The rate tracks SOFR (the Secured Overnight Financing Rate), the benchmark overnight interest rate published every business day by the Federal Reserve Bank of New York.
See https://docs.carolinacloud.io/organizations/prepaid-interest...
That's nice. Though I won't read that far if I have no idea what this is going to be about. 1 paragraph is how much you get my attention for and if that's not enough then my attention goes elsewhere.
Think of it from a small hobbyist perspective: I want to host a few small workloads, but I don’t want to deal with reoccurring billing. Maybe I have money now, but can’t guarantee it later. With this scheme, I frontload with a substantial amount of prepaid credits - say, $150 - while only using $5 or $10 a month. In theory, if the interest rate is correct, I could earn more on interest faster than the prepaid credits get drawn down - thus having a perpetual instance for a one-time charge.
Personally? I think that’s a fair and reasonable arbitrage opportunity, because it also means the vendor can take that excess Capital and invest it themselves to create a return greater than the credits paid out. In practice, some greedy jerk C-Suite inevitably places caps on payouts or time limits on credits to ensure they capture more for themselves and leave less for their customers.
I guess what I’m saying is that I dig the idea, I’d love to see it implemented by more vendors, but I also know it’ll get rules-lawyered to death in nanoseconds under the current market incentives.
Oh, that's not even a challenge. The reason to offer a scheme like this is basically to abuse the fact that a human customer will value this disproportionally to the cost of providing it. But if the customer perceives that value, that means you can take that surplus, which isn't real, and then extract that surplus from almost anything else that comes in the form of real money, and create something that humans value as much as the original service, but now with more money to the service provider. Converting the customer irrationality into money means you don't even need anything as obvious as a cap, which sounds scary. You just raise your other prices.
At 5% simple interest, your $150 would give you 62.5c per month. So you'd need closer to ~~$1200 to have a perpetual hosting machine; for a $5/month VPS or whatever.
You also now have an additional problem: $1200 of committed spend on a cloud provider; which could go out of business one day; for a $5/month workload.
I think for most people, the second problem is much bigger than "I don't wanna set up recurring billing".
I was replying to the parent comment, I'm just saying "prepay and commit thousands of credits so you get to run $5/month" isn't a good idea to me, but I do like your mechanism.