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Archive for November, 2009
Merchant Account Extra Fees
I recently stumbled upon a really great article in Digital Transactions magazine from June 2008 by Marc Abbey, a managing director at First Annapolis Consulting and an expert on credit card processing, entitled The Threat to Price Stability in the Small Merchant Market.
If your business depends on credit card payments you should read that article, but here are the highlights:
- Competition for new customers is increasing ( **great** news if you accept credit cards)
- Pricing for large customers has decreased by 8%-10% per year for the last 10 years
- Prices for smaller customers have not decreased because, while the list prices has decreased, extra fees have increased
- Merchant acquiring (credit card processing) is a business with large scale economies and low variable costs – in other words, the profit margin from adding a new customer is very high, which means that they have a strong incentive to add new customers
- Owners of small businesses do not pay much attention to their credit card processing fees, which leads to an inefficient market – in other words some businesses get better deals than other businesses, depending on how good they are at shopping.
- Business owners don’t pay enough attention to extra fees, which allows the processors to grab extra profits by sneaking in extra fees the business owners don’t notice (for example 37% of processors charge a more than 1% downgrade markup)
- Processors have grown rich charging extra fees, but that is about to change as the environment gets even more competitive and business owners learn how to see through pricing tricks
- More and more processors (around 30%) are using interchange plus pricing, which is more transparent and offers less opportunity for hidden fees (previous article Why You Want Interchange Plus Pricing) and those processors are gaining market share rapidly
Photo from Boxchain - http://www.flickr.com/photos/boxchain/
If you are a business owner that accepts credit cards, it pays to shop carefully (previous article Strategies for Cutting Processing Costs). If you want help shopping, we can help, the TransFS Marketplace has a dozen of the best credit card processors bidding for your business, every customer who uses the marketplace gets a great deal without wasting a lot of time shopping.
Extra fees like those described above are illegal on the TransFS Marketplace.
We are so thankful to everyone for their support, encouragement, and feedback with TransFS. We hope you have a happy and safe Thanksgiving!
The GAO released this report last Thursday, on credit card interchange rates. Interchange rates are the rates charged by the banks that issue credit cards, and typically are about 2% of each transaction. These rates are extremely frustrating to merchants because they have been steadily increasing and because merchants (especially small businesses) have no practical means for negotiating these rates. Basically, if you want to accept 
Visa and Mastercard you are stuck with interchange rates. But hue and cry from merchants has caught the attention of the Feds. There are several legislative proposals on the table designed to help control interchange rates, and Congress directed the GAO to create a report on the subject.
The GAO report verifies the perception of merchants that interchange rates have gone up. The report also suggests that issuing banks may exercise market power, such that they can raise rates without losing customers (an economically inefficient state of affairs). That aspect of the report is the good news for merchants and their political advocates. The bad news is that the report criticizes the most commonly proposed approaches for fixing the problem, including (i) setting interchange rates, (ii) requiring disclosure of rates to consumers, (iii) prohibiting card networks from imposing rules on merchants, and (iv) antitrust exemptions to allow merchants to directly negotiate with issuing banks (which would generally be considered an illegal agreement in restraint of trade). The GAO is apparently skeptical that such measures would actually reduce prices for consumers.
While the best solution to interchange rate hikes may need to come from government, there are other transaction costs that merchants can negotiate down, including processing fees (for an earlier blog post explaining the difference between interchange and processing fees, click here). In fact, the GAO report found that the market for processing fees is in fact highly competitive. Each year approximately 1.4 million merchants switch processors (otherwise known as merchant account providers). TransFS tries to make it easier for merchants to make this switch, by setting up an internet auction to find the best-priced processor.
A customer recently asked this question:
My processor had loads of hidden fees that I was not
aware of…view bill online fee, terminal rental, etc. I’ve read the
contract on your site, but what additional fees are there besides the
monthly fees you have stated?
Our answer:
The bids are inclusive of all fees, meaning that there are no extra
hidden fees such as the ones you mentioned encountering with your
current processor. We screen the processors allowed to bid on the site
for transparent and fair pricing practices in order to make sure that
doesn’t happen.In fact, there are only 3 kinds of fees (included already in the bid)
that we allow our bidders to charge:1) Interchange- This is the portion that Visa/MC card receives. We can
very accurately estimate how much this will be, however, it varies
monthly based on your transaction mix.2) Proessor markup- This is a percentage per item charged, and is
plainly disclosed in the contract.3) Monthly fee- Plainly disclosed in the contract.
Since we have many different processors on the site, once you select
the processor of your choice, they will send you their contract to
read. Start an auction here.
A customer recently asked this question:
What pieces do I need to process credit cards? I know of the merchant account, payment gateway, and payment processor. Is this right? What are good ways to deal with each of these (aside from a TransFS auction, of course)?
My answer:
That is correct except “merchant account” and “payment processor” are actually the same thing. So what you really need is just a payment processor and a gateway. The “account” part of merchant account is kind of a misnomer, since it’s just a pass-through account, the funds are collected into the account at the end of the day from visa/mastercard/amex and then deposited at the beginning of the next day (or longer if you have a lousy processor).
My advice for a gateway is – get one that is easy to integrate and that is processor-agnostic. Some gateways are processor-specific or captive gateways, so that switching requires you actually rip out code. If you use a processor-agnostic gateway, switching processors is as easy as a phone call or email.
Also, my opinion on gateways is that bigger is better. Auth.net is the largest, and I think best for most people, it is among the cheapest, there are *lots* of libraries and code samples around the net which makes it easy to integrate, it works with the largest number of processors and they have the resources to ensure that they rarely go down.
My advice for the merchant account / processor is – 1. get interchange plus pricing and 2. get a zero-cancellation fee contract. Both are standard on TransFS and they are the two best ways to not get ripped off (if your switching costs are zero then you keep the processor honest).
Say a restaurant patron pays with a credit card for an $8 meal and leaves a $2 tip. If the restaurant’s cost of processing credit card payments is 3% and the waiter receives the full $2 tip, the restaurant’s actual credit card processing cost for the transaction is 3.75%. Can the restaurant deduct the 3% processing fees from the $2 tip? The answer depends on state labor laws.
The majority of states allow employers to deduct credit card processing fees from tips. I say this because 35 states (and D.C.) have implemented the federal Fair Labor Standards Act (FLSA) with respect to tipped wages. Two recent federal court decisions have determined that section 3(m) of FLSA, governing tipped wages, does not prohibit employers from deducting processing fees from tips. These courts both relied on a 1977 opinion letter from the Department of Labor, which reaches the same conclusion.
However, some states did not implement FLSA with respect to tipped wages, choosing instead to write their own laws. Some state laws clearly prohibit employers from deducting processing fees from tips, including those of Alaska, California, Colorado, Montana, Nevada, Oregon and Washington. Other states law differ from FLSA and do not clearly deal with the question, including Delaware, Hawaii, Idaho, Minnesota, New Jersey, New Mexico, North Dakota, and Wisconsin.
Of course, whether the cost of processing credit card tips falls on employers or employees, it is in everybody’s interest to find lower credit card processing fees. A number of food service businesses have been able to do just that, by starting an auction on transfs, and getting credit card processors to compete for their business. Here’s how it works.
* Note: This blog post is a brief survey of an interesting legal issue, and is obviously not intended to be relied on as legal advice.
** Photo by Juntos http://www.flickr.com/photos/31343451@N00/2789856763
A customer recently asked this question:
I’m planning on using PayPal to collect payments at first until we grow out of it. The question, what are the limits and gotchas of PayPal and when will I need a proper credit card processing system?
My answer:
The biggest downside to PayPal is that it sends users off-site to handle payment (which is an advantage to the extent that you don’t want to worry about it) – which can have an impact on your conversion rate. I personally hate paying with Paypal since they encourage using lower-cost forms of payment than credit cards (funds already in my paypal account, link up my bank account, etc). Their incentives are toward internalizing transactions (lower transaction costs), not toward getting the $ from the customer as quickly as possible and getting them through the checkout process (maximizing your conversion rate).
Once you hit $5000+ in revenue / month Paypal will likely be more expensive, too.
On Monday the U.S. Senate Committee on Commerce, Science, and Transportation released a report summarizing its investigation into deceptive e-commerce business practices. The report highlights the growth of sleazy direct-marketing practices on the internet, particularly companies such as Affinion, Verture or Webloyalty. These companies, which have operated for years through direct mail and telemarketing, exploit consumers’ confusion about the online “checkout” process to sign consumers up for monthly payments in exchange for services that consumers may not want or understand. The report highlights two deceptive practices in particular: (i) “misleading ‘Yes’ and ‘Continue’ buttons that cause consumers to reasonably think they are completing the original transaction, rather than entering a new ongoing financial relationship” and (ii) the “data-pass” process whereby “direct-marketing companies receive automatic transfers of credit or debit card information from a familiar web seller to the third-party membership club.” After “agreeing” to enter into a relationship with direct marketers, consumers are typically charged $10-$20 per month until the consumer cancels the membership. According to the Senate Committee, thousands of online consumers have complained to their attorneys general about these deceptive and misleading practices.
Why would a reputable web commerce company enter into a partnership with a sleazy third-party membership club? The answer is that such partnerships are extremely profitable. Whereas typical internet advertising banners have CPMs (cost per thousand people who view the ad) around $30-$40, third-party membership clubs pay out CPMs of between $850 and $2,650, depending on conversion rates.
However, when reading the frustrated testimonials of customers who feel duped by these deceptive practices, one wonders whether it is truly in the best interest of e-commerce companies to allow third-parties the opportunity to deceive their customers.
Photo by Thomas Hawk http://www.flickr.com/photos/thomashawk/
As a frequent visitor to NYC (at least 6 times / year) and Boston (which recently added a similar program) I really like the ability to pay for cabs with a credit card and I wish Chicago had it too. A recent Huffington Post article Cash or Credit? In a Taxi, It Depends Which Side of the Partition You’re On describes some of the challenges faxed by cab drivers in that situation.
A recent story in the New York Times reported that credit card use in the city’s yellow cabs has risen steeply, suggesting that cabbies are making more money because of it… To the contrary, it appears they in fact have been hit with a pay cut, in the form of credit card processing fees, payment delays, bunk cards, chargebacks, and system failures.
While most businesses, from bodegas to bars, are charged an average of 2% on credit card processing fees, when you swipe your card in a cab, the driver has to pay a hefty 5% for the transaction. This fee is placed on the total metered fare, including the tolls, the tip, and now, even on the fifty-cent MTA surcharge. Why are New York’s cabbies paying so much more than everybody else?
Because of all the middlemen.
That 5% goes back to the garage or medallion broker, where the owners take an average cut of 1.5%. The rest is passed along to the TLC-selected vendor supplying the device. That company takes out another average cut of 1.5% and then, finally, passes the rest on to the bank that is actually processing the credit card. Multiply these numbers by millions of cab rides a year and it becomes clear that a few people are making truckloads of money on drivers’ backs.
That’s actually not that different from most smaller businesses (see previous article average credit card processing rates) – small businesses usually pay a 1%-3% markup over the wholesale (or interchange) rate for their transaction. There are two reasons for it – 1. it costs more for the processors to reach them so the processors need to build those sales costs into the price and 2. they operate at a big informational disadvantage and are taken advantage of by the processors and/or the middlemen.
It stinks that the cabbies are not given choice in which processor they use. If they had a choice they could shop on their own (or use TransFS!!) to cut out the middlemen and get a fair deal.
A customer recently asked us this question:
Is there a way for a not-yet-incorporated business to get a separate business checking account, or would I have to have a separate personal checking account until I have the proper business organization, Tax ID, etc?
Having a checking account is required if you want to accept credit cards, which is why he asked the question. Below was my answer:
There really isn’t, banks have all kinds of legal requirements about the business actually existing, etc. However, you can *very* easily set up a sole-proprietership (doing business as) which isn’t really a business entity, it’s actually just saying that you personally are going to do business under a different name. Sole-proprietorships can open business bank accounts.
