Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Electronic Payments Industry changing Forever – All Points Bulletin!
August 23, 2011Electronic Payments Industry Changing Forever – ALL POINTS BULLETIN
Posted on December 17, 2010 at 8:36 PM
Attention business owners and to all those employed in the merchant processing and Merchant Cash Advance industry. The world is changing and not at the ‘global warming will one day kill us all’ pace. It’s happening right now. Remember that little thing called the Wall Street Reform and Consumer Protection Act that passed in July? There was a little itty bitty part in there that we so happened to broadcast and critique in detail on our site, known as the Durbin Ammendment. Take a look the law’s summary, particularly #3. On the evening of December 16th, the Federal Reserve Board delivered an early Christmas present to all the debit card networks and big banks. The gift contained the government’s proposed debit card fee changes, or as some bank executives might tell you, “they mailed us 10 sticks of dynamite.” If you’re serious about this business, read through the 176 page document that every news agency is trying to sum up in 3 paragraphs.
Visa’s stock plunged on the news
Debit cards accounted for 35% of all non-cash transactions in 2009. The proposed changes seek to cap the fee charged for accepting a debit card to a maximum of 12 cents. According to the report issued by the Board, here’s what businesses are paying now:
“Networks reported that debit and prepaid interchange fees totaled $16.2 billion in 2009. The average interchange fee for all debit transactions was 44 cents per transaction, or 1.14 percent of the transaction amount. The average interchange fee for a signature debit transaction was 56 cents, or 1.53 percent of the transaction amount. The average interchange fee for a PIN debit transaction was significantly lower than that of a signature debit transaction, at 23 cents per transaction, or 0.56 percent of the transaction amount. Prepaid card interchange fees were similar to those of signature debit, averaging 50 cents per transaction, or 1.53 percent of the transaction amount.”
Debit interchange fees have always been assessed as a percentage of the sales amount. The larger the transaction size, the higher the fee. Debit cards are most frequently used for smaller purchases but a flat cap on transaction fees regardless of transaction size is a game changer. Now twist this with the fact that interchange fees are almost disappearing altogether and one needn’t think too hard about the unintended consequences.
MasterCard issued a statement immediately. “Experience demonstrates that consumers, not banks or payments networks are the biggest losers as a result of this regulation,” said Noah Hanft, MasterCard’s general counsel. “This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.” Visa hasn’t provided any useful feedback at this time but has openly condemned the report.
The Board acknowledges that some card issuers can’t even cover their own costs with the 12 cent transaction fee in effect. This Board’s direct response to this dilemma is that they simply don’t care. “An issuer with costs above the cap would not receive interchange fees to cover those higher costs. As a result, a high-cost issuer would have an incentive to reduce its costs in order to avoid a penalty.”
Thank you Federal Reserve for the feeble minded, anti-capitalistic solution. “Just lower your costs or we’ll fine you.” The outrage is warranted because the proposal isn’t really a proposal at all. This is the new order granted to the government after the passage of the Wall Street Act back in July. The payment networks and banks may comment on this proposal but effective July 21, 2011, this simply becomes law.
This is the equivalent to forcing all the businesses in America to lower their retail prices under penalty of law as the solution to dealing with consumers whining about the recession.
Additionally, the Board constantly refers to the life cycle of a debit sale to being a 4 party transaction. There is:
* The bank that issued the card to the customer
* The customer
* The business that the customer shops at and uses the debit card
* The acquiring bank that the business uses to accept debit cards
The payment networks are what allow the acquiring banks to communciate with the banks that issued the debit cards. The networks have costs associated with their service, infrastructure, and overhead. The 12 cents per transaction is the combined total that can be charged between both the acquiring bank, payment network, and issuing bank. There’s not a whole lot to go around.
While the Federal Reserve and congress are patting themselves on the back and high fiving eachother for saving the economy (by sticking it to the big banks), the end result will be the loss of millions of jobs, the elimination of debit cards, an increase in other bank fees, the end of all debit rewards programs, the end of electronic payments quality, the end of electronic payments assurance, and the collapse of the free market economy. Give me a high five. Not!
Here’s what will happen and why:
* The Board ignores or does not understand the electronic payments industry business model. The debit card business is not a 4 party transaction. The acquiring bank party encompasses multiple layers and parties in itself. Acquiring bank —> Payment Processor —> Indepedent Sales Office —> Sales Agents. Debit transaction costs are marked up at each level to create a competitive marketplace. The electronic payments industry employs millions of people. With a 12 cent cap and no markup abiliity, those millions of workers will lose their jobs overnight.The majority of this business is commission based, with processors and sales agents directly taking home solely what’s generated on the markup of debit/credit fees of their clients.This is probaby the most blatent and incredibly obvious oversight. There can be no competitive market because costs are fixed and there can be no sales because there is no money for anyone to earn on markups. National unemployment will rise several percent over the course of a few months.
* Rewards debit cards can no longer exist. Card issuing banks currently pay their customers rewards by charging businesses more for accepting a rewards card transaction. Since a bank no longer has that ability, rewards cards can no longer exist.
* Debit cards become a moot point for banks. With no profit incentive to put them in the hands of customers and no ability to compete on price, there is no incentive for debit networks or cards to continue.
* Quality, fraud protection, and assurance will suffer. Banks whose own costs are higher than the imposed cap face fines by the Federal Reserve unless they cut costs. Therefore the government is not only incentivizing poor quality, but in fact making it mandatory.
* Ever hear of too big to fail? This industry is too big to be messing with. These are the actual national and international money networks through which trillions of dollars move through every day. Mandating poor quality, eliminating all competition, and removing profit incentives will de-evolutionize the flow of money altogether.
The Board will review and allow comments through March 31st, at which point this industry will meet its maker. Yes, it’s that’s serious.
-deBanked
https://debanked.com
Do I Need a New Terminal to get a Merchant Cash Advance?
August 23, 2011Posted on December 19, 2010 at 6:50 PM
This past July, 2010 the Payment Card Industry Security Standards Council phased out yet another batch of credit card terminals. This has made the last 6 months a tad bit challenging for resellers of the Merchant Cash Advance(MCA) financial product. Non-compliant machines have often times caused delays in what is supposed to be a quick process.
By far and away the biggest complaint by MCA reps has been the push-back by their clients to upgrade equipment. Many merchants have been using the same credit card machine for years with no problems. This challenge is perpetuated by credit card processors that ignorantly let their clients process with non-compliant machines despite the risks. So when a MCA rep comes along and informs a business owner that their equipment violates PCI Standards, you can imagine the skeptical reaction.
Business owners should be aware that PCI Standards compliance is not something to be brushed aside. If your business is responsible for just one data breach of card holder data, the financial penalties will put you out of business. This will be no ones fault but your own. We recently added a section to our site which mirrors the basic information on pcisecuritystandards.org. That information can be found here: https://debanked.com/pcicompliance.htm
Possessing a non-compliant machine does not give your current processor or your MCA rep the right to gouge you with the cost of a brand new one. There are options available to avoid paying hundreds of dollars upfront.
* Have your processor take possession of your old machine and replace with a new one for free
* Have your processor let you borrow a new machine for a low monthly fee
* Have your processor give you a free one in return for a contract extension
* Have your processor set you up with a lease through a 3rd party
Good luck and safe processing!
https://debanked.com
Consumers Can Help Businesses Saves on their Credit Card Processing
August 23, 2011
Attention business owners and to all those employed in the merchant processing and Merchant Cash Advance industry. The world is changing and not at the ‘global warming will one day kill us all’ pace. It’s happening right now. Remember that little thing called the Wall Street Reform and Consumer Protection Act that passed in July? There was a little itty bitty part in there that we so happened to broadcast and critique in detail on our site, known as the Durbin Ammendment. Take a look the law’s summary, particularly #3. On the evening of December 16th, the Federal Reserve Board delivered an early Christmas present to all the debit card networks and big banks. The gift contained the government’s proposed debit card fee changes, or as some bank executives might tell you, “they mailed us 10 sticks of dynamite.” If you’re serious about this business, read through the 176 page document that every news agency is trying to sum up in 3 paragraphs.
Visa’s stock plunged on the news
Debit cards accounted for 35% of all non-cash transactions in 2009. The proposed changes seek to cap the fee charged for accepting a debit card to a maximum of 12 cents. According to the report issued by the Board, here’s what businesses are paying now:
“Networks reported that debit and prepaid interchange fees totaled $16.2 billion in 2009. The average interchange fee for all debit transactions was 44 cents per transaction, or 1.14 percent of the transaction amount. The average interchange fee for a signature debit transaction was 56 cents, or 1.53 percent of the transaction amount. The average interchange fee for a PIN debit transaction was significantly lower than that of a signature debit transaction, at 23 cents per transaction, or 0.56 percent of the transaction amount. Prepaid card interchange fees were similar to those of signature debit, averaging 50 cents per transaction, or 1.53 percent of the transaction amount.”
Debit interchange fees have always been assessed as a percentage of the sales amount. The larger the transaction size, the higher the fee. Debit cards are most frequently used for smaller purchases but a flat cap on transaction fees regardless of transaction size is a game changer. Now twist this with the fact that interchange fees are almost disappearing altogether and one needn’t think too hard about the unintended consequences.
MasterCard issued a statement immediately. “Experience demonstrates that consumers, not banks or payments networks are the biggest losers as a result of this regulation,” said Noah Hanft, MasterCard’s general counsel. “This type of price control is misguided and anti-competitive, and in the end is harmful to consumers.” Visa hasn’t provided any useful feedback at this time but has openly condemned the report.
The Board acknowledges that some card issuers can’t even cover their own costs with the 12 cent transaction fee in effect. This Board’s direct response to this dilemma is that they simply don’t care. “An issuer with costs above the cap would not receive interchange fees to cover those higher costs. As a result, a high-cost issuer would have an incentive to reduce its costs in order to avoid a penalty.“
Thank you Federal Reserve for the feeble minded, anti-capitalistic solution. “Just lower your costs or we’ll fine you.” The outrage is warranted because the proposal isn’t really a proposal at all. This is the new order granted to the government after the passage of the Wall Street Act back in July. The payment networks and banks may comment on this proposal but effective July 21, 2011, this simply becomes law.
This is the equivalent to forcing all the businesses in America to lower their retail prices under penalty of law as the solution to dealing with consumers whining about the recession.
Additionally, the Board constantly refers to the life cycle of a debit sale to being a 4 party transaction. There is:
- The bank that issued the card to the customer
- The customer
- The business that the customer shops at and uses the debit card
- The acquiring bank that the business uses to accept debit cards
The payment networks are what allow the acquiring banks to communciate with the banks that issued the debit cards. The networks have costs associated with their service, infrastructure, and overhead. The 12 cents per transaction is the combined total that can be charged between both the acquiring bank, payment network, and issuing bank. There’s not a whole lot to go around.
While the Federal Reserve and congress are patting themselves on the back and high fiving eachother for saving the economy (by sticking it to the big banks), the end result will be the loss of millions of jobs, the elimination of debit cards, an increase in other bank fees, the end of all debit rewards programs, the end of electronic payments quality, the end of electronic payments assurance, and the collapse of the free market economy. Give me a high five. Not!
Here’s what will happen and why:
- The Board ignores or does not understand the electronic payments industry business model. The debit card business is not a 4 party transaction. The acquiring bank party encompasses multiple layers and parties in itself. Acquiring bank —> Payment Processor —> Indepedent Sales Office —> Sales Agents. Debit transaction costs are marked up at each level to create a competitive marketplace. The electronic payments industry employs millions of people. With a 12 cent cap and no markup abiliity, those millions of workers will lose their jobs overnight.The majority of this business is commission based, with processors and sales agents directly taking home solely what’s generated on the markup of debit/credit fees of their clients.This is probaby the most blatent and incredibly obvious oversight. There can be no competitive market because costs are fixed and there can be no sales because there is no money for anyone to earn on markups. National unemployment will rise several percent over the course of a few months.
- Rewards debit cards can no longer exist. Card issuing banks currently pay their customers rewards by charging businesses more for accepting a rewards card transaction. Since a bank no longer has that ability, rewards cards can no longer exist.
- Debit cards become a moot point for banks. With no profit incentive to put them in the hands of customers and no ability to compete on price, there is no incentive for debit networks or cards to continue.
- Quality, fraud protection, and assurance will suffer. Banks whose own costs are higher than the imposed cap face fines by the Federal Reserve unless they cut costs. Therefore the government is not only incentivizing poor quality, but in fact making it mandatory.
- Ever hear of too big to fail? This industry is too big to be messing with. These are the actual national and international money networks through which trillions of dollars move through every day. Mandating poor quality, eliminating all competition, and removing profit incentives will de-evolutionize the flow of money altogether.
The Board will review and allow comments through March 31st, at which point this industry will meet its maker. Yes, it’s that’s serious.
-deBanked
Let’s Play ‘Solve That UCC Filing!’
August 23, 2011
Underwriters have shared with us that it is more challenging than ever to determine if a merchant has an existing MCA balance already. Integrity Payment Systems, a merchant processor in Chicago, recently stated that they have signed on nearly 100 split funding partners. This is astounding given that we only list 24 officially recognized funding firms in our database. Sounds like we could use an update.
The challenge is not so much that WE don’t know who is funding merchants, but rather MCA firms don’t know. We’ll be the first ones to tell you that a retrieval percentage used to be black and white on a merchant statement. If not, you couldn’t miss that big fat UCC-1 lien by a known MCA firm. Those were the easy days when you saw “Secured Party: Fast Capital” and you could phone them up to verify a balance or find out what the scoop was.
Nowadays, there are lockbox programs, ACH debit programs (both variable and fixed payments), and a whole slew of creative structures to make MCA financing possible. The North American Merchant Advance Association(NAMAA) has an exclusive live network of funding activity. That means any NAMAA member can login to make sure that another member doesn’t already have an outstanding balance with the merchant they are about to fund. This database is an invaluable tool to the industry’s success and yet it has one major flaw, there are ONLY 12 members!
So let’s run through a scenario:
——
Mr. MCA Underwriter is analyzing an application and supporting documents. There is nothing being deducted from the 6 months worth of merchant statements. The bank statements look clean. The credit is good. Everything is pointing towards an approval until they do a UCC search. There are a few terminated UCC’s from over 5 years ago by Bank of America, back when bank lending actually existed. There is nothing since then, except for one by a so called ‘ABC LLC’. There is an address for ABC LLC but there is no contact information for them and a web search reveals nothing about their location or what it is. The UCC language is generic and indicates that it is a lien on the debtors property. Mr. MCA Underwriter has seen plenty like it before but asks the merchant about it anyway. The merchant indicates ABC LLC leased them all their equipment including a new oven and freezer. Everything adds up, the deal is approved, and subsequently funded.
Five days later Mr. MCA Underwiter gets a call from an upset individual with accusations that the merchant’s processing receivables already belong to someone else, an ABC LLC. The individual is a reseller of MCAs normally but has funded 5 clients with his own money(a trend becoming more popular. Read here). He funds those deals under a nondescript company, ABC LLC so that nobody will figure out what it is and solicit his client. Mr. MCA Underwriter explains there was no evidence of repayment of a MCA. It turns out the merchant defaulted 7 months prior and hence the 6 months worth of documentation were clean.
—-
For the past few years, it has been very common for resellers to search UCC databases by secured party, thus revealing ALL of the clients that particular secured party or MCA provider has funded in that state. Those clients are then solicited with the appeal of better rates on a MCA and incentives to get bought out. For some MCA providers, this has had a disastrous effect on retention.
ABC LLC successfully protected themselves on that front because no one was able to identify them as a MCA provider. Thus there was little chance their clients would be revealed. However, the strategy backfired when it became unclear that the merchant’s future credit card receivables had been sold.
ABC LLC’s strategy is becoming extremely common. Many MCA providers are resorting to using code names as the secured party to throw UCC hunters off the trail. We list a lot of those code names HERE. Combine that with the fact that hundreds of people are now funding their own accounts and we have a big mess of no UCCs, confusing UCCs, and incorrectly filed UCCs(some funders are filing them in the state they operate in instead of the state the merchant operates in).
Mr. MCA Underwriter is facing a lack of clues and it would not be surprising if the industry starts to see a resurgence in advance stacking. If anyone would like to anonymously share UCC code names that we do not have included in our records, please e-mail them to merchantprocessingresource@gmail.com
As the industry evolves, so will the issues. In our opinion, MCA providers should be plainly clear on the arrangement they have with their clients. No judge is going to listen to a story about code names, misleading UCC language, or why you don’t file at all. A UCC-1 is intended to be a public notice and is meant to be found. Small businesses will benefit by the expansion of the MCA industry but poor use of UCCs will inhibit the rate of growth.
And that’s our 2 cents…
-The Merchant Cash Advance Resource
https://debanked.com/merchantcashadvanceresource.htm
Evidence Merchant Cash Advance is Going Mainstream
August 23, 2011
Need evidence that the Merchant Cash Advance industry has gone mainstream? One of our site’s editors shared this story:
I’ve been working in the Merchant Cash Advance business since 2004. It’s been quite a journey and we’ve really made a difference to small businesses facing capital shortfalls. The growth has been phenomenal and there have been dramatic shifts both in underwriting standards and the characteristics of our clientele.
While I could sit here and write a book about my experience, it’s the phone call I received last week from an old buddy of mine, Bob, that’s worth sharing. Bob is a Venture Capitalist(VC) out in California. He’s a self proclaimed expert of the hospitality industry and has heard a thousand young entrepreneurs pitch him a thousand different ways.
He’s always kept a distance from the Merchant Cash Advance industry and yet is always eager to hear about our tales of success, the achievements of our clients, and our ability to evolve to meet their needs. Last week Bob learned something and gave me a call.
He was sitting in a boardroom in Denver, Colorado. A group of entrepreneurs that made it big with a hotel in Florida, wanted to double their luck and open another hotel there and several in Wisconsin. These were well capitalized individuals and were pitching them for a cool $2 Million.
Bob’s firm seeks equity, so when the hotel group flatly stated that they did not intend to give up any shares, some were ready to declare the meeting over.
The powerpoint presentation flashed to the next slide and the entrepreneurs’ financial proposal was outlined in detail: “In return for $2 Million, you will be purchasing $2,400,000 of our future credit card sales. We will allow you to withhold 15% of each card transaction up until the purchased amount is paid in full.” The withholding percentage would also apply to the location that’s already established.
None of the deciding members of the VC firm like loans too much. There’s something about one payment per month that seems to not work anymore. Too many young businesses see monthly payments as an opportunity to leverage heavily. Having to make one monthly payment to the VCs enables the business to spend money on 20 other projects, all of which carry their own singular monthly payments. Then at month end, the cash gets spread too thin, and suddenly not all of these monthly payments can be met. Sure there are restrictions and terms that are supposed to prevent the business from doing this while the loan is outstanding, but there’s not much anyone can do about it if these terms get violated anyway. By the time the lenders find out, the return on investment is nullified by the cost of fixing it and that’s just if the problem can still be remedied at all. Sometimes all the money is just gone and the lenders have no idea until the day the monthly payment is due.
A purchase of the hotel’s future credit card sales would not classify this proposal as a loan, nor would it rely on a hope that the hotel’s books were properly managed and a payment made on time. While the VCs considered the unique level of security in getting repaid, Bob had a Eureka moment and took a timeout from the meeting to call me.
“It’s the pay as you go aspect of it that I like. The pace at which we get paid purely depends on the sales volume of the business. Sales up, we get paid more. Sales Down, we get paid less. Good for them, Good for us. If our credit card processing partner is withholding 15 percent of the sales before they’re deposited into our client’s bank, the hotel guys won’t face liquidity issues to meet our payments because we’re already getting paid. They can spend what’s deposited and we don’t have to get nervous on the 29th of the month.” and on and on Bob went, to which I replied, “Yes buddy, some of us have figured this out years ago.”
While $400,000 was a little bit below their desired return on investment, the VC firm put the entrepreneurial hopefuls up in a hotel for a weekend while they convened. There was an intense debate on the subject of equity vs. the purchase of future sales. One triumphal argument was that since hotels conduct transactions on a daily business, they would be collecting back on their investment every business day. That would allow the VC firm to reinvest those funds immediately.
Without completely spilling the beans on a negotiation that included non-disclosure agreements, a compromise was reached. The entrepreneurs left with a deal where they retained 100% of their equity and a structure where payments are made only at the pace that they are able to generate sales. It may have cost them more than what bank loans were going for in 2005, but like Bob and the other VCs made bluntly clear to them “What’s a bank loan? I don’t know any banks that are actually in the business of lending anymore.”
Bob could tell you that he’s been in the Venture Capital business since 1994 and it has been quite a journey. VCs have really made a difference to entrepreneurs with capital shortfalls. The growth was phenomenal until things started to change. The sale of future credit card sales from business to investor is a true mutually benefitting transaction.This structure is not only gaining popularity, but also solidifying a permanent footing in the financial transaction world altogether.
Don’t be surprised if John Doe business owner shows up at a local Bank of America branch in 2014 asking for a loan and this happens: “A loan, What’s that?” replies the financial officer. “Based on your merchant processing history, we’d like to purchase $30,000 of your future credit card sales.”….
-The Merchant Cash Advance Resource
https://debanked.com/merchantcashadvanceresource.htm
