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Many people have been talking and asking about Square, the new gadget coming from Tom Dorsey, the prolific founder of Twitter. The basic idea is to make the acceptance of credit cards universally available for everyone individuals, businesses, etc.–provided they have an iPhone and Square’s little swiper piece (you plug it in the iPhone to facilitate the swiping of credit cards). Cool idea, huh? Here are some questions to ponder:
1) Is Square accomplishing something new?
2) Is Square a good idea for my small business?
3) What’s the catch?
4) What are the pros and cons?
I welcome discussion and addition to these questions. Having read a ton about Square, this is purely speculative. Since it does not come out until the summer, only test users have actually put it into use.
1) Is Square accomplishing something new?
Yes and no, but mostly no. Accepting credit cards via iPhone has been around for a while. In fact, TransFS has a free iPhone app that does virtually the same thing as Square. The difference: with TransFS (and many similar apps) there is a different credit card processor involved on the back end, but with Square, they act as both gateway and processor. Another difference is the swiping feature–most other apps require keying in the number.
Square also includes some nifty toys like photo verification (for identity theft purposes), the ability to swipe cards, and email receipts with lots of information like geographic location of transaction.
2) Is Square a good idea for my small business?
It depends on your size, but mostly no. If you are a bicycle messenger, or some other occupation with very low volume of credit card revenue and also need mobility–then Square may be worth it. Rates for credit card processing fees vary by revenue from credit card transactions. The higher the volume, the lower the fees (generally). Square charges 3-3.5% per transaction which is absolutely not worth it if your business has high volume.
3) What’s the catch?
Square is still deciding what to charge for its services. Some say both the hardware and software will be free, while others point to a $1 download fee for the app. This isn’t where Square will potentially make its money: the bulk will be that 3-3.5% processing fee. Like I mentioned before, for small businesses will little revenue, then it’s not bad. For example, Paypal’s processing fees for monthly credit card revenues under $3,000 are 2.9%+0.30 (per transaction). So in reality, you could download the TransFS iPhone app (free) and use Paypal as your processor for less. However, if your monthly revenue is really high, then processing rates can be as low as Interchange+0.10+0.05 (that’s just an estimate). Translation: 2%+$0.20 per transaction. That’s a huge difference from 3.5% flat fee. Learn more about average fees here.
4) What are the pros and cons?
| Pros | Cons | Conclusion: | |
| Mobility | Able to be used anywhere. | Not if you lose that swiper chip. | Keying in apps already exist. Swiping is cool, but not losing the add on piece. |
| Price | Flat fee. | It’s really high! | If you’re low volume and an infrequent user, you’re paying for convenience. Otherwise go another route. |
| Features | Ability to swipe, email receipts, photo ID, signing on the screen, geographic markers | You’re paying a lot for these! | If you really like the features and are willing to pay a premium, all power to you. |
Interchange is the fee that businesses pay directly to credit card issuers for the service of processing their credit cards. Visa and Mastercard publish their rates for public knowledge, while American Express does not. After doing some digging, we found that the American Express 2007 Annual Report reveals that, on average, Amex’s discount rate was 2.56% (2007), 2.57% (2006) and 2.58% (2005).
Compare this to Visa’s interchange rate, which averages out to be 0.77% lower.
Keep in mind that the average Amex discount rates shown above are an average and include a much lower interchange rate that large companies can negotiate with Amex. A great example of this kind of partnership is Amex’s deal with Costco (as discussed in Paying with Plastic p. 169). After accepting only Discover card for eight years, Costco signed an exclusivity agreement with Amex which industry experts say put Costco’s Amex interchange rate at about 1.11%. In return, Costco customers had membership cards which doubled as American Express credit cards.
Compare that 1.11% to the fact that small businesses pay about 3.25-2.75% for Amex interchange.
Let TransFS help you find the best deal on credit card processing for your business. Start here to get multiple bids from top quality processors at no cost, all apples-to-apples comparison, and transparent pricing. What you see is what you get. Users save an average of 40% on credit card processing with the most transparent pricing: interchange plus.
What is Interchange, again?
TransFS uses Interchange Plus pricing in our credit card processor marketplace. The biggest chunk of change that processors charge is Interchange, but what does that really mean?
Two of the things that confuse merchants the most are:
- Why they are charged different amounts when different kinds of cards are used
- Who gets to keep the 1.5% – 3.0% of their hard-earned sales that are siphoned away as “discounts” and “fees”
A big part of the answer to both of those questions is: “Interchange”.
What is Interchange?
Interchange is the set of rules that define how much of a cut the issuing bank (the bank that issued the customers’ credit card, big issuing banks include Capital One and MBNA) gets to keep from the credit card transaction.
The part of the transaction that you see:
The back-end of the transaction (where the money flows):
How big is interchange?
Interchage is the largest piece of the transaction, usually 70-90% of processing fees. Basically, the card issuing bank captures most of the economics of the transaction.
- Morgan Stanley estimates that interchange is, on average, 1.75%, or 81% of the total fees charged to the merchant on the transaction.
- The Kansas City Fed estimates that interchange is, on average, 1.60%. However, their data was from 2003 and earlier, which may account for the difference in the estimates, since Interchange tends to rise every year.
Why should I care?
When negotiating a deal with your credit card processor it helps to know how much of a cut they are getting for two reasons:
- It lets you know how much they are making off or you and therefore how much room they have to negotiate
- The main rate that a processor will quote is on a standard credit card transaction. With the rise of rewards cards and debit cards, these “standard” cards make up the minority of transactions. If you focus your energy on negotiating a good “standard” rate, with a fair markup for your processor, they probably will sneak in a much larger markup on the rewards and debit cards. An example of that can be found in “Reading a Merchant Processing Statement“
Until recently interchange rates were secret, but now you can get a full description of them at the Visa and Mastercard websites: Visa interchange rates , Mastercard interchange rates.For a chart of different interchange rates, click here.
New rules for credit cards will be kicking in less than a month from now, as legislation for fairer industry practices finally begins. These new rules may change the terms on your existing credit cards, so the most important thing to do to prevent being surprised by unnecessary fees or changes in rates is to seek out information on how the new legislation will affect you. Don’t stop reading if you have a great credit history and amazing FICO score, you may be affected as well. Five smart things to do before the the law sets in can be found here, here are a couple of the more salient points.
1) Don’t Get New Cards Until Feb 22- Under the new law, new accounts (after Feb 22) will be protected from interest rates increases for the first year. Since credit card companies will be adapting to the new reform laws, this may mean better deals and exploding offers for people who have good credit histories.
2) Consider Switching to Lower APRs- Although there is a cost of 3-4 percent of the amount transferred, doing a balance transfer from a higher interest rate account to one with a lower APR can save big bucks. In the current economic climate, issuers are offering balance transfer of at least a year to customers with good credit histories. Keep in mind to check what the new interest rate will be after the promo period is over. If the rate ends up being higher or only a bit lower, it may not be worth switching.
3) Under 21 and want a credit card? You’ve got til Feb 22- Young responsible adults hoping to build a good credit history may want to get a card before the new law goes into effect, since under the law, an adult (over 21) co-signer will be required for applicants who are under 21.
Some things don’t change with the new law, such as the consumer’s responsibility to pay on time in order to build up a good credit history.
USA Today reported on the growing trend of consumers quitting their credit card habit: cold turkey.
Although the average person has five credit cards, many Americans are reacting to recent economic trends by cutting off their source of debt creation and living off of cash and debit cards. Revolving credit fell by nearly 20% in November! Indeed, even debit card use has been increasing slowly but surely and has recently started booming (which is great for small business since processing fees are much lower for debit transactions).
Citing aversion to debt, credit card naysayers may suffer incredible backlashes when attempting to do basic things such as renting a car or securing a car loan. Since most of these require checking credit history and FICO score, people without a credit history will be denied, or may require enlisting a cosigner who has a good credit history.
An interesting case study is the young Baker family, whose desire to live a simpler life, free of the chains of debt led them to sell most of their assets, pay off their debt, and travel the world. Follow their adventures here, on their blog.
Another reason for opting out is incredulity at the unfair practices of credit card companies, although their abilities to raise interest rates whenever they feel like is soon coming to a close with the start of new legislation designed to curtail abusive practices. The days of increases to 20% or 30% may soon be over, but credit card companies are gauging consumers and getting the most they can in the remaining days.
Responsible credit card use is of course the desired outcome, but many consumers feel the lure of high spending limits is too much to handle and are instead choosing to go the abstinence route.
Image thanks to http://www.flickr.com/photos/82386510@N00/2977425354/
The government has adopted a new philosophy (and one we’ve long rooted for): Transparency. In response to President Obama’s mission to make government more transparent, the Open Government Directive was established in December 2009. Here are some of the sweeping goals, direct from a White House memo:
The three principles of transparency, participation, and collaboration form the cornerstone of an open government. Transparency promotes accountability by providing the public with information about what the Government is doing. Participation allows members of the public to contribute ideas and expertise so that their government can make policies with the benefit of information that is widely dispersed in society.
The Open Government Directive has four broad goals:
1) Publish government info online.
2) Improve the quality of government information.
3) Create and institutionalize a culture of open government.
4) Create an enabling policy framework for open government.
Pretty cool. So I know you’re probably thinking, “how does this affect me? Why should I care?”
Besides being an informed citizen, this Directive has multiple benefits for your business. Read all about them at Business.gov, however, the most important benefit is the availability of raw government data.
This data can be manipulated to create meaningful new tools for small business owners. Already some tools have been created such as the Loans and Grants search on Business.gov, which gives businesses information on federal, state, and local financing programs for which they may qualify. The tool which makes this powerful resource possible is the underlying data provided with the new initiatives. Powerful stuff. Image thanks to http://www.flickr.com/photos/35034352455@N01/7486278/
In an effort to do some targeted advertising, I decided to try Facebook Ads and LinkedIn Ads. My assumption before the experiment was that LinkedIn would be much more effective and have higher CTRs because it is a professional sphere whereas Facebook is more informal. I started with Facebook Ads, designing 3 different ads in one “campaign.” One great feature in making a campaign is that Facebook really holds your hand throughout the process. Not only is their help section extremely useful, and offers a range of tools and explanations, but help is provided on the side with each step. After designing the ad, Facebook lets you narrow in on your target market much more detailed than LinkedIn. 
Whereas on LinkedIn, your choices are much more limited due to the way they define their users. For example, “business owner” on Facebook can just be listed as an interest, whereas on LinkedIn you have to guess at which title/position a person has: manager, vice president, CXO, etc. Here’s what their Targeting page looks like. 
The pricing on Facebook is also superior to LinkedIn. On both sites, you can choose between CPM vs. CPC, but Facebook suggests a value for both. Another huge difference is that LinkedIn is much more expensive. Facebook’s minimum daily advertising budget is $5.00 while LinkedIn’s is double (not sure why?). On Facebook, the ability to see the ad’s performances side by side was really helpful in playing with messaging and seeing what was effective. The ability to manipulate data was also superior on Facebook. They offer different kinds of reports, graphs, CSV uploading…it’s fun to manipulate and play around with all of the tools they offer. LinkedIn: don’t even think about it. Extremely underdeveloped. As far as performance, neither one was fabulous or game changing, but Facebook is proving to be worth the little money put in, whereas as LinkedIn was a failure. By running multiple ads, we are able to see which messaging works, and experiment with our targeting (for example: we started out targeting “college graduate business owners who speak English” and decided to drop to “business owners who speak English”). Our highest CTR on Facebook is 3.3% while it’s less than 1% on LinkedIn. Conclusion: Though Facebook ads aren’t as effective as we’d like, they are a great way to get your brand out there while on a tight budget. Though LinkedIn may seem intuitively like a better fit for some business advertising, skip it. Facebook’s advertising is immensely superior in quality. For more information, check out this great article about another business owner’s experience.
TransFS is pleased to announce the addition of Paypal Website Payments Pro to its arsenal of top quality processors on its online credit card processing marketplace.
Paypal Website Payments Pro is the industrial strength version of Paypal, in that users are not redirected to Paypal’s site upon payment acceptance, and can pay directly through a merchant’s site. This is great for merchants as it helps boost their conversion rate.
Although Paypal Website Payments Pro does not utilize interchange plus pricing, TransFS is able to include the processor since TransFS’s software allows translation between different pricing mechanisms, meaning users will still get an apples-to-apples comparison.
The processor joins a growing list of stringently screened merchant account providers.
A TransFS user recently asked:
When there is a return, do I get money back from the processor?
Our answer:
Yes and no. You do receive money back for the interchange and assessment portion of processing, but since the return is another transaction, you will be charged again to process. (this is pennies) Feel free to learn more here.
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About TransFS
TransFS is a comparison shopping website for credit card processing.
Our unique auction process and comparison shopping engine leads to an average savings 40% on credit card processing.
Click here to learn how TransFS works or try TransFS now to quickly add cash to your bottom line. Search
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