Paying for gas with your driver's license
Posted on Wednesday, May 16, 2007 by Bryan Johnson
Everyone wants a piece of the payment processing pie that is currently owned by Visa and MasterCard.
Technologies are being developed that will serve as alternative payment methods to the plastic in your pocket. For example, now instead of paying with a credit card at the gas pump, you might have the option of paying with your drivers license. I had a conversation today with Peter Guidi, VP of Sales for National Payment Card, who is pursing this technology.
They've built some technology that allows consumers to swipe their drivers license at the gas pump to pay for their purchase. The consumers checking account is then automatically debited. Retailers love it because they don't have to pay the 2% to 2.5% interchange fees to Visa/MasterCard and the issuing banks. Currently only 24 states have driver's licenses that have a magnetic strip so the opportunity is limited now.
However, as NPC continually refines the technology and can roll it out on a more seamlessly, they may very well become a viable alternative to credit cards. This is just one of a long list of companies trying to ease the strangle hold Visa and MasterCard have on the payment processing industry. For another example, see a recent article on Gratis Card.
In a competitive market place, whenever margins get too large, new entrants arrive to capitalize on the opportunity. That's exactly what's happening with the rates that Visa and MasterCard are charging businesses. The rates that businesses pay (see Where do credit card fees come from) to accept credit have steadily been climbing over the past few years and the total amount of fees is becoming significant.
How to choose a merchant service provider
Posted on Monday, April 09, 2007 by Bryan Johnson
A very common approach for merchants new to the industry is to choose a provider solely based upon price. I am not suggesting that getting competitive rates is not important. I am suggesting that price is one of many factors that should be considered. However, since other salient variables are unknown at the time, price usually ends up being the primary driver which can lead to some larger and more costly challenges. Even those that have years of experience with credit card processing fees struggle to truly understand enough to successfuly negotiate good pricing.
More experienced merchants search better understand technical capabilities, security and compliance implications, underwriting and risk management, products and solutions, customer support, and rate disclosure practices. (I thought this was funny and noteworthy. In the middle of writing this post I got a call from a large merchant that was looking for a different provider. He recounted his very unpleasant first, second, and third experience choosing a provider and then walked me though what he was looking for in a company - noting many of the items above). Before I make some suggestions about what you may want to consider when choosing a provider, let me quickly provide some context about the different types of providers.
There are two types of providers: processors and ISO's
In Merchant Account Basics I outlined that there are basically two types of providers, processors and ISO's (resellers for processors). One of the takeaways of that post was that ISO's can be just as good if not better than processors in providing high value processing solutions. I mention this because this is counter intuitive to some who run with 'cut out the middleman' thought process. I of course fully disclose my personal bias in the matter but will also call out that I worked for a large processor for several years prior to starting my own ISO.
First, don't let price be your primary decision making factor
It's understandable that watching your costs is the one of the most important parts of your business, but don't let it be the primary driver when choosing a merchant service provider. Providers know this and so to appeal to your needs they advertise rates and fees that are not all inclusive. This industry is so competitive and the margins that merchant processors make are so small, get a competitive rate, but focus your energy on larger and more important issues. If you're not convinced and still want to pursue price as your sole decision making factor, just know that the 'creative' selling strategies being used by some are really just part of a larger, and accepted culture in the industry. Here is an example.
Not all providers are made equal
Not all merchant service providers are made equal. Some only focus on specific business types while others are generalists. Some are upfront and straightforward while others are not. Some have best in class solutions while others have standard services. It will be helpful to ask the sales person your dealing with about their current customer portfolio to get an idea of the types of specializations they've developed.
Try not to piecemeal solutions together - find one provider that can meet all your needs
For example, if your business is selling goods and services online you may need credit card storage, a payment gateway, virtual terminal, risk and fraud management and echeck solution. What services you need depend on your acceptance channels such as website, phone, fax, mail and instore. Make sure your provider can not only do all of those things - but do them well. Ask to look at their solutions before committing.
Do enough research about prospective providers to gain a level of trust
This industry is fundamentally very complex. As a business owner, you won't have time to learn or keep up to date on everything going on in the payment processing industry. You will need to work with a company that won't take advantage of your limited understanding. One of the best indicators is to evaluate whether or not they are upfront with their prices and capabilities. For example, if they list their fees on their website, do they disclose all fees or is it bait and switch. You can also read Some advice to help you avoid common mistakes.
Other Suggestions
Ask good and through questions in the beginning of a relationship to find out what your provider's capabilities are. Ask them to throughly explain all fees, rates, and conditions. Ask them if they have experience with different products and services and then ask for examples of when and where they previously implemented it. Try to avoid getting into a relationship where your vendor runs out of steam right after the most basic service is in place. Also remember that the things I generally discuss in these blog posts are just the most basic topics in merchant processing. There is a whole additional layer of value added services that your business can benefit from in partnering with a more sophisticated provider.
Why is the credit card processing industry so challenging?
Posted on Sunday, April 08, 2007 by Bryan Johnson
This last summer my car broke down late one Saturday evening in downtown Chicago. Without much of a choice, I had it towed to the only shop in town that was still open. After having some guy poke around under my hood for a minute, the owner of the shop told me about this complicated problem that was very serious. He quoted me something like $1,500 to fix it. I had no idea if his assessment was reasonable, outrageous, or somewhere in between. Despite my limited options, I just couldn't get comfortable with him or the shop. I decided that I would be better off to pay an additional $150 and have my car towed to a shop close to my house where I knew the mechanic. In my opinion, this experience was a very good example of what goes on in the credit card processing industry.
Merchants have a considerable disadvantage
It is very challenging for merchants to understand enough about credit card processing to negotiate fair and reasonable deals. There is an information advantage held by sales people in the industry that is terribly difficult for merchants to overcome. Not only is the industry fundamentally very complex, most providers don't seem the least bit inclined to make it any easier. There are occasionally articles written by knowledgeable third parties that are are very helpful in providing general advice. One such example is a recently Wall Street Journal Article Charge It!. Even after reading this, merchants wouldn't necessarily be aware of some of the key 'gotchas' that can be pretty significant. Even merchants that I've known over the years that have been the most ambitious in trying to learn about the industry usually come up short.
Very few barriers to entry and little industry regulation
Fueling this situation are the lower barriers to entry and a loosely regulated industry. Stock brokers and life insurance sales people are required to become licensed and abide by a strict code of conduct or face serious penalties. Those in the payment processing business are not required to obtain any licenses or certifications and the only governing body that ever really gets involved is the FTC, which only addresses the most egregious cases. So as you can imagine, it's a bit like the wild wild west and you get some interesting characters that are attracted to the industry. So this is what you get:
Complexity + information advantage + few barriers to entry + light regulation = the payments industry
These industry characteristics are not necessarily unique to payment processing. Similar characteristics exist in the mortgage industry. Anyone who has sat down to sign mortgage documents can see how far government oversight has gone to try and thwart unfair sales and lending practices. I am not arguing for oversight, just highlighting what inevitably happens when you combine motivation for profit without proper checks and balances. No particular type of merchant service company is really above the less than desirable tactics that appear to have long ago become the industry standard. That includes banks and well known national businesses.
My advice is to find a provider that is willing to provide some context around this complex industry and even educate you about its nuances. Make sure that the person/company you're dealing with has some long term accountability to you and profit incentive so that you reduce the risk of them trying to front load their profits and skip town. You can learn enough from this and other online sources to be dangerous in the questions you ask which will hopefully deter those who didn't have your best interest at heart in the first place. To become a better buyer you can read the following posts: How to choose a merchant service provider, and Some advice to help you avoid common mistakes.
Some advice to help you avoid common mistakes
Posted on Saturday, April 07, 2007 by Bryan Johnson
There are quite a few ways that business owners can make mistakes when buying and maintaining credit card processing services. There are two reasons why this is the case. First, the merchant processing industry is so complex that it's challenging even for the most educated merchant to know what to look for when signing up for or maintaining a merchant account. Secondly, due to the fact that this industry is not regulated and has low barriers to entry, any Joe Schmo can get into the business. Low barriers to entry have created an environment where unsavory sales practices have become pretty common. You can also read Why is the credit card processing industry such a mess?
So if you have been involved in merchant processing at a previous company you probably know exactly what I'm talking about. And if you've fallen for one of the tricks I've listed below, hopefully I will help you avoid other potential traps. If you haven't ever taken credit cards before, you may save yourself some pain and suffering by reading the following.
This is not intended to be a comprehensive list, but it will hopefully give you a heads up on some of the most common tactics that sales people use to get a little extra money (or a lot) from you. Here is a list of six things to watch out for.
1. Promotional Rates
"Get a 1.39% rate!" or "1.99% on all internet and MOTO transactions!" Don't fall for it. That rate only applies to a limited number of transactions. Higher rates will apply to other card and transaction types that are often not disclosed. This is perhaps the oldest trick in this business and nearly everyone is doing it from the small shop to the largest providers in the industry. Merchant service providers will promote certain rates that lure merchants in, but it's a bait and switch tactic. Make sure you understand ALL of the rates that you're being offered, not just the lowest.
The best thing to do is specifically ask for ALL rates that may apply. The answer may vary according to what pricing structure your provider is using but those questions will at least get you headed into the right direction. More importantly, the sales person will then realize that you may know a thing or two about this game.
Keep in mind, that while the difference between a 1.79% and 1.99% rate may seem like a big deal to you on paper, calculate it out and see what it actually means. On $50,000 in sales, a .20 basis point difference would be $100 dollars. A $100 dollars is a $100 dollars, but it's fairly small in the larger context of your business and the importance of choosing a good, long term partner. My advice to you: get a competitive rate but don't buy on price because you're more likely to get yourself into a bad situation. Your cost cutting efforts may end up costing you $200 more a month because you went with someone who wasn't forthright with you.
2. Card not present or non-swiped credit card rates
One of my customers is a restaurant who has a large delivery component to his business. When I first spoke to him, he said, "I like your solutions but there is no way that you're going to be able to offer me the same rates as I'm getting today." The guy I'm working with told me that he was getting special wholesale rates. Yup, so you guessed it, his initial swiped rate was very competitive, but his phone order rates were very high. He had been paying over 5% for years.
These types of fees are often hidden in your statement in some cryptic language that not even the NSA can decode. Again, just be mindful of the various rates that you're being charged for different card types and means of transaction (swiped vs. non-swiped).
3. Contracts
In recent years, contract problems have become less of an issue for merchants but it's still a significant enough problem that you need to be mindful of it. It's fairly standard in the industry for a provider to charge a merchant a cancellation fee in the amount of $200 to $500 if the contract is terminated before its expiration date. Contract terms usually vary from 1 to 3 years.
Some contracts out there however call for damages equal to the amount of money the provider would had made if the business would have completed the term of the contract. That can get very expensive. Just make sure if they are going to charge you a cancellation fee for terminating prematurely, that it's reasonable and doesn't have any extra hooks in it.
If a provider hasn't done a good enough job to keep the business, why should the merchant be penalized? Make sure that you read your contracts thoroughly and ask your provider specifically the duration of the contract and the cancellation fee. It's not unreasonable to ask for them to waive their fee but some sales people just don't have the option of accommodating your request.
4. Before and after the sale
It's not uncommon in this industry for a sales person to sneak in some extra fees and charges after you've signed the agreement. The monthly statement that most providers use is so complex that it will nearly be impossible for you to ever notice it.
So don't just assume that the credit card processing industry is like most any other industry where a company actually delivers on a price that is quoted, verify it for yourself. And when you try to verify it yourself and find that you can't because the statement is too complex, call your sales rep and have them explain it to you.
5. Cinco de Mula rate increases
Every spring Visa and MasterCard make some adjustments to their interchange rate structures (see Where do credit card fees come from) which means that rates usually go up. Most companies see this as a great opportunity to not only pass along the increases but increase their margins. The rate increases are always very complex so it's hard to actually understand what happened. Most providers in the industry will capitalize on that opportunity and tack on some additional margin for themselves. Like most merchants, you of course probably never knew that there were set times for rate adjustments; you just knew that you're rates keep on going up.
I think that it's fair that merchant providers pass on the interchange increase with nothing extra added. You get the same competitive pricing from your provider and limit the sting to what Visa and MasterCard increased.
As I said before, this is not a comprehensive list, but hopefully after having invested a few minutes of your time, you are now better equipped to manage this portion of your business.
Ad Revenue to offset credit card fees?
Posted on Friday, April 06, 2007 by Bryan Johnson
I had an interesting conversation today with Paul Harkins, CEO of DreamPlay Ventures. DreamPlay has developed technology (and has filed for a patent) that would allow businesses to print targeted advertisements on credit card receipts and at the same time, generate revenue. They are currently only targeting brick and mortar merchants, online retailers will be in phase II and include a search engine optimization component.
It could be a great way for businesses to offset some of the fees they are paying for accepting credit cards. It’s a good idea but DreamPlay will need to convince credit card processors like ChasePaymentech and First Data to sign up. On this point, he assures me that in the coming months they will have some important announcements.
T.J. Maxx owner: 46M card numbers stolen
Posted on Thursday, March 29, 2007 by Bryan Johnson
This is a huge breach and they’re going to see some significant fines. Also noted in this article is that card holders are suing TJX for being breached. The stakes keep getting higher.
Here is part of the story from CNN:
TJX (Charts), which also operates other store chains in North America and the U.K., also said 455,000 customers who returned merchandise without receipts had their personal data stolen, including driver’s license numbers. The retailer made the disclosures in an SEC filing late Wednesday.
Gratis launches alternative to high interchange cards
Posted on Monday, March 26, 2007 by Bryan Johnson
Gratis Card is launching a new debit/credit card that competes directly with Visa, MasterCard, American Express and all of the others. Their pitch to merchants: lower fees. While fees range for different merchants, Gratis is looking to cut fees by 40% to 70%. The card is processed via the internet (versus the private card associations network).
For consumers, Gratis Card is positioning the card for 1) people who do not have adequate credit scores to get a regular credit card 2) people who desire to remain anonymous in their transactions and 3) those seeking a secure alternative to the risks of fraud that accompany a regular credit card.
Fueling this is the ever increasing frustration by businesses who pay the expensive credit card rates. For years now the Card Associations (Visa and MasterCard) have nearly unilaterally decided the prices and rates they would charge merchants. As these rates have gone up over the years, so has the ire of every merchant who has to pay those fees.
Having said that, it’s an interesting situation because most merchants don’t quite know where to point the finger and direct their outrage. Companies like mine who provide the service on behalf of Visa and MasterCard usually get a lot of flak because we’re there and easy to accuse. We however are making very small margins and those margins keep getting smaller. I think it would be fair to say that 85 to 90% of all fees paid by businesses are going to Card Associations, making it clear where the attention should be.
GratisCard, backed by Steve Case, is one company trying to capitalize on the frustration of businesses and is in the process of launching a debit card of their own that would be transmitted via the internet versus the private card networks. To roll this thing out nationally would require a significant amount of momentum from consumers and retailers but it’s the latest attempt to try and introduce some pricing competition into the market.
What are downgrades?
Posted on Thursday, January 04, 2007 by Bryan Johnson
To briefly mention one layer of the complexity and introduce a topic that I’ll be writing about later, transactions can be downgraded when they don’t meet ‘interchange’ requirements. For example, if the employee at the restaurant swipes your card on their credit card terminal and it won’t read the magnetic strip, the hand keyed transaction is then downgraded or penalized for not being swiped. Transactions that are taken over the phone, via the internet, or are submitted without the proper information can also be downgraded.
The difference in a downgraded transaction can range from .30 basis points to 2.0%+, a significant penalty for any business. Downgrades are the industry’s dirty little secret. It’s also where service providers make most of their margin. These surcharges will usually show up on your monthly statement in some illegible format. My company is the only company in the industry that I know of that has created a specialty in helping companies minimize the number of downgrades.
Quick summary of the Visa and MasterCard class action lawsuit
Posted on Wednesday, January 03, 2007 by Bryan Johnson
I think that nearly everyone has heard one thing or another about the lawsuit against Visa and MasterCard. If you didn’t ever understand what it was all about, here is a brief explanation. In early 2000, merchants from all over the U.S. claimed that Visa and MasterCard’s “Honor All Cards” policies unfairly required them to accept signature debit card transactions at supracompetitive prices. (Visa and MasterCard’s signature debit products are also referred to as Visa Check, MasterMoney or Debit MasterCard.) Merchants also claimed that Visa and MasterCard were attempting to monopolize the debit card business in the United States. In April 2003, just as the trial was about to begin, Visa and MasterCard settled with the plaintiffs’ Class.
Or in other words, Merchants were upset that they were paying the same fees for both credit and debit cards. The case was settled for an amount somewhere between $25 and $87 billion.
A Brief History of the Credit Card Industry
Posted on Thursday, December 21, 2006 by Bryan Johnson
Most people think that credit card processing is a rather recent invention but it actually dates back to the early 1800s. While plastic wasn't used then, merchants and financial intermediaries did extend credit on durable goods. In the early 1900s the larger hotels and department stores began to issue paper cards to their most valued customers.
In 1949, Diners Club launched the first general merchandise charge card. It was primarily used for travel and entertainment expenses for a more well-to-do customer. Diners quickly expanded their network across the nation and charged merchants a hefty 7% fee per transaction.
In the 1950s Bank of America launched the first general credit card. At the time, banking regulations limited the geographic reach of individual banks, so Bank of America found it difficult to compete with Diners nationwide access. To overcome this limitation, Bank of America licensed their card to other banks. Initially they were successful but soon became overwhelmed with the administrative task of processing all of the paper slips from member banks. In effort to address the growing needs, Bank of America decided to spin off the organization and it eventually became known as Visa.
In light of Bank of America's success with their card, a competing network of banks launched a second network known today as MasterCard in 1966. American Express was launched in 1958 and Sears, Roebuck, and Co. launched the Discover Card in 1986.
Issuing credit cards has turned into big business. These financial institutions that issue cards to consumers make money through outstanding balance fees, annual fees, and late payment fees. On the front end, when consumers make purchases with their cards, financial institutions make roughly 2.00% (the actual amount depends on the size of the sale).
The fees that banks charge when credit cards are used for purchases are known as Interchange. The industry has come under fire during the past few years because interchange fees have risen 117% in the past five years. Interchange prices are fixed regardless of volume, which has irked many larger retailers.
Credit cards are now an integral part of our lives with roughly 80% of all families having some type of credit card.
