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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/
New bank overdraft regulations that went into effect August 15, 2010 may cost banks billions in lost revenue according to guess who: major banks. Research firm Moebs Services estimates overdraft brought banks $37.1 billion last year, as reported in The Washington Post.
The new rules may help small businesses that are dealing with tight cash flow and were slapped with huge fines. Here are how the rules were before the new regulation:
Let’s assume your bank account shows you have a few hundred dollars in your account. You buy a cup of coffee, you buy stamps, you maybe have lunch. You paid for all of those with your debit card.
A few days later you discover you are overdrawn by hundreds of dollars. How could that possibly happen when you had a few hundred dollars in your account? Quite simply, banks decide which withdrawals they post first. Let’s assume a check you gave a month ago was just now posted into your account, or a recurring automatic payment you forgot about went through.
Regardless of the dates, the bank posted your big check first. That brought your balance to zero. All the other withdrawals, small as they may be, now appear after it. Instead of paying overdraft on one big withdrawal, you now pay for all the small ones – with a fine. The cup of latte for which you paid $3, has now a fine of $37. A few of those and now you owe the bank hundreds of dollars.
This was one of the ways the banks made a lot of money with an unfair but legal practice, and that is one of the problems the Dodd-Frank Wall Street Reform and Consumer Protection Act addresses.
According to the new rules, the banks have to give their customer the option to enroll in overdraft protection or opt out. But many economists fear the new rules are not spelled clear enough, so here they are:
The customer can decide if he enrolls in the program and has the bank honor all of his debit card withdrawals regardless of whether there’s money in the account. Overdraft charges will be accompanied with a fine. If the customer opts out, banks will not honor debit card payments when there’s not enough money in the account to cover them.
The FDIC admits the complaints about overdraft abuse doubled from 2008 to 2009, prompting the agency to write guidelines that include small banks as well. They say the banks have to limit the number of times an overdraft accrues by limiting the dollar amount or the number of times the fee can be slapped, a provision that is not included in the bill, and they call to review the order in which bank post the withdrawals.
What worried bank critics is the idea that the bank will now look for other inventive ways to make up for their lost revenues. Legislation takes years and until the public catches up with the bank shenanigans, the customers lose.
Image thanks to http://www.flickr.com/photos/7578081@N07/2585039824/
Navigating the sea of acronyms in the PCI (Payment Card Industry) can be somewhat scary, so here is a helpful guide to deciphering basic terms.
- CCP- Credit Card Processor.
- DSS- Data Security Standard. This is a standard set by the PCI Security Standards Council by which companies must be compliant to ensure financial data security.
- MAP or MSP- Merchant Services Provider. Another term for credit card processor.
- PAN- Primary Account Number. The actual number on a person’s credit card. It is also encoded in the magnetic stripe and contains the major industry identifier, and a code that ensures the authenticity of the embossed account number.
- PA-DSS- Payment Application Data Security Standard. SSC (see below) managed council focused on helping software vendors create secure payment applications that do not store prohibited data, for example, the PIN number.
- PCI- Payment Card Industry. The debit, credit, prepaid, e-purse, ATM and POS cards’ businesses.
- PIN- Personal Identification Number. A numerical password a user must enter into a system in order to authenticate his/her identity.
- POS- Point of Sale. The location where a transaction occurs, for example, a checkout counter.
- SAQ- Self Assessment Questionnaire. A tool used to gauge a merchant’s level of PCI DSS compliance.
- SSC- Security Standards Council. PCI’s council to develop, enhance, and implement security standards for financial data protection.
- SSN-Social Security Number. Major liability for credit card breaches since cards have access to the SSN of the user.
ApparelNews.net reported that the The Merchants Payment Coalition released a study showing a growing concern from retailers over exaggerated credit card fees. In the US, retailers pay roughly a two percent interchange fee for each credit card purchase. This is compared to a 0.5% interchange fee in Australia, and a 0.3% interchange fee in the EU.
Fed up with paying fees up to six times greater than other countries, retailers are now pushing for action in congress. A bill in the House called the “Credit Card Fair Fee Act of 2009” and the Senate’s “Credit Card Fair Fee Act” propose a system where merchants can together negotiate with banks over interchange fees. These two bills would let merchants have more access to talk to banks in establishing fees. However, Visa and Mastercard retort that merchants have plenty of opportunities to discuss lower fees.
Reform is met with criticism from merchants and consumers alike. About 60% of consumers believe merchants should continue paying the cost of accepting credit cards. Some retailers also believe that reform would benefit large businesses, but would not affect small business.
Last year, US interchange fees were up 33% from 2006. This represents $48 billion in 2008, and $42 billion in 2007. At TransFS.com, we strongly support the reform of interchange fees. Here are some ways for retailers to save on processing costs: (From ApparelNews.net)
1) Buy transaction machines instead of leasing: Buying a machine can cost about $300, while leasing a machine from a fee-processing company can cost $50 for 48 months.
2) Ask customers to use debit cards: Debit cards have lower processing fees, so offering savings on preferred payment methods can often pay off.
3) Use TransFS’s comparison shopping engine: We allow processors to compete against each other to win your business. This results in better pricing for you. We vet all of the processors who bid on our site to make sure they provide the best service and will act in the best interests of you, the merchant (in fact, we even contract the processors abide by certain rules that are merchant friendly).
The pace of articles relating to credit card fees is accelerating at a rapid pace due to the credit card legislation going through congress. In fact, there are so many articles flying around that it is hard to keep up. So, what does that mean for TransFS and for you? It means that we should be filtering the myriad articles out there down to the top handful in order to help you, our valued customers and other small business owners (hopefully soon to be customers), get the skinny on what is happening in the credit card world.
In the last week we found one article that does a great job of summing up some of the key points in the current debate on interchange fees. The article by “Trader Mark” on SeekingAlpha.com puts forth some very interesting merchant-side credit card processing facts that have come to light recently due to the battle in congress around consumer credit card fees. Here are a couple of the more interesting tidbits Mark mentions in his post:
- Visa Inc., MasterCard Inc. and JPMorgan Chase & Co., already squeezed by new U.S. curbs on how credit cards are marketed to consumers, are girding for a renewed battle over $48 billion in fees levied on merchants.
- Lawmakers are promising new rules to bring down the interchange fee, a charge on purchases sometimes topping 3 percent that’s split by the two banks serving the customer and merchant.
- Supporters of the legislation include the biggest retail chains, restaurants and small businesses, which say the fees erode profit and inflate prices.
- The debate pits the largest card lenders including JPMorgan and the two biggest payment networks, Visa and MasterCard, against Wal-Mart Stores Inc. and Target Corp. Interchange is the second-biggest cost after payroll, Target said, and merchants want to negotiate lower payments collectively without running afoul of antitrust law. (remarkable statistic)
- The Credit Card Fair Fee Act would let merchants bargain together on interchange rates and designates the Department of Justice as arbiter. Card networks and lenders would be forced to disclose components of the fee and how banks share the money.
- In a typical transaction, the retailer’s bank deducts 1.9 percent from proceeds of the purchase, a sum known as the merchant discount rate. The largest portion — the interchange fee — goes to the bank that issued the card. The bank for the merchant keeps what’s left. Interchange fees average 1.7 percent of the purchase, according to JPMorgan analyst Tien-tsin Huang.
- Visa and MasterCard get paid a processing fee from each bank of 15 to 18 cents on a $100 purchase, Huang said in a June 5 report. MasterCard and Visa process about 58 billion transactions annually, company filings show.
- Visa Europe Ltd. faces an antitrust complaint from EuroCommerce Inc., a retailer group that said this month that stores should be able to negotiate fees. MasterCard settled in April with European Commission antitrust regulators by reducing credit card interchange to 0.30 percent.
- JPMorgan, Bank of America Corp. and Citigroup Inc., last year’s biggest bank card lenders, don’t detail interchange revenue. (i.e. they are not transparent)
- “In every other aspect, merchants have the ability to negotiate and reduce their costs except this one,” said Jennifer Hatcher, spokeswoman for the Arlington, Virginia-based institute. Target lacks leverage because it’s “simply not realistic” to stop accepting cards, said Eric Hausman, a spokesman for Minneapolis-based Target
As we already know, Mastercard and Visa are not entirely forthcoming with their fee structures and it is next to impossible to negotiate the interchange fee due to the market dominance of just two firms (i.e. this isn’t really a free market since there is virtually no competition). If Target has trouble negotiating their rates then the rest of us don’t have a chance.
For now we will have to wait and see where this goes. In the meantime, we at TransFS can help business owners lower their credit card processing fees through our reverse auction system where credit card processors compete for your business. Check it out if you want to save on your credit card processing fees and let us know what you think.
The Wall Street Journal ran an article last week on the rising use of debit cards, attributing the trend at least partly to consumers’ growing reluctance to use credit and a new preference for paying as they go. Unlike Europe where debit cards have long been predominant, payment volume on credit cards has always exceeded that on debit cards in the U.S. But debit card use has been growing rapidly over the past decade and Visa reported on Thursday that debit card use exceeded that of credit cards in the last quarter of 2008 for the first time in the company’s history. It’s hard to know the extent to which rising debit card use is replacing credit cards or is due to the gradual movement away from cash and checks, but it is certainly true that greater use of debit cards by consumers is good news for merchants.
As readers may already know, debit cards can be processed through the Visa or MasterCard system (also called signature or offline debit) or through an EFT Network (called pin based or online debit). Any debit card with the Visa or MasterCard logo can be processed either way as long as the merchant has a pad for the customer to enter a pin. Generally, interchange rates on transactions processed as signature debit are much lower than credit card processing rates. And rates on pin based debit transactions are even lower. According to a recent Federal Reserve paper, the average merchant discount rate on pin debit was 0.62% in 2007, compared to 1.75% for signature debit and 2.19% for Visa/MasterCard credit. These are just averages (small businesses generally face much larger markups than large businesses) and continue to change but it gives some sense of the difference.
So whatever the reason, merchants should be glad to see consumers whip out their debit card at the cash register and even happier when the customer takes advantage of the pin pad.
Debit Markup
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
Debit Markup is one of the ways that Merchant Account Providers make extra money from merchants. The reason why Merchant Account Providers make so much money off of debit transactions is that Mastercard and Visa charge the processor less for debit card transactions than credit card transactions.
Explanation
Typically, a debit card transaction costs between 0.50% and 1.00% less than credit card transactions (see What Is Interchange for more details), the cost of which is usually NOT passed on to the merchant. Even when the processor does pass on a lower cost for debit cards to the customer, often they pass on less than the full savings, creating extra profit for themselves (this practice is related to marking up downgrades).
The exact mix of credit and debit are dependent on what kind of customer your business serves, but in 2004 Visa Announced that the value of Debit Card transactions had surpassed the value of Credit Card transactions, so you can bet that a big portion of your transactions are actually debit.
If your processor charges you based on Interchange Plus pricing, then you are having the debit card discount passed on to you.
However, most merchants are charged using 3-tier pricing, in which case your debit card transactions are being grouped into your standard credit card rates and you are being charged too much.
What you can Do about it
You should call your Merchant Account Provider and demand that debit card transactions be split out on your bill and the price reduced, just ask them “but debit cards are cheaper, right?” and then ask why you are being charged the same for them as for the credit transactions. Usually the Merchant Account Provider will get the idea and change your billing. If they don’t, then go shopping for a new Merchant Account Provider.
Or you can ask to be given Interchange Plus pricing, which is the best solution.
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
Small business owners are busy people. They also make the best customers because they
- Make more money on average than other types of workers
- Are sympathetic to business interests – i.e. you know what it’s like for a customer to give you a hard time so you cut your suppliers a break
- Are too busy generating new revenue to bargain very hard with their suppliers
Credit card processing services (Merchant Accounts), however, are among the biggest expenses for many small businesses and usage of credit cards is only going to increase in the future. In the case of my business, which sells satellite radio equipment online, our monthly Merchant Account expenses are more than our Downtown Chicago rent. By learning a little bit about the industry and taking the time to shop carefully I reduced my Merchant Services expenses by approximately 33% (several thousand dollars / month) which had a very beneficial impact to our bottom line. These are the techniques I used:
Understand How It Works
You can’t bargain effectively if you don’t understand how your Merchant Account Provider makes their money. Read these articles:
Who Makes Money From My Merchant Account
Know how to read your statement
This is key, if you don’t know what you are getting charged you are going to have a hard time negotiating:
Reading a Multi-Tier Statement
Reading an Interchange-Plus Merchant Statement
Get Pricing As Transparent As Possible
The more transparent your pricing is, the easier it will be to tell what you are getting charged and know that you are not getting ripped off.
The two biggest things that you can do to ensure transparency are:
1. Get Interchange-Plus pricing
2. Get Monthly (rather than Daily) discounting
Watch Out For Their tactics
There are several tactics that Merchant Account Providers use to get the upper hand, know them and you won’t be fooled:
When shopping for a new merchant account provider don’t call just one
If you just call one Merchant Account Provider you usually will get a better deal than you are getting now, because they will offer you a lower price to get you to switch. However, if you really want to get the most out of your time, find a few Merchant Account Providers and bid them off against one another. Some tips:
1. Be organized – The main piece of information that they will need to give you an offer is a copy of your last 3 statements. You can use a fax machine to send those but I have found it easier to go to Kinkos and scan them into 1 PDF document, so that it only takes a few clicks to send a copy to another prospective Merchant Account Provider.
2. Sound professional – Sounding professional and well-informed is important because it will reduce the chances that the salesperson will think that he can sneak things by you and also because Merchant Account Providers are can be easily defrauded by fraudulent businesses and are very paranoid about not doing business with anyone that sounds illegitimate.
3. Make sure that they know you are price comparison shopping. Explain to them that you want to get the best deal, but also good customer service. If a bid isn’t competitive, tell the salesperson. In many cases they will improve their bid.
4. Get everything in writing, have the salesperson prepare a sales pitch that includes every single fee. If you don’t do this, in writing, they will try and sneak extra fees in on you at contract time.
I did an experiment where I shopped for a new Merchant Account several times to see how important it is to have multiple bidders. The first time I decided to only talk to onie bidder and I got a slightly better price that I currently had. I didn’t sign that contract, I waited a week and then I went shopping again, this time talking to 2 bidders. I repeated the experiment until I was talking to 6 bidders. The results are below.
I got significantly greater savings by making the bidding process more competitive. At a certain point the benefit of adding more bidders tapers off. Based on this experiment I would say that anything more than 4 bidders is a waste of time.
Wait Three Months and then shop again
Humans all suffer from a cognitive bias called Anchoring (see Wikipedia article). “During normal decision making, individuals anchor, or overly rely, on specific information or a specific value and then adjust to that value to account for other elements of the circumstance. Usually once the anchor is set, there is a bias toward that value.”
In the world of Merchant Accounts, both the salespeople for the Merchant Account Providers and the merchants tend to become overly fixated on the old price that the merchant was paying. Usually when you request a rate quote the merchant account provider will quote one that is below your current rate, but higher than the lowest rate that they can offer. They will then point out to you the very significant savings from the new rate schedule.
If you push back at the salesperson and say: “well why can’t we go lower” they will respond “I already cut $500 a month off of what you are currently paying, I really can’t go lower than that”. The solution is to accept the lowest offer, use that Merchant Account Provider for 3 months and then go shopping again. Repeat until you get a deal that you are happy with.
Why 3 months? Because they will insist on seeing your last three statements. It looks a lot better if they all have your last (lowest) rate and if they all are from the same provider. You don’t necessarily want the people that you are shopping with to know that you might jump ship for a better deal in 3 months.
I did another experiment where I shopped around for a new provider over a period of 2.5 years (I didn’t go shopping every 3 months because I was busy). The results are below and pretty clearly show the benefits of continuing to shop for better deals over time.
This isn’t a fully scientific experiment, since it was only tested with one company (mine) and during that time my business was growing in size (bigger customers get better deals), however, the general direction of the results seems right.
This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started TransFS.
There are two kinds of debit card transactions: Signature / Offline Debit and PIN / Online Debit. Signature / Offline debit is processed over the same network as regular credit card transactions and saves the merchant a small amount of money. PIN / Online Debit is processed over a seperate (cheaper) network and can save the merchant lots of money.
Signature / Offline Debit
In a Signature Debit transaction the card must have a VISA or Mastercard logo (which most debit cards have these days) and the customer must not enter their PIN code and must sign the receipt. In other words it “feels” just like a regular credit card transaction. These transactions are slightly cheaper than regular credit card transactions because VISA and Mastercard have created a seperate interchange category for debit transactions. Keep in mind that your Merchant Account Provider may not be passing the savings along to you (see “Debit Markup“).
PIN / Online Debit
PIN / Online debit transactions go over different networks (the same networks used for ATM transactions) such as NYCE, STAR, Interlink (owned by VISA), and PULSE (owned by Discover). The costs of those networks, because they are newer and becuase they have less risk of fraud, are lower than the credit card networks.
The Pin / Online Debit transactions have a lower risk of fraud because they require the PIN code. Your merchant services provider can set you up with PIN / Online Debit in addition to Credit and Signature / Offline Debit (see “Equipment and Terminals“).
Online Debit transactions are called “Online” because the transaction happens in real-time (i.e. an ACH of the customer’s money out of their account happens right away), rather than the credit card transaction process which has two steps: first an authorization while the customer is standing there and then later that day a settlement where the money is transferred (see “How Merchant Accounts Work“).
Consumers can also usually get cash back with their Online Debit transactions.
Wal-Mart Class-action Lawsuit
Since the same card can be used in 2 different ways in the same situation, one of which is significantly cheaper to the merchant, merchants typically do everything that they can to encourage consumers to type in their PIN code. Wal-Mart in the early 2000′s decided to take that idea to it’s extreme and not allow Signature Debit transactions.
VISA and Mastercard replied by threatening to cut off credit card transactions for Walmart, saying that their contract requires merchants to accept all card bearing the VISA or Mastercard logo. Wal-Mart then sued VISA and Mastercard for anti-trust violations, claiming “tying”.
VISA and Mastercard eventually settled the case in Wal-Mart’s favor. Most merchants are not going to want to shut off signature debit transactions to their customers, but the length to which Wal-Mart was willing to go demonstrates the amount of savings possible from encouraging shoppers to switch to the PIN network.
See “Mastercard Settles Wal-Mart Lawsuit” (Tech-MIT)
See VisaCheckMasterMoneyAntiTrustResolution.com
See “April Showers for MasterCard and Visa” (Transaction World)
Overall cost comparison
Economists at the Kansas City Federal Reserve have done some research on the relative costs of each option, which I have summarized below (see Fumiko Hayashi’s Payments Research for more information).
It is important that I note that online / PIN Debit transactions are usually charged as a flat fee, in contrast to Offline / Signature Debit transactions which, like credit card transactions, usually have a flat fee as well as a percentage fee.
