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Archive for February, 2009
The St. Louis Magazine Editors Room blog called us on Friday to ask about an article they were writing about the Post Office’s financial issues. The author wondered how it impacts the post office when people pay for a stamp or two with a credit or debit card.
The phone call prompted me to do a little more digging into how much it would cost the Post Office to accept a credit card to pay for a single $0.42 stamp. First, lets look into the interchange rate. Interchange is the amount that is collected by Visa and Mastercard and is paid to the bank that issued the credit card (for example, Capital One).
While Mastercard and Visa do have a discounted rate structure for small transactions, only certain industries qualify and the Public Sector is not one of them. Fortunately for the Post Office, Mastercard has a special discounted rate structure for Public Sector entities, which is 1.55% + 0.10 for credit and 0.80% + 0.25 for debit Mastercard. Visa has a similar program, called CPS/Retail 2 Developing Markets, that costs 1.42% + 0.05 for credit cards and 0.80% + 0.25 for debit cards.
| Type of Card | Percentage fee | Per-transaction fee | Fee for a $0.42 stamp | Fee for a book of 20 stamps |
| Mastercard Credit | 1.55% | 0.10 | 0.11 ( 25.4% ) | 0.23 (2.7%) |
| Mastercard Debit | 0.80% | 0.25 | 0.25 (60.3%) | 0.32 (3.8%) |
| Visa Credit | 1.42% | 0.05 | 0.06 (13.3%) | 0.17 (2.0%) |
| Visa Debit | 0.80% | 0.25 | 0.25 (60.3%) | 0.32 (3.8%) |
When applied to the purchase of a single stamp, or even of a book of 20 stamps, the interchange rate can amount to a sizable portion of the purchase price, as much as 60.3% when using a debit card to buy a single stamp.
In addition to the interchange rate, the Post Office will be assessed a fee for each transaction by its credit card processor. For a small business, those fees can be quite substantial, sometimes even more than the interchange fees, effectively doubling the cost of the transaction. However, for a large government entity such as the post office, the processor’s markup is probably a constant $0.02-0.04 per transaction, adding a small amount to the fees.
Do credit card fees contribute to the financial troubles faced by the Post Office? Probably a little bit, but we should keep in mind that around 50% of the business conducted by the Post Office is wholesale (catalogs, mass-mailings), most of which are probably not paid for with credit cards.
We know from the USPS’ published financial reports that 50% of the revenue from the post office comes from Standard Mail (all of which are mass mailings). Let’s assume that 25% of the remaining 50% of revenue is paid for with a credit card. This is a conservative estimate, based on the First Data / Hitachi Consulting study that shows that credit and debit card payments accounted for 63% of all in-store payments in 2008. Then let’s assume that the credit and debit card payments cost the post office 2.5% on average.
Applied to the roughly $75,000,000,000 of 2008 revenue we get $75,000,000,000 x 50% x 25% x 2.5% = $234,375,000. An extra $234M wouldn’t have been enough to bring the post office into the black (it lost around $2B in 2008) but it might have helped.
Note that those in the payments industry will point out that taking other kinds of payments – checks, cash, etc. – also have costs. They are right, but there is an argument to be made that credit cards are more expensive than other forms of payment when they *should* be less expensive since they are more modern and high-tech.
On Anita Campbell’s excellent Small Business Trends blog, a recent post from guest author Amit Mullerpattan was entitled Top 10 Outsourcing Trends. Amit is an outsourcing pro and his analysis list interesting to me as a frequent user of outsourcing services.
The article however missed a HUGE trend in outsourcing, one that we have been making great use of here at TransFS – Crowdsourcing.
Crowdsourcing as defined by Wikipedia is:
The act of taking a task traditionally performed by an employee or contractor, and outsourcing it to an undefined, generally large group of people or community in the form of an open call. For example, the public may be invited to develop a new technology, carry out a design task (also known as community-based design[1] and distributed participatory design), refine or carry out the steps of an algorithm (see Human-based computation), or help capture, systematize or analyze large amounts of data (see also citizen science).
Basically you publish the specs of whatever it is that you need to get done ( design, code,research, etc.) and a large group of people compete to come up with the best answer. In our use of crowdsourcing we have seen almost unbelievable results, and we will write more on this topic over the next few weeks.
Despite the learning curve, crowdsourcing should be part of every businessperson’s toolbox because it is so efficient. Crowdsourcing is absolutely a big part of the future of outsourcing.
ACH Based Payment Networks
Tech Crunch yesterday wrote about a payments startup called Noca. Noca allows customers to pay for purchases using an electronic check. After a text-message verification, Noca uses the ACH system to collect money from the customer’s checking account and deliver it to the merchant. Noca charges 0.25% for this service, or around 1/10 the amount for a credit card transaction.
There are a handful of other ACH-based payments startups and Amazon, Google and Paypal payments all offer ACH as an option. This is a welcome addition to the payments arena, but not one that is without it’s problems. Here are my initial thoughts.
Interchange Rate Refunds
Today I spoke with a potential customer who was frustrated with his credit card processor because it was charging him twice in a refund situation. For example, he was charged 2% when the customer made the purchase and another 2% when the purchase was refunded.
Refunds happen, quality businesses know that having a good relationship with customers requires standing behind the product and taking it back for a refund or exchange if the customer decides the product is not needed or realizes that it doesn’s precisely work in his/her situation.
Interchange, fortunately, does not charge for refunded charges. In fact, interchange actually provides a refund for such charges. For example, here is an interchange plus bill for one of our customers. The lines circled in red are the refunds. You will notice the little – sign next to them, that means that the merchant is being credited that amount, rather than being charged.
Refunded Transactions Result in Refunded Credit Card Processing Fees
If your credit card processor is charging you for refunds, then you are getting a bad deal. The processors participating in TransFS do not charge for refunded transactions.
Every small business owner hates chargebacks. Sometimes chargebacks are due to customer disatisfaction with the product and sometimes they are due to fraud, but often they are because the customer is confused and doesn’t remember making the purchase.
Jason at 37signals just published a cool article about they reduced chargebacks due to customer confusion.
I am a Costco member and I like shopping at Costco because they generally have great deals on pretty much everything. For example, this morning I went grocery shopping to buy some fish for dinner. Costco had an incredible price on a nice big piece of omega-3 rich salmon, yum, 2.38lbs for $16.68 ($6.99 / lb).
Costco Offers an Excellent Price on Salmon $6.99 per lb
At the regular grocery store next door to the Costco (Dominick’s, the Chicago version of Safeway) I found a comparable sized piece of fish for $8.99 / lb (marked down to $7.99 / lb if you have a frequent shopper card). Even at the sales price, Costco was 14% cheaper than the normal grocery store! That’s a great deal on salmon.
The Regular Grocery Store was 14% More Expensive
Costco also offers credit card processing, through a partnership with Elavon (formerly known as Nova). Elavon is a subsidiary of USBancorp. Unfortunately, unlike the fish example above, this credit card processing offer is only a mediocre deal.
Here is the Costco ad I recently got in my email box. It sounds like a pretty great deal, 1.64% on card-present transactions and 1.99% when no card is present.
Costco Credit Card Processing Looks Like a Good Deal
I clicked through to look at the fine print, where I found this seemingly innocuous statement (in the red circle): “Rates listed are for qualified transactions. Rewards cards process at a higher rate…Rates and fees may change without notice…Rates for American Express, debit and corporate purchasing cards may vary” (click on the image to enlarge).
Be Sure to Read the Fine Print!
That statement is a pretty big deal because rewards cards are currently 50-70% of all credit cards and are expected to increase to more than 90% within the next few years. Additionally, most businesses can expect 5-15% of their customers to be using a business card, and depending on your industry that percentage can be quite a lot higher. So, basically the fine print covers the majority of transactions while the advertised rate rarely, if ever, applies.
TransFS has customers who switched from Costco / Elavon to another processor that they found on TransFS, so we have examples of some of those customers’ bills to use for demonstration. Here is an example of a typical Costco / Elavon customers’ bill:
Most Transactions Do Not Get the Advertised Rate
Transaction categories that got the advertised rate of 1.64% are circled in green, while those that did not are circled in red. Unfortunately for this business owner, 7/12 of the categories are red, accounting for 67% of the volume!
The overall rate this business owner is paying can be calculated by dividing the total charges (15.92 in per item charges + 155.11 in volume charges) into the total volume of 8028.96. The result is an overall rate of 2.13%, much higher than the 1.64% that was advertised.
How does this compare to other credit card processors? Our free credit card processing calculator can answer that question. I entered the information for this business into it and it resulted in this report, which tells us that Elavon and Costco are splitting about $28 / month in profit off this customer after subtracting the amount that they have to send to Visa and Mastercard. More importantly, it compares the rate to rates from other merchants who have tried the calculator and tells us that the overall rate of 2.13% is only slightly lower than the average rate of 2.17% that other businesses in the same industry with a similar transaction mix pay.
For farm-raised atlantic salmon, Costco is the best deal going, but for credit card processing Costco is only slightly better than average. If you do want to find a great deal on credit card processing, try out our free credit card processing comparison shopping tool.
