Amazon rains on PayPal's parade
Posted on Wednesday, August 22, 2007 by Bryan Johnson
PayPal is a great story. In less than 8 years they've been able to sign up 133 million users in over 100 markets. In 2006, they generated nearly 30% of eBay's (PayPal is owned by them) $1.4 billion operating income.
But Amazon is about to rain on their parade. The secret to PayPal's lucrative business model is that they charge the equivalent of credit card fees for transactions that really amount to ACH (electronic check) transactions.
The cost of an electronic check transaction is substantially less than a credit card transaction. (Click here to see where credit card fees come from.) For example if you take payment from a PayPal user who's pulled funds from their checking account, you're going to pay 2.90% and .30 cents. PayPal's cost on that is less than a penny.
If someone uses a credit card to fund their PayPal account, PayPal increases the rate and charges the receiver 4.9% and .30 cents. PayPal has been making huge profits for years now using this model. Amazon has squarely set their crosshairs on PayPal's making machine of processing electronic check transactions at credit card rates.
Amazon is the only player in the online payments space that could pull this off. They are leveraging 69 million registered and active Amazon users who can immediately replace their PayPal account with one from Amazon. So with a third and probably final major entrant into the online payment processing space, PayPal, Google, and Amazon will have to hash it out between themselves.
Google's attempt at buying market share by waving fees has not been successful and their inability to access funds from a checking account has been a shortcoming. We'll just to wait and see if this is a space they really want to play in. Until then, most merchants are trying to gauge demand for each different payment type to determine if integrating all of these different methods makes sense. PayPal had the sandbox all to themselves for quite sometime but they better start brainstorming about ways to replace the income they are going to lose when Amazon starts raining on their parade.
How do you tame predatory sales practices?
Posted on Tuesday, August 21, 2007 by Bryan Johnson
I have been outspoken about unscrupulous sales practices in the credit card processing industry. A comparable environment exists in the mortgage industry and the similarities between the two are many. Both industries have very complicated products and services (credit card processing is more complex). Sellers of both these services have a disproportionate knowledge advantage over buyers and often take advantage by extracting higher fees in sneaky ways. Both industries are very fragmented. And both have low barriers to entry allowing admittance to just about anyone who wants to be in the business.
So the question is: what is the best way to discourage such practices and protect consumers from falling prey? It's an issue that the credit card processing industry has just started talking about. Some within the industry have begun speaking out advocating that the industry better clean itself up before regulators have to engage. My take on that approach - good luck. With a sales environment so loosely controlled and transient, you'll never be able to play on your honor.
There is an article on the front page of the Wall Street Journal today Illinois Tries New Tack Against Predatory Loans. In it, Amy Merrick rehashes the current turmoil in the credit markets that is stemming from subprime lending, and one of its biggest causes, predatory sales practices.
The article focuses on what the state of Illinois is doing to combat predatory practices: government intervention. This is apparently a new and improved approach from the first go around of attempts where regulators threatened fines and penalties to deter bad behavior. Thirty states, including Illinois, have predatory lending laws that prevent certain practices.
However, when that proved inefficient in curbing bad behavior, the new solution the Illinois legislature is now advocating requires prospective borrowers to sit down for 1 to 2 hours with a counselor prior to completing a loan. I can see the logic in providing expertise to those who don't have it, but requiring?
It's an interesting topic and one which is very tricky. I don't see any sort of regulation or oversight happening anytime soon in the credit card processing industry. Businesses receive different treatment than consumers from regulatory bodies. So in the meantime, you are all on your own, without a credit counselor to help you with your next credit card processing purchase decision. Good luck with that.
Rule Breakers in the credit card processing industry
Posted on Friday, August 03, 2007 by Bryan Johnson
The credit card processing industry is notorious for complexity, hidden fees, not-so-great providers, and generally considered by many to be one of the most challenging parts of running a business, and rightfully so. Buying credit card processing is like getting your car repaired in that consumers usually do not know enough about what they're buying to ensure that they're being treated fairly. Sellers end up having a significant knowledge advantage over their customers and can hide fees, overcharge for the service, or charge them for things that are unnecessary.
The rub for me has always been that the overwhelming majority of all merchant service providers don't play by the rules and capitalize on the industry's complexity for their own benefit. By "rules", I simply mean shooting straight with buyers. Some providers of course are more egregious law breakers than others. Despite being rule breakers, these companies are often rewarded because they win the business of even astute buyers over other companies who refuse to use the same sneaky tricks.
QuickBooks Merchant Services and Costco Wholesale are two great examples of 'Rule Breakers'. I could have chosen any number of companies as my examples but I wanted to demonstrate that even the largest players, with the greatest amount of perceived 'trust' are using the same sneaky tactics as everyone else. Let's look at QuickBooks first. Here is the screen shot for their main merchant services web page. I've highlighted the area in red where they show their rates: 1.72% for swiped and 2.44% for key entered. Fair enough, competitive rates. But..
If you look down in the fine print you'll see that some Non Qualified Transactions will be charged 3.27%. That's a significant bump from the advertised rates. That's important to know because depending on a few variables, anywhere from 10% to 80% of your transactions are going to be Non Qualified and fall into the 3.27% rate category. I know this from poring over my own customers' transaction data every month. As a consumer, I need to know about this 'minor' detail.
But let's say that you didn't read the fine print and then clicked on the "Try it!" button on the side to see just how much you should budget to pay for credit card transactions. What comes up is a comparison with only the 2.44% rate represented. The 3.27% rate for "Non Qualified Transactions" is nowhere in sight. So now they've provided two data points to demonstrate to you that you should expect QuickBooks Merchant Services to charge you 2.44% on your credit card transactions. That's simply not the case.
Finally, after not being upfront with their own fees, they make a disingenuous gesture and try to become your caretaker by announcing:
Now let's take a look at Costco; they're worse than QuickBooks. If you look at their website, they offer merchants a swiped rate of 1.64% and $0.20 and 1.99% and $0.27 for internet or mail order transactions. No where on their website do they disclose that Non Qualified cards are charged 3.47% and $0.31. You have to pick up the phone and speak to a sales person before you can squeeze this minor detail out of them.
A few things about this:
# It's not just Costco and QuickBooks doing this. The overwhelming majority of providers in the credit card processing industry use these same selling strategies.
# Most merchants don't ever find out about these higher fees because they're not disclosed upfront and the monthly reporting statements are so confusing that it's nearly impossible to tell what you're paying.
# Most experienced merchants I know just get overwhelmed with the dismal nature of this industry and have given up on trying to find a straight shooting provider. That's what makes QuickBooks and Costco's behavior so reflective of the industry as a whole. Consumers see them as a safe haven from the wild wild west nature of the industry and then end up with the same thing they would get elsewhere.
Summary The problem I have with every provider who is selling this way is that it's underhanded. These are the same selling tactics that have been used in the mortgage and title business and what ultimately got Congress to start regulating those industries.
Companies who use these types strategies bet that even though customers will become irritated when then find out the reality, they'll stick around to avoid the cost and effort of switching to another provider, who will probably just be the same. It's certainly a way to play the game, but definitely not one that I could ever be proud of.
Credit cards moving to Account-Level Processing
Posted on Thursday, August 02, 2007 by Bryan Johnson
For Visa, it’s out with the old and in with the new. As part of a multi-year upgrade to their processing systems, they are in the process of launching Account-Level Processing (ALP) as its new standard for credit card issuance and usage. The change will allow consumers to keep the same credit card number regardless of their stage in life or particular card program. In the past, if you changed credit cards from when you transitioned from being a poor college student to a debt ridden professional, you got a new card with a new number. With Account Level Processing, you’ll keep the same credit card and your bank will be able to change credit limits, rewards, interest rates, and other variables on the back end.
The obviously advantages for banks is that they no longer have to issue new credit cards, which saves them money. They are also more likely to keep you as a long term customer as you move into different stages in life because you will be less likely to shop for a new credit card every time you want something different. The biggest incentive for Visa (and the banks) however is that ALP will allow them to better track your spending habits and then monetize that information to make you offers. Click here to read more about potential uses of targeted promotions and offerings and how this is slated to benefit merchants to help offset credit card processing fees.
Before ALP, only the first six digits on your credit card was used to process and manage transactions. Known as the Bank Identification Number (BIN), these six digits will become a thing of the past as all 16 digits will now be used in processing your transitions.
I was talking to David Fish, Senior Analyst at Mercator Advisory Group about this and his comment was that all the value that is being created by the ALP is now owned by Visa and the issuing banks. He said that processors acquirers (also known as back end credit card processors) should be banging down the doors begging for access to the ALP databases so they can tell their merchants who their best customers are.
Innovative marketing could help offset credit card fees
Posted on Wednesday, August 01, 2007 by Bryan Johnson
I’ve been having a conversation with Aneace Haddad, founder of Welcome Real-time about some of the innovations in next generation payment products like contactless payments and EMV (a technology that facilitates communication between a point of sale device and a consumers credit card). Aneace’s company specializes in this.
The new technologies being developed like EMV will facilitate communication between a credit card and a point of sale device. So instead of your credit card issuer just capturing information that you spent $20 at Target, it could capture products purchased. That data could be maintained in aggregate and provide a much more relevant picture of your buying habits and preferences. It’s granular data that would piece together all of the other information that your credit card issuer already has on you. Some retailers are already doing this with their own programs such as Chicago based grocery retailer Dominicks with their Fresh Value Card.
With that data, the idea is that as you’re purchasing something from a retailer, the chip in your credit card would communicate with the point of sale device and use your buying history to determine what relevant and targeted things to offer you. Merchants would benefit from this as the revenue they would generate by offering this would offset some of the credit card processing fees they pay on the transaction.
Aneace shared a number of ideas regarding how these innovations may be prove useful to both consumers and merchants:“Another angle we are exploring is something similar to roaming. When you go to another country with your GSM phone, you usually receive one or two SMS messages from your operator telling you which local operator to switch to for the best service. Why not have something similar when you use your card in a new country? The first time you pay, the receipt could include a roaming message from your bank telling you which bank’s ATM’s are free, or offering you special traveler’s insurance and a local number to call. You don’t want those messages popping up over and over again; the intelligence built into the new payment devices ensures that the message is only delivered once.Imagine for a moment that MasterCard PayPass cards are widely available across the US. Or if you prefer, look at Europe, and imagine that merchants already have a large number of customers using Visa Vpay debit cards, which all have chips. I’ve talked a lot about how a merchant can leverage data hidden within those card products to deliver targeted promotions. What else might happen in addition to targeted promotions?”
What is Visa’s role in credit card processing?
Posted on Tuesday, July 31, 2007 by Bryan Johnson
Visa dominates the credit card industry maintaining nearly a 70% market share of all U.S. credit cards that are in circulation. Despite their dominance, Visa’s role is usually not well understood by merchants or consumers.
Visa is now a publicly held company primarily owned by 13,000 U.S. financial institution. Visa provides much of the necessary infrastructure to support financial institutions in issuing and processing debit and credit cards. Financial institutions like Capital One and your local bank issue credit and debit cards because it makes them money.
Visa does not issue plastic, set fees or determine the interest rates that will be charged on a Visa branded card. The issuing members have the latitude to determine those fees.
Visa USA makes most of their $2.9 billion in revenue two ways. First, they get a fixed .0925 basis points on all money that is spent using their co-branded cards (that’s $.095 cents on a $100 transaction). Their second stream of revenue is from Data Processing, which means facilitating the transaction and settlement of transactions.
Here are some statistics to put their U.S. operations in perspective:- 6.3 million businesses accept Visa
- $1.3 trillion dollars of goods were purchased with Visa branded cards, up 17% from last year
- Visa processes on average 100 million transactions per day
- Consumer credit cards – $588MM in sales volume, 282MM cards, 10% growth
- Debit and prepaid cards – $574MM in sales volume, 192MM cards, 23% growth
- Commercial – $159MM in sales volume, 26MM cards, 26% growth
An ideal business model: shower your customers with perks and have someone else pay for it
Posted on Monday, July 23, 2007 by Bryan Johnson
Can you imagine having a business model that would allow you to be unsparingly generous to your customers through rewards and perks and then require someone else to pick up the bill? That’s what banks and other non-bank card issuers have been doing for years.
You’ll remember a few years ago when credit card companies started offering reward programs. Incentives to use your credit card included cash back, reward points, travel perks, etc. All of those rewards cost money and business owners who take credit cards ended up footing the bill. The fees that credit card issuers charge have gone up an amazing 117% since 2001. Take a look at an except from a recent Forbes article The Worlds Most Exclusive Cards that was provided to me by Aneace Haddad.
“Though lenders aren’t going to make much in the way of late fees and interest charges (assuming rich people pay their bills on time and in full, which isn’t always the case) they make up for it in the fees they charge to merchants to process transactions. American Express network transactions mean fees of about 4% each purchase, so a $60,000 car charged to a Black Amex could potentially rake in $2,400 in processing revenue. Even if the issuer takes half of that and pays it back to cardholders in the form of outlandish perks, the profits are still good.”
A Tempo shake up looks promising
Posted on Thursday, July 19, 2007 by Bryan Johnson
Tempo Payments, Inc. is shaking up the debit card processing industry, and at the same time, sending a loud message to the larger incumbent banks and financial institutions that have dominated (in near monopoly style) the payment processing space for decades.
Tempo’s innovation is a pin based debit card that works on the ACH network, which let’s them circumvent the issuing banks and therefore the high priced interchange that they charge. They’ve built out their own network and are now providing the platform for retailers, financial institutions, and others to issue their own private labeled Tempo cards to their customers. Prior to Tempo, it was largely cost prohibitive for all but the largest banks to issue their own cards because of the high costs of building the inhouse processing capabilty.
Tempo is providing a hosted solution that will allow retailers and financial institutions (banks, and non-bank card issuers) to issue and manage their own portfolio.
In April of this year Tempo secured an agreement with ChasePaymentech to make their debit card available to an additional 600,000 merchants. That was in addition to the existing 200,000 they already had.
One of the advantages offered to consumers is that they can now get a pin-based debit card that does not have to tied to a certain bank account, which is also advantageous to whomever is issuing the card because then they don’t have to be a bank.
What’s interesting about this is how a start up with only $17 million from venture capital firms Integral Capital Partners, Cardinal Venture Capital and Selby Venture Partners could successfully overcome the long standing barriers and gain admittance into the industry.
Others trying to enter the alternative payment processing space like Gratis Card should take note of their market penetration model. By inking a deal with ChasePaymentech they avoid the hassle that Gratis Card is dealing of signing up merchants one at a time. This is the chicken and the egg problem. Tempo is heading down a path of eliminating the supply problem which puts them in a much stronger position.
Tempo’s early success will surely attract a lot of attention from the large incumbents in the industry who are threatened by this such as the existing pin-based debit networks such as NYCE, Pulse, and Shazam as well players like Visa and MasterCard who see that disruption is coming.
Interchange Under Pressure - Again
Posted on Wednesday, May 30, 2007 by Bryan Johnson
Almost every spring both Visa & MasterCard raise their interchange rates, which are essentially the wholesale costs for the credit card processing industry. To better understand Interchange, read Where do Credit Card Fees Come From?
Merchants have seen a dramatic increase in their credit card processing fees over the past few years. The interchange increases that went into affect this April represent an estimated 17% increase over the last year and a whopping 117% increase since 2001.
Rate increases are not the only source of contention but also on the type of transactions that interchange is being charged on. For example, interchange is also collected on sales tax, not just the price of the good or service that was purchased.
There are some groups such as the Merchants Payments Coalition who are trying to argue that the Federal Reserve Board has the authority to control interchange. Whether or not that’s true, the mere presence of the argument mounts increased pressure on the Card Associations (Visa & MasterCard) and signals more clearly that the unrest among merchants may be moving towards a tipping point.
So what does this all mean for you? Well, maybe not immediate relief in lower interchange fees, but perhaps a reassurance that others are fighting this battle for you and their efforts are gaining steam and someday, may just make it to your bottom line.
ACH and EFT payments show impressive growth
Posted on Monday, May 21, 2007 by Bryan Johnson
Electronic checks and electronic funds transfers (EFT), also generally known as ACH payments, are becoming increasingly popular methods of payment. Transactions such as check by phone, automatic debits (reoccurring billing), direct deposit, and electronic funds transfer are convenient, low cost methods of moving money. According to the Nilson Report, in 2006 the ACH network ranked second only to Visa in transaction volume with $13.43 billion, up 15.3%. Visa's 2006 growth rate was 13.2%.
Two of the most impressive areas of consumer ACH transactions relating to the payment processing industry were in Internet and Telephone categories. Consumers are increasingly pulling out their check book to pay for goods and services. The growth of electronic ACH/check payments appears to be coming at the expense of credit cards and paper checks.
Retailers love taking electronic checks or other forms of ACH payments versus credit cards because it saves them up to 70% of the fees they would have to pay the card networks such as Visa. Preferences to pay via a checking account are driven by security and fraud concerns that are most associated with credit cards and because people who don't have a credit card can now start buying goods and services in ways they couldn't before. If you haven't already, you should start looking in to ways in which you can replace credit card payments with electronic checks or other ACH methods. While every business is not successful in making this introduction, it's worth looking into.
