Archive for the ‘Payments’ Category

Credit Cards and Financing the Next Big Thing

by on Wednesday, September 8th, 2010

The final provisions of the new regulations governing payment cards (credit, debit and prepaid) are now in effect. The new regulations limit certain penalty and other fees, require a minimum period before gift cards can expire and restrict issuers’ ability to market on college campuses and, in general, to customers under 21.

via adria.richards (Creative Commons)

John Berlau of the Competitive Enterprise Institute made the point that under the new rules Sergei Brin might not have been able to acquire the plastic he is said to have used to start Google. True or not, enshrined in modern folklore are the entrepreneur or filmmaker maxing out their credit cards to fund the Next Big Thing.

Implicit in these stories is that credit cards are the financing vehicle of last resort, something the new rules don’t change. But why should smart, dedicated, creative people ever have to fund business ventures with consumer credit? Why can’t they find more appropriate sources of financing?

Raising money from angel investors makes a lot more sense than using credit cards, but it just got a little harder. Most angels have to be “accredited investors” under the Federal Securities laws. The policy is to permit only the “wealthy and wise” to invest in presumably risky offerings since they are least likely to require protection against either unscrupulous promoters or themselves.

However, the definition of accredited investor was recently changed to exclude the value of the investor’s home from her assets for purposes of the regulation’s $1 million net worth test (an alternative test, which looks at income, has not been changed). Unless one of these tests is met, it doesn’t matter how knowledgeable and experienced a potential investor might be. And although the new rules may put some potential investors on the sidelines, it could have been worse. Proposed rules would have disqualified an estimated 2/3 of angel investors.

A newer alternative is “crowd funding”, in which individuals invest very small amounts to finance a venture (the Securities laws permit this). This model has proven especially popular in film financing, with communities such as IndieGogo and Kickstarter. In the tech world micro-investment communities include Grow.
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The Zavee takeaway:

  • Credit cards should be the funding vehicle of last resort.
  • Angel investments are never easy to come by and may have become a bit more difficult.
  • Micro-investment communities are an innovation worth exploring.

3 Things to Ask an ISO Sales Rep

by on Wednesday, September 1st, 2010

All Zavee merchants accept credit/debit cards, and many are frustrated by the complexity of their merchant services agreement. Their frustration only increases when they are pitched by representatives of other merchant services companies, many of whom offer deals that sound too good to be true and/or are hard to compare to their current plan.

This lack of transparency is bad for everyone: it may keep a merchant from making changes that would save money or spur growth; or it may dupe a merchant into making changes that result in higher costs, false economies or unwise capital investments. This post, and several others to follow, are intended to help guide local merchants to making decisions about merchant services that best serve their business.

All Credit Cards Accepted (creative commons)

Some basics about the business: merchant services is a pure commodity in that every bank and processing company processes the same data and remits or collects the same funds in accordance with the same rules. Nevertheless, the business is extremely competitive, with sales reps constantly calling on merchants and urging them to change processors. It’s probably happened to you already.

When you swipe a customer’s card the customer’s bank checks the customer’s account and extends credit to your bank by authorizing the transaction. When your merchant services bank clears the transaction and pays you it is extending credit to you. This process is highly data-intensive and most merchant services banks outsource the processing of transaction data to one or more large “back-end” data processing firms.

At the front end, many banks that offer merchant processing services outsource the sales role (and sometimes other services, such as underwriting) to independent sales organizations, or ISOs. ISOs usually represent one or a small number of banks and back-end processors. An ISO’s “feet on the street” is the merchant level sales rep, or MLS. An MLS typically works on commission, and often gets part of the ISO’s net revenue from you for the duration of your contract with that ISO.

How can you tell how well the processing deal an ISO offers you today stacks up against the one you already have? It isn’t easy. Beyond some basic fees that are passed through from the card associations (Visa and MasterCard), ISOs differ in the names they use for similar charges, in the extent to which charges are separate or bundled, and of course in the amount of all of their charges. Even basic “per-transaction” fees can’t always be compared on an apples to apples basis.

Here are three things to ask about the next time you hear a pitch about changing processors.

Termination fees. Your current processing agreement probably includes an early termination fee. If you have to pay it when you change processors you should factor that cost into the overall cost of the new deal. But an MLS sometimes will offer to pay some or all of your termination fee to induce you to switch. So ask about that. And ask whether your monthly fees change if the sales rep does pay off your termination fee – after all, nothing is free. And ask about the termination fee in the new deal, because it’s almost certain that someone from another processor will be trying to induce you to switch yet again.

Equipment. Depending on the terminal equipment you currently have, you may or may not have to change equipment when you change processors. Even if you don’t have to acquire new equipment it might make sense to do so, if your current equipment is old and unreliable, or if the new equipment contains features and capabilities that can help your business grow. For example, you might want to be able to connect with your bank over an IP (computer) line rather than a phone line, which tends to be faster, more reliable and cheaper. Or you might want to acquire a handheld wireless terminal so customers don’t have to pay at the register. If you do want to upgrade your equipment be sure to shop around for the best package of services and equipment. ISOs can subsidize low processing fees by charging high equipment lease fees. They also can do the opposite: offer low-cost or even free terminal equipment that is subsidized by higher processing fees.

PCI Compliance fees.
Almost everyone who collects and stores credit card data, including merchants who transmit card data over IP, is required to comply with the Payment Card Industry Data Security Standards, usually abbreviated PCI. ISOs are required to comply but can’t meet the standards unless their (IP) merchants do. Merchant processing agreements therefore typically include a charge to ensure PCI compliance. This fee normally has two components: a monthly (or sometimes annual) fee for compliance testing that a third party firm conducts for the ISO; and a separate charge for each month that the merchant is not PCI compliant. The compliance fee is normally marked up from the ISO’s actual cost, often dramatically. Ask about the amount of the mark-up. It may be negotiable, and even if it isn’t it’s one more way to comparison shop different ISO deals. The non-compliance fee is meant to be punitive and is less likely to be negotiable.

In future posts we will take a look at other aspects of ISO pricing, value-added services, and technology that may have an impact on how ISOs and merchants interact.

The Zavee takeaway:

  • It may not be easy, but it’s worth the effort to compare the total cost of your current merchant services contract with the total cost of anything you are being offered. If the only difference is money (and not equipment or other services), decide how much savings is enough to make you switch. And don’t forget about those termination fees.
  • Equipment upgrades don’t have to be a rip-off. They may make perfect sense for your business. Remember to evaluate the total cost of any proposed plan, including equipment charges. Don’t get talked into equipment with features you don’t need and will never use. And if you are otherwise satisfied with your current processor, find out what deals they can offer on the equipment upgrades you want.
  • Your best protection as a merchant services customer is to read and understand your monthly statement. Make sure you know what you are being charged for and that the charges are calculated correctly. And don’t be afraid to ask for changes to an existing deal. The longer you have been with the same processor the greater your leverage. Use it.