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
Credit Card for Business Owners? Forget it!
August 23, 2011Posted on April 4, 2011 at 9:59 PM
“Anyone that owns a small business is automatically declined,” revealed an inside source at a major credit card issuing bank. A friend of ours that we’ll call Dave (name changed), is an underwriter in charge of approving credit card applications. We were discussing tighter credit standards for consumers, an issue we felt to be of little relevance to business credit, until it got interesting.
According to Dave, and the bank doesn’t make this information public, small business owners and the self-employed are issued automatic declines for cards. “Just to get a simple credit card?”, we asked. Dave explained that their data indicates consumers are less risky than the self-employed. We dug deeper and were told his:
- Employed consumers are more likely to have a fixed budget and steady income.
- Business owners experience continuous ups and downs. During a down, they are more likely to supply their employees with their steady paychecks and skip out on the credit card payment until cash flow improves. If they did it the other way around, they would lose their employees and the business wouldn’t last.
- Employed consumers are better equipped to prove their income since they have verifiable documents such as W-2s or paystubs.
- Business owners are less able to verify their income, more likely to show losses on their tax returns, and less willing disclose their true financial status. Though this may serve them well come tax time, it works against them on credit applications.
But that shouldn’t discourage small business owners from applying. Dave concedes they’ll consider extending credit to businesses open longer than 20 years so long as the applicant has above 720 credit. Ouch!
The Ugly Face of Business Credit Cards
So if you don’t make the cut, or even if you do, credit cards aren’t so attractive these days anyway. The Credit Card Act of
2009 made major changes for consumers but NONE for businesses. In an article by creditcards.com, titled “10 ways business credit cards are different“, is a list of many dangers to look out for. If you’re a business owner, these are the pitfalls:
- A teaser rate can be as short as 6 months, 3 months, or even 1 day. That attractive 2% rate can be increased on a whim as soon as you sign up or start using the card.
- There is no minimum amount of time to notify you of a payment due. Consumers are required to receive their bill at least 21 days in advance of the payment due date. For business owners, you might not get the bill until the day before!
- Your due date can change every month. Don’t get too comfortable paying on the 30th every month, your card company can switch it up to throw you off and entrap you with late fees.
- There are no late fee penalty limits.
- Payments are applied to the balance with the lowest interest rate first, instead of to the highest interest rate like consumer cards.
- The business owners are usually personally liable for the business card’s debt.
What’s the Alternative?
It’s bad news galore but there’s light at the end of the tunnel. A unique financial product known as a Merchant Cash Advance (MCA) offers all the positive features of a credit card and spits out the negative. Any business that accepts credit/debit card payments from their customers is eligible. Different than a loan, a MCA provider purchases the future card revenues of the business in exchange for a lump sum of cash today. The benefits and differences are truly astounding.
- Good credit is not necessary.
- Funds can be received in under a week. (You can barely get a credit card that quick)
- A business can qualify with as little as 3 months in business.
- The “rate” or the cost of the funds can’t change. Once the cost of funds has been established and executed, it remains the same. The balance does not increase with time nor is there any element of interest.
- Because the balance is only reduced by withholding a percentage of card sales, less funds are withheld in slow periods, and more in strong periods. This tackles the issue of business ups and downs.
- There are usually no personal guarantees.
- Additional funds can be made available before the balance has been reduced to zero.
- Personal income does not need to be verified, just the monthly credit/debit card sales volume.
- Your credit can’t be negatively affected since it is not a loan.
Becoming a First Choice Option
A Merchant Cash Advance is not a last resort method of financing and is quickly becoming a first choice pick in the business world. Certainly better than business credit cards, they also rank better than SBA Loans. [SBA Loan vs. Merchant Cash Advance]
Before you fill out that credit card application, just remember what our friend Dave said. “You’re automatically declined.” Say goodbye to the card issuing naysayers and SBA Loan ploys. The lending system is too far broken to be aggravated about it anymore. If your business needs capital, you can simply sell your future card sales in exchange for cash today. Check out the true direct funding sources in our directory and walk away with flexible financing your business can depend on.
– The Merchant Cash Advance Resource
Merchant Cash Advance Statistics for First Quarter of 2011
August 23, 2011
The results are in! The Merchant Cash Advance Resource has researched and released funding statistics for the 1st quarter of 2011. Here’s what we found:
- Funding in California is on pace to drop by a whopping 45% in 2011.
- Funding is on pace to increase in the remaining states by about 2.5%.
- The quantity of transactions is on pace to match 2010’s levels.
- There are more small independent funding providers but the bulk of transactions are done by a few major veteran firms
- An average deal funding size of $25,000 may not be appropriate. Most of the largest providers have ramped up “starter advance” operations, which normally involve transactions that range from $1,000 to $10,000. Therefore the average deal size is being averaged down and this will probably cause overal funding output in 2011 to be lower than 2010.
Take a look:
Merchant Cash Advance Statistics for First Quarter of 2011
– The Merchant Cash Advance Resource
MasterCard interchange rates rise. What does that mean?
August 23, 2011
MasterCard recently released announced their Interchange costs effective as of April 2011. The subject of Interchange has been a hot topic ever since Debit Card fees were brought into the crosshairs of the 
Wall Street Reform Act. Interchange, for those that don’t know, is not paid to MasterCard, nor to the acquiring bank that grants a business the ability to accept payment. It is paid to the banks that issue the cards. For instance if a customer makes a purchase with their Wells Fargo MasterCard, the Interchange fees are directed to Wells Fargo. Pretty snazzy huh?
The new Interchange structure will not necessarily affect all businesses since there are hundreds of cost levels and only some have changed. The system is not easily interpreted, nor easy to break down. The new pricing chart alone is 144 pages. (Download April 2011 MasterCard Interchange Chart). We fell asleep on page 4, so fortunately our friends at the Green Sheet clued us in. The increases worth mentioning are on the World Merit III category and apparently “World Merit III can be 20 to 30 percent of a retail merchant’s MasterCard transactions.” It will rise from 1.73% + $0.10 to 1.77% + $0.10.
Other changes include:
- World Full UCAF (the rate for a world card e-commerce credit transaction conducted with merchant security and cardholder verification) will increase from 1.83% + $0.10 to 1.87% + $0.10.
- World Merchant UCAF (the rate for a world card e-commerce credit transaction conducted with merchant security only) increased from 1.73% + $0.10 to 1.77% + $0.10.
- The Supermarket Base and Enhanced Supermarket Base rates will increase from 1.48% + $0.05 to 1.48% + $0.10.
Is this payback for the Wall Street Reform Act or a direct result of it? Hardly, in fact this is a normally scheduled increase. Visa and MasterCard typically make updates on a semi-annual basis. According to MasterCard, Interchange pricing is determined in the following way:
“MasterCard interchange rates are established by MasterCard, and are generally paid by acquirers to card issuers on purchase transactions conducted on MasterCard cards. Interchange rates are only one of many cost components included in a MDR, and are a necessary and efficient method by which MasterCard maintains a strong and vibrant payments network. Setting interchange rates is a challenging proposition that involves an extremely delicate balance. If interchange rates are set too high, such that they lead to disproportionately high MDRs, merchants’ desire and demand for MasterCard acceptance will drop. If interchange rates are set too low, card issuers’ willingness to issue and promote MasterCard cards will drop, as will consumer demand for such cards. In response to these competitive forces, we strive to maximize the value of the MasterCard system (including the dollars spent on MasterCard cards, the number and types of cards in circulation, and the number and types of merchants accepting MasterCard cards) by setting default interchange rates at levels that balance the benefits and costs to both cardholders and merchants.”
Accepting card payments may seem expensive but how much less would customers spend if they only had the cash in their pocket? Probably a lot less. The Interchange fees pay for themselves and it’s up to the business owner to find the most reliable, cost effective acquirer. Good luck!
– deBanked
I want my credit card sales now! Why the delay?
August 23, 2011
One of our readers e-mailed us wondering why there was a delay from the point of the sales transaction to the time the proceeds are deposited into his bank account.
An Excerpt:
I’m curious if there is any imaginable justification for processors/merchant banks delaying card payment to merchants over the weekend. My thursday sales are deposited on Monday, Friday’s on Tuesday — four day’s float.
I don’t actually follow your blog regularly, so if you got the inclination to write about this, an email would be much appreciated so I don’t miss it.
Thx,
Steve
======================
Hi Steve,
Don’t blame your processor/merchant bank. They are merely 1 party out of many involved in a single transaction. We’ll divide this into 7 categories for the purpose of this explanation:
- Customer
- Customer’s card issuing bank
- Business
- Business’s merchant processor
- Business’s checking account bank
- The acquiring bank
- The payment network
- A customer comes into your store with a MasterCard credit card he got from Bank of America. He makes a purchase for $500.
- Your merchant processor passes that up to the Acquiring bank they are sponsored by. (An acquiring bank is the bank that allows them to be a payment processor. They have the permit to use the MasterCard and Visa Networks.)
- The acquiring bank uses the MasterCard network to trace the payment to Bank of America. They will then find out from Bank of America if the card information is valid, if the account is active, if there is a freeze on the account, whether or not they are under their spending limit, and then request for it to be approved. Bank of America will then reject or accept the transaction and notify the acquiring bank, who will then pass it along to your merchant processor.
- Your merchant processor will then determine if the sale was processed in a manner that is allowable by your merchant account contract. Is $500 a normal sized transaction or suspiciously high? How often have you charged this customer? Did you swipe his card or key in the numbers? Is the way you did it considered normal for your business type? Did it prompt for a zip code when you entered the info and if so, did you get the answer right or wrong? All these factors are considered by your merchant processor before approving the sale. Most of it happens by computer, but some by human audit.
- Once the transaction is approved by all parties, they initiate a wire. Only Federal Reserve wires are instant and they cost a lot of money to send. So rather your merchant processor transfers your sales via the Automated Clearing House (ACH). Those sales never post the same day and the time they post to your account the following day depends completely on what time your bank chooses to accept the wire. Your bank has the ability to accept or reject incoming wire transfers. How large is this incoming transfer? Has there been suspicious activity on the account? Is the customer’s account seriously overdrawn with unpaid outstanding fees? This is decided mostly by computer but also by people. Once approved, that original $500 sale is finally available for you to spend.
So don’t fault your merchant processor. They’re at the mercy of the payment network and banking systems. That being said, next day deposit DOES exist but not everyone can offer it. If the acquiring bank that allows you to accept card payments is also the same bank where you keep your business checking account, then chances are you will already have next day deposit by default.
In regards to the weekend being included in the delay time. If the banks are closed, then the banks are closed. There is nothing you can do about that. That’s the American banking system. Hope that helps!
– deBanked
How to Start a Merchant Cash Advance Company
August 23, 2011Originally published: 4/11/2011
One of our readers e-mailed us this question:
I would like to open a MCA company. What do I need and where do I apply ? Do I need permit, license or what? Where can I get the help and info?
– From: J.H.
=============
J.H.,
Are you looking to be the actual funding provider or a broker?
If you’re looking to be the provider, you should spend some time brokering the deals first. You need to get your feet wet and get the hang of what the business is all about. You will not the have the security that a bank has, such as collateral or a fixed payment schedule.
A summary of basic terminology and processes: https://debanked.com/apps/wiki/merchant-cash-advance-wiki
Here’s what other companies require and analyze: https://debanked.com/application%20process.pdf
You need to ensure that your contracts, agreements, applications, and marketing materials are consistent with the transaction being a purchase of future sales, not a loan.
Additionally, you don’t need to start a funding company from scratch. There are Merchant Cash Advance funding networks such as Colonial Funding Network that can provide everything you need, including systems, underwriting, and even a portion of the capital itself. You make the deal, they service the account.
We hope that helps.
– The Merchant Cash Advance Resource
Interchange Regulation and Reduction: Proof it will fail
August 23, 2011Originally Published on April 16, 2011.
As proponents and opponents debate debit card fee reform, few seem to be aware that interchange regulation has been
implemented before and the results were disastrous. In 2000, The Reserve Bank of Australia (RBA) published a 90 page report (A STUDY OF INTERCHANGE FEES AND ACCESS) that outlined their assessment on card payment interchange rates and the impact. It’s central thesis was this: “The study is concerned with the economic efficiency of these [payment] networks. Most importantly, are they delivering the best possible service at the lowest cost to end-users?”
Eerily similar to the U.S. Federal Reserve’s 2010 analysis, the RBA reached the following conclusion: “While a pricing system based on interchange fees still seems to be the most practical arrangement for the credit card network, the levels of interchange fees are high relative to costs and fees of this magnitude are not essential to the continued viability of this network.”
Bolstered by the findings, consumer activitsts groups pushed for regulation and by 2002, the RBA announced that 4 party payment networks such as those operated by Visa and MasterCard would need to make serious changes. Lobbyists groups fought to rally against regulation but came up short. In 2004, strict measures to limit costs became law and with that a series of unintended consequences.
The U.S. should examine the outcome in Australia, a country whose values and economic system is much like our own. 3 years before the Durbin Amendment came to pass, MasterCard did just that. In early 2007, it researched the impact and side effects of regulation in a report titled “Interchange Regulation: Lessons From the RBA Intervention in Australia.” We reviewed the rules that most closely resemble those of the Federal Reserve and have republished MasterCard’s findings below:
Regulatory Measure #1: Reduction of Interchange Costs
Intended Consequence #1: Merchant fees would be reduced, which would then be passed onto consumers, resulting in lower prices for all.
Actual Outcome: 70% of merchants did not realize that any changes had been implemented and thus did not make an effort to pass on savings to consumers. Annual reports actually showed that retailers pocketed the difference instead. This issue has been largely debated in the U.S., with many retailers openly stating that they would not pass on any savings. Proposed New Debit Card Rules May Not Help Consumers Much
Intended Consequence #2: Debit card usage expands while credit usage declines.
Actual Outcome: Debit card usage declined instead. This appears to be the same path the U.S. is on already as implementation of the law approaches. JP Morgan Chase, Bank of America and Citigroup Might Limit Debit Card Purchases
Regulatory Measure #2: Elimination of The “No Surcharge” Rule
Intended Consequence: Merchants would judiciously surcharge for accepting credit cards; and in so doing, make credit usage less attractive than debit usage; which would in turn encourage higher debit card usage.
Actual Outcome: Where surcharging actually occurred, it appeared to be mainly by brand, applied in a way that is not disclosed to consumers, and done mainly outside of retail markets. As of July 2010, the U.S. implemented a similar law under the Durbin Amendment that is already in effect. See an article we wrote on the subject back in December titled “Take Your Rewards Card and Get Out My Store!.”
The outcomes seem to answer questions that we in the U.S. are spending too much time debating. Regulation in Australia was a failure. “Contrary to the RBA’s intention of making the payments system more efficient and increasing competitive intensity, the exact opposite has happened in Australia. In addition, the payments system has actually become more expensive for the average cardholder. While there is no evidence of retail price reduction by the merchants (so confidently predicted by the RBA), there is widespread acknowlegement that issuers have actually increased fees to cardholders to compensate for lower interchange fees since the RBA regulation.”
Consumer rewards programs are already disappearing as reported by CBS News. “Banks to strip debit card rewards; What next?” This is the exact sequence of events that happened abroad. MasterCard addressed this in their report, but did not offer any hard statistics. “For the most issuers, the rewards programs have been downsized, and in some instances very substantially.”
Many believe the shortsighted push for reform has less to do with savings for retailers and consumers and more with to do with a desire for Americans to punish the banks for their role in the financial crisis. The banking industry employees millions of people so the harm intended for rich CEOs is more likely to affect the jobs of the middle class.
There is still hope. A few Senators have proposed the Debit Interchange Fee Study Act of 2011, which seeks to delay regulation for two years. This will allow the Federal Reserve to properly assess the goals they hope to achieve, come up with a better plan of action, and study the likely consequences.
While two years seems fair, we can’t help but point out the chain of events in Australia should be all the evidence we need. Ignorant disdain for the electronic payments industry is a major distraction from the real issues facing our country today. The unemployment rate, the national deficit, and the educational system all lose our full attention every time we quip about debit card fees.
Customers spend more when they pay with plastic. Consumers don’t need to carry bundles of cash in their pocket. Banks employ millions of workers. Everybody already wins. deBanked’s advice? Let’s move on to fix a different system that’s actually broken. We’ll all be better off.
– deBanked
Your Credit Card Processor is on the Hook for illegal Sales
August 23, 2011
A long, long time ago when I first got into the electronic payments business, I encountered a tricky situation. One of my clients owned a small retail store in a mall selling African art, sculptures, posters, and merchandise. Looking over the previous few statements, it was obvious their customers paid face to face, their transactions ranged from as low as $2 to as high as $150, and that they conducted about $10,000 in sales per month. I was happy to have saved them a few bucks and made my way on to the next client.
Three weeks later I was called into the boss’s office. He stared at me intently and asked in a very serious tone “What do you know about this art store?” I replied with what I knew but was confused as to what the fuss was about. That very same art store had run three transactions for $7,000 in one day, all with foreign credit cards that were hand-keyed into the machine. Red flags went off and the processing account was frozen. The sales were far in excess of $150, he processed double what he would normally do in a month all in one day, the transactions were not conducted face to face, and the cardholders were not in the U.S. It didn’t look good.
I, with my boss, called the art store to determine what had happened. The owner explained that his brother owned an adventure touring business in Kenya. Since he didn’t have the ability to accept credit cards, he would occassionally take the card information from customers, call his brother in the U.S. and have him run the transactions for him at the art store. Once the deposit cleared, the proceeds would be wired back to his brother in Kenya and the customers would be told that their adventure tour was approved.
That’s not exactly art, sculptures, posters or merchandise now is it? We didn’t catch it because they hadn’t done this in any of the previous three months statements they supplied to approve the account. To our surprise, the banks reached the card holders who confirmed the transactions were legitimate and they had actually intended to pay $7,000 each for tours in Kenya. The only problem was that this retail store merchant account wasn’t approved for such use, nor could sales be processed by one business on behalf of another.
The result was termination of the account and a crash course for me in the school of electronic payment schemes.
All that was nothing compared to the shocking message online poker players received when trying to access fulltiltpoker.com and others on April 15th. A screenshot is below:
Online gambling is illegal and U.S. based banks are not allowed to process payments for gambling. So how did online poker sites accept card payments for over a billion dollars? They lied to the credit card processors about what they did or induced them to commit fraud in order to reap big profits.
As reported by Forbes, the scheme was very complex. the poker companies created multiple fake online shopping sites that supposedly sold flowers, pet supplies, and other items. So when a gambler used their Visa card to load their poker account with $100, the poker company would create a false invoice that showed $100 worth of flowers had been sold and shipped to the customer. The scheme was so efficient that it remained undetected for years.
As stated on Forbes “Federal prosecutors claim that the men behind PokerStars, Full Tilt and Absolute Poker, relied on highly compensated payment processors who lied to U.S. banks about the nature of financial transactions they were processing.” Shame on them.
I bet my old boss is shaking his head right now after hearing this on the news. No doubt all the new sales representatives are in his office, being stared at intently and spoken to in a serious tone. “What do you know about these poker sites you’re hearing about?” Confused by all the fuss, I’m sure they’re learning just like I did, that payment processing is a very, very serious business. Keep it clean and play by the rules.
– deBanked
