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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/
Unfortunately most credit card processing rate quotes cannot be trusted, which is why we created TransFS, where all the offers are full-disclosure and fully accurate.
Here is an example of how a merchant account provider has advertised false rates.
Business owners all over the country say it is almost impossible to be approved for a bank loan. The banks are very careful, demanding documentation and projections that are very hard to satisfy. The banks demand good credit scores and collateral, but with real estate prices still down, business owners often find they don’t have enough collateral to guarantee their loans.
The big banks throw the blame on the customers. They say people are applying less for loans, afraid to expand because they do not know what the next day will bring.
As reported in the New York Times, Mr. Bernanke said: “It seems clear that some creditworthy businesses – including some whose collateral has lost value but whose cash flows remain strong – have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.”
Some small business owners found it helpful to try microlending.
If this concept sounds foreign, it’s because it is. Microlending has been operating in developing countries for over two decades now. Muhammad Yunus, the founder of Grameen Bank, a nonprofit organization based in Bangladesh, has received the Noble Peace Prize for his work in microlending, granting small loans mainly to poor people. Now Grameen Bank has arrived to the United States. Together with another organization called Kiva, which has lent more than $150 million in 53 countries, they are widening their loans to Americans.
The trend is growing. Cities like New York and San Francisco have introduces their own microloans programs. “Everyone is knocking on our doors, even those with good credit,” said Galen Gondolfi from “Justine Peterson,” another microlending company based in St. Louis.
There are more than 360 outfits for microlending in the United States, some have been operating since the 80’s and experts expect the numbers to rise as long as the bank remains tight.
According to another article in the New York Times, microlending programs in the United States typically lend up to $35,000 to small businesses with less than 5 employees. The interest rate is a bit higher than the bank rate, between 5%-18%, but the documentation required is reasonable.
While banks rely mainly on credit scores, the microlenders consider passion and commitment as well. They require participation in marketing and business-plan workshops and money management courses that can help the small business owner even more in the long run.
The article tells the story of a small business owner (a wine shop in St. Louis) who tried to get a $50,000 loan from his longtime bank. He was rejected because the bank claimed he had too much debt. Another bank turned him down as well. He applied for a microloan and he got $15,000, for 10 years with a 12% interest rate. He had to scale back his plans, he says, but “It’s the only way to go.”
Grameen bank has opened 4 new branches in NY and one in Omaha and has plans to open branches in San Francisco, Washington, Boston and North Carolina.
Kiva works in a different way. It uploads the business profile onto their site. People browse the site and decide, based on the business owner’s profile, who they would like to loan money to. Kiva distributes the money. Borrowers can ask for as much as $10,000, and Kiva made almost one million dollars in loans up till now.
So if your bank has turned you down for a loan, don’t despair. There’s another way to go.
BillShrink is a great site that helps consumers shop for better deals on credit cards, cell phones, etc. It’s a good resource for business owners too, since most of us use those products. They recently announced that they reached 1,000,000 users, really an incredible amount of progress, very impressive.
Currently our company TransFS helps business owners get better deals on credit card processing. In the future we will help business owners shop for other financial products, such as payroll processing and lines of credit.
We do not compete with Billshrink, but we are similar enough that we draw inspiration from them and are happy when they have success since their hearts are in the same place as ours.
Keep kicking butt Billshrink!! We’re pulling for you!
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.
If you are an ecommerce business and you are paying more than 2.00% + 0.20 per transaction (so $2.20 for a $100 transaction or $0.40 for a $10 transaction) you likely could get a better deal – more info below.
There are lots of costs involved in credit card processing. But the largest is Interchange, which is the amount that the credit card processor (also called a merchant account provider) collects from the business accepting credit cards and passes along to Visa and Mastercard, who then in turn pass most of interchange along to the banks that issue credit cards.
If you accept credit cards, your interchange rate will vary depending on your transaction mix. But we recently did analysis of all our e-commerce customers to determine their average interchange rate. The result:
average per-item fee = $0.1226
average % fee = 1.844%
Credit card processors deserve a reasonable markup over the price of interchange. They provide all the customer service, maintain the computer networks that send the transactions around, handle all the billing, etc. In our opinion, a reasonable markup over interchange, depending on the size of your business, is 0.10% to 0.50% of volume, plus 0.05 to 0.20 per transaction. If you are paying more than that, you might want to consider finding a new credit card processor.
If you don’t want to spend a lot of time and effort shopping, and you want to ensure that you get the best deal possible, use TransFS.com to get a fast, accurate, unbiased and apples-to-apples credit card processing comparison.
If you are not an ecommerce merchant, some additional data on average interchange rates is available in these articles: Average Interchange Rate and Average Credit Card Processing Costs.
A new survey conducted by Visa recently found that consumers aren’t sympathetic to merchants when it comes to the costs of accepting credit and debit cards. It turns out that “consumers believe retailers benefit far more from accepting credit and debit cards than they pay in costs.” Consumers also believe that merchants look at card acceptance costs as a cost of doing business, just like they look at electricity.
Here is an excerpt from the survey that is especially interesting:
Retailers and their well-funded trade associations have filed lawsuits and are aggressively lobbying Congress to allow them to shift their business costs to consumers by allowing merchants to charge checkout fees whenever consumers use credit or debit cards. At the same time, national convenience store chains have launched misleading, in-store petition campaigns to cover for their checkout fee efforts.
“The response is loud and clear: consumers aren’t buying the message convenience store chains and big retailers are selling,” said Bill Sheedy, group president of the Americas for Visa Inc. “This research demonstrates that consumers are well aware that legislation is a Trojan horse that likely will lead to higher prices for cardholders while retailers pocket the savings.”
“Retailers want the best of both worlds – the benefits of card acceptance without paying the costs,” Sheedy added. “This research shows that retailers who are campaigning for checkout fees or uneven legislative schemes that shift the cost of doing business onto the backs of consumers are risking a customer backlash.”
I think it is instructive to put all of this is some historical context. When credit cards and charge cards first came to market a lot of merchants looked at them a fantastic innovation. Why? Because a lot of merchants ran their own credit operations but were unable to successfully account for the risks of doing so and thus found it hard to maintain these practices (even though customers demanded to be able to buy on credit). In essence, merchants looked at credit and charge cards as a way to outsource their expensive and time consuming in-store credit operations. (source: Paying with Plastic)
With that said I should mention that we, at TransFS, do believe that merchant credit card fees are still far too high. That is why we built the TransFS credit card processing comparison shopping engine after all (we want merchants to obtain the best possible rates that they can). However, we do believe that accepting credit cards and debit cards is important for merchants and that it is certainly demanded by consumers. Even before the dawn of credit and charge cards consumers demanded that merchants allow them to purchase items on credit. Credit cards allow merchants to offer that service without all of the hassle and the risks associated with running their own credit programs.
(via PaymentsNews.com)
We come across interesting articles from time to time that we want to make sure you know about and these two fit the bill. Here are the synopses:
10 Tips for Better Business Planning
Timothy Berry, founder of Palo Alto Software, has a great guest post over on Business.gov that discusses 10 ways to improve your business planning. Our favorite planning tool comes up as #1 on Tim’s list. What is that tool? Simply calling your customers and asking some questions. Nothing is more powerful than talking to customers and potential customers about your business.
Revolution Money: When closing accounts is counter-revolutionary
Some of you may already know about Revolution Money but for those that don’t, Revolution Money is a startup founded by Steve Case that is focused on building out an alternative payments network that is very friendly to merchants (one main feature: a flat 50 basis point per transaction fee). In an article published today, American Banker columnist Maria Aspan takes a look at Revolution Money’s recent closer of 2% of their cardholder accounts. This is an unusual move for a small payment network to make. Revolution claims it is closing the accounts to accomodate an additional banking partner. To learn more please check out the article on American Banker and view the Revolution Money corporate timeline.
This is one of many “post round-ups” that will start to show up on Financially Speaking. These post round-ups will allow us to quickly and easily share articles we find relevant to business owners. In this edition we highlight a post on the Consumer Reports website that highlights the hassles consumers face when using checks. We also highlight a post on American Express’ OPEN Forum that puts forward 20 time and money saving tips for business owners.
The Hassles of Using a Check: ConsumerReports.org
With many consumer turning back to checks in order to curb their credit and debit card spending, the issues of paying with checks have begun to emerge once again. This article from Consumer Reports highlights some of those issues. One of the main issues that is highlighted in the article is the use of TeleCheck. TeleCheck essentially runs credit checks on customers and can deny customers who actually have sufficient funds in their accounts. This is a huge hassle for both consumers and business owners.
20 Tips to Save Time and Money in Your Small Business and at Home: AMEX OPEN Forum
While the post doesn’t include using the TransFS credit card processing comparison engine to quickly and easily save money on credit card processing we still think it contains some great time and money saving ideas for business owners. One of the ideas that is close to our hearts is to shop around around for the best banking deals to make sure you are paying the least amount of fees and earning the most interest. You would be surpised how much different accounts vary in terms of both fees and interest payments.
