New rules which will go into effect in January 2012 require all businesses and nonprofit organizations to issue a 1099 form for all goods and services which were paid over $600 a year. The buzz that this new regulation causes can be heard from those who will impacted the most – small business owners.

How this legislation happened is another story. It was slipped into the Health Care bill which was passed in March as an attempt at closing a gap of income tax revenue reporting. The additional paperwork puts business owners at a disadvantage because of minimal or non-existent support staff.

Pennsylvania’s SMC business networking organization surveyed its members and found that they currently average 10 filings a year. The new rules might push that average to over 200 fillings per year for typical small business.

What will be the effect of this regulation?

It will undoubtedly cause small businesses to consolidate their purchases, going from many vendors they do business with, to only a few to ease on the reporting. That might hurt small businesses in general.

It will also cause a larger paper trail.  ”Small businesses that lack the capacity to track customer purchases may lose customers, leaving the economy with more large national vendors and less local competition.” Says SMC Business Councils Tom Henschke.

Because of product returns and other complications, the payment documented by the 1099 won’t match up cleanly against the revenue business report, putting small business owners to have increased communication with the IRS.

How to avoid the new reporting?

The buzz this new requirement created was heard all the way to the IRS. In May, in a speech before two payroll trade groups, IRS Commissioner, Douglas Shulman, announced a major exemption to the new rule. The IRS plans to exempt transactions made through credit cards and debit cards. “Whenever a business uses a credit or debit card, there will be no new burden under the new law,” Shulman said.

The main beneficiaries of that exemption are likely to be credit card companies, which will get an added hook to get small businesses to pay their fees.

Image thanks to http://www.flickr.com/photos/joshuacraig/2415343592/lightbox/

Will new regulations, which went into effect this Sunday, August 22, 2010 (designed to protect consumers against rate hikes and bank charge) change the way banks conduct business with small businesses?

The new rules do not apply to small businesses… only to personal credit cards, but they might have an effect on the way business owners conduct their business.

“While small business credit cards and consumer credit cards are similar in terms of their function and features, they differ markedly in the manner in which they are used. As the Fed report makes clear, small business cards limits and per card spending tend to be much higher, and small business cards require specialized management and underwriting techniques to help manage the particular risks that small businesses present,” says Kenneth J. Clayton of the American Bankers Association, as an excuse for not extending these regulations to small businesses.

With the new regulations it is tempting to use  your personal credit cards as your business cards, and get the new protection. However, doing so has its own set of problems;

Accounting – Blending business and personal cards can create accounting issues. If you keep all your business purchases on one card, you probably can deduct the interest and the fees for this card. Once you start mingling personal purchases, any accountant will tell you it gets pretty hard to distinguish how much of the balance is due to personal purchases and how much is due to business purchases.

Credit Score – The business debt will show up on the personal credit report and the surge in debt might lower your credit score. The usage of available credit on revolving accounts is one of the factors to calculate your credit score. Increasing this ratio will cause your credit score to drop.

Banks – The bank may notice increased usage on your personal credit card and decide it is not a personal card. Then, they can change the terms making it a business card.

Yet, 86% of small businesses say they use their consumer cards for business purposes, according to the 2009 National Small Business Association survey.

Is there a silver lining? With the new law, the credit card issuers are scrambling to make up for lost revenue. What is a better place than the cards that did not go under the new rules? Small business owners might find that the new business credit is greeted by a much friendlier credit card industry. Offers sent out in the second quarter of 2010 totaled 40.5 million, up from 26 million in the previous three month period, according to a new report from the consumer advice website WalletPop, which goes to show the banks are already starting down that road.

Image thanks to http://www.flickr.com/photos/34747799@N06/3323417297/

Several times a day, TransFS users ask us, “Which is better for me, Square or a traditional credit card processor?” To make life easier, we created the Square Calculator, a tool which lets business owners quickly and easily see which choice is more cost effective for their situation: Square or a merchant account. There’s no signup or lead generation form; merchants can see which option is better for their business clearly and in a matter of seconds.

Below is a screenshot which shows the side-by-side, apples-to-apples comparison that business owners see when they enter in their information.

The Square Calculator works by comparing the main drivers of fees – average transaction size and monthly volume of the merchant.  It also gracefully handles the case of a merchant already owning an iOS device, such as an iPhone or iPad, in the cost comparison calculation.  In addition, merchants who want to see a more exact comparison based on their particular credit card mix of credit, debit, reward, and business credit cards can do so – again with no signup or personal information required.

The Square Calculator then takes these inputs and runs a real-time fee analysis between Square’s rates and an average of the credit card processors that participate in the TransFS.com comparison shopping marketplace for merchant accounts.  Because the rate structures for Square and merchant accounts vary widely, the Square Calculator relies on TransFS’ proprietary software to translate between these different pricing mechanisms to provide an apples-to-apples comparison.

Check out the calculator, then start an auction on TransFS to get bids from credit card processors.

Check out the official press release here or feel free to email me with questions or feedback:  stella@transfs.com

Mastercard recently announced that it is opening it’s API, which is terrific news.  Payments are important and they should be more open.  However, the announcement is very light on details.

In addition to payments, MasterCard has identified approximately 20 platforms and services that it plans to open up to developers via the portal. These platforms and services provide additional functionality and enhancements to MasterCard’s payment capabilities.

The automated email that comes back from expressing interest to api@mastercard.com isn’t much better.

Thank you for your interest in the MasterCard API.
We will be in touch once we open this up to the development community.
Best regards,
The MasterCard Open API team

A few observations:

1. Payments are the primary functionality so it is good they are included – any API that did not include payments would be a publicity stunt
2. This will create channel conflict for Mastercard.  Right now to process a transactions through mastercard, businesses typical sign up for a credit card processing account with a company like First Data or one of their 800 smaller competitors. If Mastercard is going to allow everyone to go around First Data and the other payment processors, that is very bad news for those payment processors. One way around the channel conflict is to have a different (higher) pricing structure for the new-style payments.
3. If Visa does not come up with a competing product this will be very awkward for them.  If there is an open API for Mastercard and Visa requires a traditional merchant account to handle the same transaction, there are at least a few online services that will use only Mastercard (afterall, most people have both a mastercard and a visa in their wallet).
4. We will have to wait to see what the non-payments platforms and services are but they are an afterthought.  Access to rewards programs?  ATM locations?  That’s underwhelming.

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 Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD) was a major piece of legislation signed into law on May 22, 2009. The Act was supposed to cause the credit card industry to make sweeping changes and alter the standard use of deceptive practices. “The new rules of the road established by the Credit Card Act will shield credit cardholders from widespread abusive practices,” Senate Banking Committee Chairman Chris Dodd, D-Conn., the Bill’s author, said.

The changes would be made in two stages, the first effective in August 2009 and the last in February 2010. All of the law’s provisions can be read here. One extremely important thing to note, and a criticism why the law is extremely limited, is that it does not apply to business or corporate credit cards. Therefore, deceptive practices in the business arena will continue until legislation similar to the consumer act is proposed. There is a bill  (HR 3457) in the House right now which proposes to extend the Truth in Lending Act to small business credit cards, however, this bill was referred to committee last summer and has yet to see any other action.

As deceptive practices pervade the credit card industry, one action the business owner can take is to expect full transparency from his/her credit card processor. Anything less should be grounds for suspicion. To find a fully transparent processor, check out the marketplace of pre-screened processors on TransFS.com. Start and auction and have processors bid for your business with an average savings of 40%. We even offer complementary bill analysis of your current processor so as to see how much you’re actually paying and demystify hidden fees. Transparent Financial Services should be the standard practice and not the exception.

Image thanks to  http://www.flickr.com/photos/63583256@N00/4229010722/

Here is the much awaited follow-up to our first blog post explaining common acronyms in the PCI (Payment Card Industry).

ACH- Automated Clearing House is an e-payment network which allows fund transfers to occur using Electronic Funds Transfer (EFT). The Federal Reserve, in addition to over 98% of US banks belong to the ACH.

Acquirer- A financial institution (bank, public or private company, etc) that develops a seller’s CCP (Credit Card Processing) account. Acquirers maintain all transactions from the seller and distribute them to credit card issuing banks.

AVS- Address Verification System. A service provided by the seller where he/she verifies the cardholder’s address with the issuing bank.

BIN- Bank Identification Number. The Federal Bureau of Standards assigns a 6 digit BIN which is used by credit card companies to keep track of financial transactions. For example,  the Mastercard range starts with a 5 and becomes 5xxxx, and Discover starts with a 6, 6xxxx.(Visa begins with a 4).

ISO- Independent Sales Organization. Third party organizations between merchants and acquiring banks; they must all register with Visa/Mastercard.

MID- Merchant Identification Number. An ID assigned to each merchant by processors for billing and accounting purposes.

POS- Point of Sale. Refers to both the time and place a transaction occurs, and also the devices used to complete the transaction.

The National Retail Federation today reported that more than half a million retailers will begin receiving checks which total over $1 billion this week. The refund is the result of a federal judge’s decision to approve an early payout of funds from a 2003 settlement of a class action lawsuit against Visa and MasterCard’s debit card practices. Retailers welcome the extra money during a slow holiday season where the ongoing credit crunch is taking its toll.

The lawsuit goes back to 1996 and was settled in 2003 for $3.1 billion.  Thus far, Visa and Mastercard have paid back about $1.85 billion to merchants represented in the lawsuit, however retailers were expecting to wait at least 3 more years to receive their windfall. To learn more and see if you are qualified to receive money, click here.

An easy way for retailers to save money on operating costs this holiday season is to get a better deal on credit card processing. Check out the reverse auction process on TransFS.com, where the best credit card

processors bid for you business. Average savings for retailers on processing are 40%.

Image thanks to http://www.flickr.com/photos/93302041@N00/498285229/

Restaurants in Louisiana are suing makers of their point-of-sale systems after hackers stole tens of thousands of dollars by stealing credit card numbers. These restaurants maintain that companies who made and resold the systems should pay up on the fines put forth by payment processors after the hack. They have filed a class-action lawsuit alleging that their point-of-sale systems were out of compliance with the PCI DSS (Payment Card Industry Data Security Standards). Read more about the details regarding the damage and claims here.

Many small businesses try to modernize their business by using the internet, however, this may serve to put them at risk for hackers and other cyber-criminals. The moral of the story is: make sure that you know whether you are up to date and PCI compliant. Standards for PCI compliance can be found here. Even if courts end up making the POS systems pay, these small Louisiana  businesses will have gone through the time and headache of the lawsuit. If you aren’t sure whether your system is compliant, check up on your processor and ask them the tough questions.

If processors aren’t up front and transparent, you may want to consider switching. We’re here to help:  Check out the TransFS.com auction for a simple and easy way to compare stringently screened processors and get the best deal on processing.

Image: Bayou in Louisiana. http://www.flickr.com/photos/8444209@N07/3467061890/