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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.
Stop Bothering ME!
Josh picked up this tweet from @stillbjorn on twitter: “I am very happy with my credit card processing company. Stop bothering me, stupid salesmen.“
Traditionally small business financial services have been pushed to business owners by well-compensated and persistent salespeople. It’s not a very efficient situation because the salesperson typically does not know in advance which potential customers actually need a new credit card processor. So he ends up making lots of phone calls Boiler Room style before finding one customer who actually wants to talk to them. Those phone calls can be pretty annoying.
We believe that the world is switching to more of a pull mentality. When the small business owner wants a new financial services provider he/she will find one on the internet using search engines, review sites and comparison shopping sites like TransFS. They will become increasingly irritated with push methods.
How TransFS Adds Value
Every business needs to justify its existence by consistently providing value to its customers. At TransFS our business is connecting business owners looking for financial services with financial services companies that meet their needs.
We talk a lot on this blog about how we create value for business owners:
- apples to apples comparison of pricing
- participating financial services providers must follow a set of merchant-friendly rules (no cancel fee, only interchange-plus pricing, etc)
- streamlined collection of documents for underwriting
- no unsolicited calls from salespeople
- pricing set in a competitive auction which usually results in a much lower rate with less shopping time
But we don’t talk too much about how we create value for the financial services companies, so for a moment now I will: we dramatically lower their sales costs.
For example, in credit card processing, the First Annapolis Group, a consulting firm focused on the payments industry, estimates that for a credit card processing company to acquire a new customer it costs them about $1000 on average. Their estimate includes all direct sales costs, such as the commissions and salaries paid to salespeople. For more detail on the research, see First Annapolis Group Navigator January 2009.
At TransFS we charge less, more like $300 per customer, and we only get paid when we actually deliver a customer, so unlike hiring a new salesperson or doing advertising, there is no risk. Delivering such a great value to the financial services company also helps our small business customers, because a big part of that cost savings is passed along to them.
Lately I have been really geeking out on the Federal Reserve website, which has lots of great data. Today I was looking at Report to the Congress on the Profitability of Credit Card Operations of Depository Institutions, a deep analysis of the profitability of credit card issuers. To do this analysis the fed takes advantage of the fact that there are many banks whose primary business is issuing cards and that those banks need to report their profitability and return on assets to the Fed, FDIC and other regulators. Here is what I learned:
- Issuing credit cards is a good business with return on assets between 2% and 4% depending on the year. Compare this to the overall profitability of banks from another Fed Bulletin entitled Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 which shows overall bank return on assets varying between 0.2% and 1.6% over the same time period. Clearly credit card issuing has historically been more profitable then most other banking products.
Credit Card Issuer Return on Assets
- At the end of 2007 there were $917 billion in consumer credit card balances outstanding, I wonder how that has changed since then.
- There were about 600 million Visa and Mastercard credit cards at the end of 2007 and another 100 million Discover and American Express.
- There were 5.2billion credit card offers mailed out in 2007 – around 17 per person in the US, or around 52 per household. The response rate was around 0.5%.
- The average credit card interest rate was around 14%.
Credit card issuers make money in two ways, first by charging merchants credit card processing fees for each transaction (for visa and mastercard those fees are called Interchange) which is collected by the credit card processor and passed along to the bank that issued the credit card (about 30% of their revenue), and second by charging fees and interest rates to the consumer for any balances that are carried (about 70% of their revenue) which are billed directly to the consumer.
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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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