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Archive for January, 2008
Anchoring – a Cognitive Bias
Anchoring, a cognitive bias, is the tendency of most humans to overly rely on a specific value and adjust further decisions in the direction of that value.
Wikipedia explains:
The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman. In one of their first studies, the two showed that when asked to guess the percentage of African nations which are members of the United Nations, people who were first asked “Was it more or less than 45%?” guessed lower values than those who had been asked if it was more or less than 65%. The pattern has held in other experiments for a wide variety of different subjects of estimation. Others have suggested that anchoring and adjustment affects other kinds of estimates, like perceptions of fair prices and good deals.
Anchoring applies to shopping for small business financial services because, when you shop around, the provider you are shopping with often says: “well, that’s a pretty good deal, but we can do slightly better” and offer you a slightly better deal. Your subconscious pressures you to accept their offer while their subconscious keeps them from offering a better deal, even if it means potentially losing your business.
Two good strategies for overcoming this cognitive bias are:
1. let the salespeople know that you are shopping broadly, understand your requirements and they won’t get a second chance to give a better offer – if possible avoid telling them what your current rates are – bluff if necessary. This is basically the strategy that the government uses in auctioning off wireless spectrum, it is also the strategy that transfs uses to our customers good deals on small business financial services
2. anchor the salesperson to a number more beneficial to you – take your first quote (the one slightly better than your current deal) and take it to another vendor, and then a third, play them off against each other until you can’t get them any lower – here is some data on how such a strategy works for credit card processing
We are frequently asked “how much is interchange”, in particular by online businesses. Interchange is the highly complicated system by which Visa and Mastercard charge the merchant money which is then passed along to the card issuer (i.e. Capital One or MBNA / Bank of America). It makes up the majority of the fees a business pays for credit card processing (the processor adds fees on top of interchange and Visa and Mastercard add on a bit for themselves as well).
Interchange varies for each transaction and is based on a combination of 1. what kind of business you are in (ex. grocery store, gas station, phone company) 2. what kind of card was used (ex. mastercard, visa, debit, rewards) and 3. how the transaction was processed (ex. swiped, entered online). The data below is also only for online businesses that use address verification and the 3-digit security code on most transactions. It is based on the aggregated data of a few of our customers and should be reasonably representative for similar businesses. I will try to post something similar for offline businesses when I have a chance.
| Card Type | Interchange Category | Share % | Rate % | Per item |
| Mastercard | Internet Merit | 10 | 1.89 | 0.10 |
| Enhanced Merit | 9 | 2.04 | 0.10 | |
| Merit Debit Internet | 8 | 1.64 | 0.16 | |
| Worldcard Merit | 4 | 2.05 | 0.10 | |
| Corporate cards | 2 | 2.32 | 0.10 | |
| International cards | 2 | 1.69 | 0.10 | |
| “Standard” Internet Debit | 1 | 1.90 | 0.25 | |
| “Standard” Internet Credit | 1 | 2.95 | 0.10 | |
| Mastercard | Total / Average | 37 | 1.93 | 0.11 |
| Visa | CPS E-commerce Debit | 25 | 1.60 | 0.15 |
| CPS E-commerce Credit | 17 | 1.85 | 0.10 | |
| CPS E-commerce Rewards | 15 | 1.90 | 0.10 | |
| EIRF Credit | 3 | 2.30 | 0.10 | |
| EIRF Debit | 2 | 1.85 | 0.10 | |
| Visa | Total / Average | 63 | 1.78 | 0.12 |
| Total | 100 | 1.84 | 0.12 |
One value proposition that we probably don’t advertise as much as we should is that using TransFS dramatically limits the amount of personal and financial information that you need to disclose when shopping for financial services for your business.
For many financial products you must disclose information such as your revenue, address, EIN, social security numbers, credit references, etc. in order to get a price quote. This is exactly the information that an identity thief would need to impersonate you. If you are a diligent shopper, you may look for 5 quotes, which means this critical information is in the hands of at least 5 people.
Normally people are trustworthy, particularly those involved in financial industries. However, particularly in the case of industries that have lots of small, independent, agents or salespeople, such as insurance and credit card processing, you have no idea what sort of information security procedures the agents utilize. For example – after you select 1 service provider from the 5 that you approached for quotes, are you sure that the other 4 service providers properly shredded and disposed of your financial information, or is there a chance that somebody is digging through their trash and finding your vital information.
TransFS allows you to get quotes from many reputable financial service providers. We keep all your confidential information on our secure servers and only parcel out small amounts of the data (and never any names, EINs or social security numbers) to the bidding service providers. Full information is only provided to the winning bidder and all confidential information is disposed of properly after the auction is complete.
While eventually TransFS will allow small businesses to shop for many kinds of financial services, we are starting during our beta period with credit card processing. One reason is that transaction processing is often the financial service with which small businesses are least satisfied. There are some very dirty practices in that industry and we at TransFS are making it our mission to create technology that enables small businesses to get a fair shake by creating reverse auctions where financial services providers bid for your business.
A recent article entitled Run From Mean Streets to Clean Streets in The Green Sheet, the trade magazine for salespeople of transaction processing services, highlights some of these dirty practices. Here are some excerpts:
“Some companies in our industry mislead merchants’ business and line the pockets of the processors…There are MLSs (salespeople) who do not disclose the fact that the company they represent charges cancellation fees…falsifying contracts. Never, ever fill in the blank spaces of a contract to your advantage after a customer has signed it.”
It is shocking that such practices, while not ubiquitous, are widespread in the credit card processing industry. TransFS does not allow participating service providers to charge cancellation fees, we also have designed our auctions with rules for keeping service providers honest, which seem to be working so far.
Speed of TransFS Auctions
Currently TransFS auctions can take as long as 24 hours. Several customers have asked if that is a permanent situation, as they would prefer a faster response time.
It is not a permanent situation. Most TransFS auctions take only a few hours, but we currently check the bids manually before allowing the auction to complete. This ensures that the software is working properly and that our customers get a good result, however, it increases the time of each auction. In the near future we will relax this constraint and allow more auctions to complete without first checking them, which will speed things up considerably and allow customers to see the results of their auctions within a few hours of entering their information.
