Square is making a jump across the pond to sell its service in the UK.
The payments company incorporated Squareup Europe Ltd in London early last month.
The six year old company started by Twitter chief Jack Dorsey plans to provide payment services in Britain which it began testing last month, Reuters reported.
With a presence in the US, Canada, Japan and Australia, the company provides payment solutions to merchants through its mobile point of sale device on iPhones and iPads.
In the US, Square made the natural transition to offering loans to its customers. In Q2, Square reported a loss of $97 million but raised projections for 2016 revenues from $600 – $620 million to $615 – $635 million. With low customer acquisition costs, Square is well positioned to become an easy choice for merchants who already use the product. The company made 23,000 advances for $153 million in the first quarter before moving on to ditch the MCA program for business loans.
I’ll say it for the hundredth¹ time, the advantage of split-funding is the ability to collect payments back from a small business that has traditionally had average, weak, or poor cash flow. Let’s put that into perspective. There is a distinct difference between a working business with poor cash flow and a failing business. A failing business is typically not a candidate for merchant cash advance or similar loan alternatives.
Poor cash flow could be the result of paying cash up front for inventory that will take a while to turn over. A hardware store with a healthy 50% profit margin may be able to turn $10,000 worth of inventory into $15,000 in revenue over the course of the next 90 days. The only problem is that the full $10,000 must be paid in full to the supplier on delivery.
Enter the merchant cash advance provider of old that discovers the hardware store has had a fair share of bounced checks in the past, mainly because of the timing of payments going in and out. Cash on hand is tight, the credit score is average, but the profit margin is there. Most lenders would take a pass on financing a transaction that carries legitimate risk such as this one does, that is until the ability to split-fund a payment stream became possible.
Advocates of the ACH method tout that it’s just so much easier to set up a daily debit and scratch their heads and wonder, “man, why didn’t we think of just doing ACH in the first place?”
The thing is, people did think of it and they concluded that for a large share of the merchants out there that needed capital, it didn’t make financial sense to try and debit out payments every day with the hope that there would always be cash available to cover them. Banks have had a hard enough time collecting just one payment a month, so what makes 22 payments in a month so much more likely to work?
I’m not inferring that there is something wrong with the daily ACH system that has taken the alternative business lending industry by storm. There’s plenty of situations for which that may be the best solution, especially for businesses that take little or no credit card payments. My point is that the split-funding method isn’t going to shrivel up and die. It’s here to stay. So long as businesses have electronic payment streams, they will be able to leverage them to obtain working capital.
When it comes to splitting card payments however, it’s important for a business to have faith in the payment processor. Reputation, compatibility with payment technology, and the assurance that the business will be able to conduct sales just as it always has are important. If you’re a funder, ISO, or account rep, it’s your responsibility to make sure that those three factors are addressed. A lot of processors are willing to split payments but they haven’t all made a name for themselves in the industry. Integrity Payment Systems (IPS) comes to mind as one that almost everyone works with and I’ve been in touch with Matt Pohl, the Director of Merchant Acquisition of IPS for some time. He’s been nice enough to share a little bit about what makes a split partner special, and what has made them particularly stand out in the merchant cash advance industry.
Clearly, the role of the credit card processor has diminished over the last couple years when it comes to merchant funding. ACH/Lockbox models have become more prevalent which created a sales mindset that switching a merchant account was more of a hindrance than a necessity. Some argue the decline in profit margin on residuals, due to price compression, made it no longer worth the time and effort to make an aggressive pitch to switch the merchants processing. ISOs also argue that too often merchants have reservations to switch processors because of previous bad experiences, cancellation fees, or because they simply know its not necessary in order to be funded. This is where it’s important to have the RIGHT split partner, not just any split partner
What makes Integrity Payment Systems a “special” split partner is the fact we control the settlement of the merchants funds, in house. IPS is partnered with First Savings Bank (FSB), which allows us a unique way of moving money. Because of our state-of-the-art settlement system and direct access to FSB’s Federal Reserve window, we eliminate the necessity of having layers of financial institutions behind the scenes that merchants funds typically filter through. This is a HUGE benefit to cash advance companies for several reasons. First, we implement the fixed split % when we receive the request, in real time. This allows the deal to be funded quicker. Secondly, since we handle the settlement process we have access to the raw authorization data which allows us to provide comprehensive reporting on a daily basis from the previous days activity. But also we can do true next day deposits, including Friday, Saturday, and Sunday funds available for the merchant on Monday morning. This is especially valuable when selling to restaurants/bars, or any other industry with a lot of weekend volume. Lastly, IPS makes outbound calls to merchants, on behalf of the sales agent and cash company, to download and train the merchant on their terminal. A confirmation email is sent to the agent which includes any batch activity so the deal can fund.
As an added example of this, on the last week of every month, the merchant boarding and sales support team fully understands that our MCA partners have monthly funding goals they need to reach. The IPS team goes above and beyond to ensure merchants get setup properly in time so those accounts can be funded before the month is over. We have a motto at IPS that the sales force are our #1 customers, and nowhere is that more apparent than by the way we take over all the heavy lifting once the agent gets the signatures on our contract. We firmly believe that by helping the agent by taking over the boarding process, that this will allow them to do what they do best, sell more deals!! A lot of competitors expect the agent to be involved in the boarding process, and that’s valuable time that takes them away from selling.
IPS has opened their doors to every MCA company that wishes to have an exceptional split funding partner/processor. We have all the necessary tools to provide this service the right way, and we want the opportunity to earn the business of every working capital provider out there. You don’t have to listen to a sales pitch from me, because I strongly believe that our reputation in the cash advance space speaks for itself. We would love the opportunity to talk to any MCA provider about a few additional services we offer utilizing our settlement system that will allow ISOs to fund more deals.
One thing I can personally attest to about Integrity is their human factor. You can actually meet some of their team and see inside their office in the fun youtube video below:
Getting deals done
Ultimately, the financing business is about getting deals done and there are countless small businesses that just won’t ever be a candidate for ACH repayment. Heck, for many years the merchant cash advance industry wasn’t even a financing industry of its own, but rather it was one of many acquisition tools for merchant account reps. (See: Before it Was Mainstream). Technically it still is. You don’t want to sign up a merchant for processing and then have to move the account because the processor doesn’t split or because there is no dedicated customer service. I’ve been in that situation before personally and it’s a nightmare.
There’s a reason this website which is dedicated mainly to merchant cash advance is called the Merchant Processing Resource. You can’t know everything about cash advance without knowing about merchant processing. Get acquainted!
If you’d like to read the lighter side of Merchant Cash Advance History, you just might want to check out MCA History in Honor of Thanksgiving. 😉
¹ I said it for the 99th time on the Electronic Transactions Association’s Blog in Preserving the Marriage Between Merchant Cash Advance and Payment Processing
Running your funding business off of excel spreadsheets or clunky old software that wasn’t meant for the Merchant Cash Advance (MCA) market? You might want to consider using something that was both made and used by MCA people. A couple weeks ago, Benchmark Merchant Solutions gave me a private demo of their all-in-one back end system to manage incoming and outgoing payments for both split-funding and ACH deals.
It had a lot of nice features and certainly would make it possible to manage your books with ease. The reports are very easy to produce, read, and make sense of. Alerts can be set up for merchants that have not processed for any gap of time you set. ACH rejects are automatically recorded and flagged.
At the current moment, the only direct split-funding integration it has is with Benchmark Merchant Solutions. They will be directly integrating with other processors in the coming month. The system uses a proprietary ACH provider.
Contact: Michael Jaffe or Benny Silberstein for more information.
Mike.Jaffe@SwipeBMS.com | BennyS@swipebms.com
Benchmark Merchant Solutions is a registered ISO and MSP of Deutsche Bank AG, New York. This is not a paid ad or review. The Benchmark team is run by solid folks.
Having issues with your books? Make it easy with MCA Track.
SafeKey is a nice little feature that American Express is now offering. A password is required in order to make an online purchase with the card. My question is, why isn’t this mandatory for all credit card purchases with all cards? 99% of the time, no one questions whether or not I am the person on the card I’m using. No wonder credit card theft is such a big business and real threat.
The History of Merchant Cash Advance
Before it was mainstream, it was kind of mainstream. Merchant Cash Advance (MCA) is not new or even relatively new and it definitely isn’t a byproduct of the 2008-09 financial crisis. In fact, in 2007 some people thought the best days of the industry were already behind it. In an August 2007 issue of the Green Sheet, Dee Karawadra expressed reluctance to write about MCA because he believed the subject was stale.
When a GS Online MLS Forum member suggested I write an article on cash advance, I explained my research and said, “I think that boat has come and gone, and I missed it.”
Dee’s article is an excellent snapshot of the feeling of 2007. Excitement was running wild and bold predictions were being made. A lot of the same questions being asked today were asked and answered back then. Those employed in the industry that do not take the time to read up on MCA history are at a disadvantage. And one thing this industry did a great job of, was chronicling all of the events that unfolded.
The Green Sheet
Prior to 2007, The Green Sheet’s forum was the only source for information. It is still filled with threads going back as far as 2003 on the subject. The discussion seems to begin by one user posing the question:
Who thinks a cash advance program, (a loan) on future credit card volume will help themselves get more deals and their merchants operate better?
By 2004, MCA was all the rage. Competition began to nibble at AdvanceMe’s monopoly, a monopoly they were rightfully entitled to because they owned the patent on split-funding. Many chose AdvanceMe anyway simply because they had already established a name for themselves.
You might want to check out AdvanceMe. I think they have a superior product and service as well as more money too … that you will be better served by AdvanceMe than you would by any of the other Cash Advance companies of which their [sic] are not that many.
August 19, 2004
And many weren’t even sure what they were selling exactly. Merchant Cash Advance had not yet even been coined as a term:
quick show of hands as to what title you would place on this product… A) Factoring of receivables B) Cash Advance C) something else… Just for the record – I don’t know what to honestly call it.
August 20, 2004
Those that responded called it an unsecured loan, factoring, merchant funding, and cash advance. Some that weren’t even familiar with the concept appeared completely lost in the conversations. It was common to confuse cash advance as meaning to take a cash advance out on an actual credit card. The need for a universal term was badly needed. An industry couldn’t progress forward if no one even knew what the industry was.
A Way to Build and Strengthen Merchant Account Portfolios
But on the subject of giving money to merchants in exchange for more back, programs offered by AdvanceMe and Rewards Network were compared on the merit of the cost to the customer. Since reps viewed MCA as an acquisition tool to obtain merchant accounts or retain them, commissions and renewals were rarely discussed. They were basically a non-factor and some folks from this era carried this mentality straight into the financial crisis age of MCA. Funders advanced merchants not to make money on advances, but to build their own processing residual portfolios and to sell or lease more POS equipment. The loan, cash advance, merchant funding, or whatever it was of the day was a tool to drive business, not a business itself. Right before and during the financial crisis, funding companies began to streamline their focus and suddenly it became all about funding and nothing else.
The MCA industry has remained in that state for about 5 years and some are starting to think that it’s time to evolve. A poster on DailyFunder.com recently ranted that his company can’t grow unless it diversifies, coincidentally citing that MCA would be better served as an acquisition tool. If this happened, history would repeat itself.
This should be a lesson to the MCA industry which is trying to make a product out of something everyone else views as an acquisition tool. Are we just lenders or diversified businesses? We are the former. As such, prices will never come down, margins can only get slimmer.
In 2004, when the MCA industry was joined at the hip with payment processing, becoming a dedicated funder was a way to stand out from the crowd. But perhaps now that the market is saturated with dedicated funders, it is getting more difficult to build a presence in the market.
Behold! Merchant Cash Advance!
In May 2005, The Green Sheet was forced to label the product when it published a story about Merchant Cash Advances. We’re not claiming that this article coined the phrase, but it is a good approximation of when it started to be called such. A few sentences in, they actually disclaim their own term.
There isn’t even consensus on what to call the product, except that it is most definitely not a loan.
The three word term was not even used in the Green Sheet forums until October 2005, and then not again until March 2006. Soon after, that became the term of choice.
The One and Only MCA Blog
As MCA financing took on a life of its own outside of payment processing, the industry turned to a blog to learn about the unfolding events. From 2007 to 2010, David Goldin, the CEO of AmeriMerchant wrote weekly updates about his firm and experiences. He wrote about his harrowing battle with AdvanceMe. After invalidating their patent, he opened the floodgates for any funder interested in utilizing split-funding. He offered honest opinions and had excellent foresight, forever documenting what it was like for the MCA industry during the financial crisis. Anyone that didn’t get to experience that time firsthand should read it start to finish.
As Goldin’s company grew, he turned his focus to other matters. The North American Merchant Advance Association (NAMAA) was formed on April 29, 2010, a non-profit alliance designed to bring peace and order to an industry that had gone through tremendous turmoil in the last few years. He all but abandoned the blog afterwards.
Free Info for All
Where Goldin left off, I resumed by starting a credit card processing/MCA blog in July 2010 named Merchant Processing Resource (MPR). At that time, I was an MCAer that had toiled away as both the head of an underwriting department and as an account executive. The blog covered a lot of topics and was targeted towards business owners and ISOs simultaneously. I believed there was a vast amount of data that newcomers didn’t have about MCA and set off to share as much as I could without self-promoting a product or service.
By December, my web host (a very simple blog site named Webs.com) informed me that the website was using too much bandwidth for the current package. I upgraded it only to encounter the same problem again 9 months later. The site was forced to transfer to a real host in order to grow and be able to handle the surging stream of visitors. Webs.com’s format was not conducive to transfers and as a result, every article written prior to August 23, 2011 was time-stamped with that very date.
Three History Books
To recap, the Green Sheet and their forums were the places to follow MCA from 2003 to 2007. Goldin’s Blog narrated the story from 2007-2010 and MPR has carried the torch since then. If we go further back, and we believe everyone should, you’ll find that AdvanceMe kind of existed in a world of their own in the late 1990s. In 1999, they funded $9 million. What they were funding annually increased to $200 million by 2006, a time when they had already amassed more than 14,000 clients. These aren’t exactly the humble beginnings of a new industry. These are serious numbers that could arguably support the theory that MCA was already well into the mainstream.
MCA in Black and White
MCA information was publicly available nearly two decades ago via the U.S. patent office. Barbara S. Johnson is listed as the official inventor of split-funding AKA Automated Loan Repayment in documents filed in 1997. There were no forums or bloggers to explain how it worked. There was only this:
Systems and methods for automated loan repayment involve utilizing consumer payment authorization, clearing, and settlement systems to allow a merchant to reduce an outstanding loan amount. After a customer identifier (e.g., a credit, debit, smart, charge, payment, etc. card account number) is accepted as payment from the customer, information related to the payment is forwarded to a merchant processor. The merchant processor acquires the information related to the payment, processes that information, and forwards at least a portion of the payment to a loan repayment receiver as repayment of at least a portion of the outstanding loan amount owed by the merchant. The loan repayment receiver receives the portion of the payment forwarded by the merchant processor and applies that portion to the outstanding loan amount owed by the merchant to reduce that outstanding loan amount.
The Automated Loan Repayment kicked off an industry that would evolve significantly over the next 15 years and yet a payment processor was already doing this to fund merchants as far back as 1992. Litle & Company didn’t call it MCA. That name didn’t even come about until around 2005, but they were the first MCA funder in the country. The makes MCA more than 20 years old.
Been There, Done That
We may have closed a chapter in 2012 when it became evident the product had finally graduated from the minor leagues, but there is a forever long story that preceded it. MCA financing existed before some account reps were even born. Sadly some of these kids talk to prospects today without really even knowing what they’re selling. Then again, in 2004 no one knew what the heck they were selling either. There is still technically no formal name especially since split-funding is no longer the standard. If the poster in 2004 posed the same question today about what to label this product as, there would be just as much disagreement. Business cash advance, merchant financing, ach advance, cash flow loan, ach funding, merchant cash advance, unsecured loan, merchant loan. Nobody really agrees and nobody really even does it the same way as everyone else. It’s all MCA to me and I’ll keep reporting on it for as long as it lasts. And as long as it keeps reinventing itself, there will always be a chance to get in early. Those that read up on the past or were there and experienced it firsthand have a major advantage. History repeats itself in MCA.
You know those butterflies you’re getting about 2013? They were felt before in 1998, 2004, and 2007. MCA was kind of mainstream before it was mainstream. 2012 ignited a spark and some of us know what’s going to happen next. As for the rest of you, brace yourselves. It’s going to be more crazy than you can imagine.
Many small businesses that weren’t able to utilize traditional credit card processing services are delighted to find that there are now applications where they can accept credit card payments using a smart phone. However, before you jump on the bandwagon, it only makes sense to do your due diligence as to how to avoid credit card fraud. Just because you can process that card via your cell phone doesn’t necessarily mean you should. You don’t want to get caught holding the bag (and paying for) products after finding out you’ve been “had.”
As a matter-of-fact, not matter what services or devices you use to accept credit cards, as a small business owner you need to institute policies and practices to avoid credit card fraud. Here are some of the basics:
When accepting cards in-person at the point of service.
It is amazing at how just asking one simple question, “Can I see some valid ID?” can make all the difference. Always ask for a valid form of picture identification (such as a driver’s license) before accepting a credit card. If the customer isn’t able to provide ID, then DO NOT process their payment. This means asking for the card and identification BEFORE it is swiped. When you have both the card and identification in hand, check the back of the credit card for the customer’s signature and match that signature with the one on their valid ID. Again, if they haven’t signed their card, or the signatures don’t match, don’t process their payment.
Many small business owners may have an issue instituting the above policies with repeat customers if they have not used the policy previously. Now, this is going to be a decision each individual owner needs to make. You may indeed have long-term customers that deserve your trust, but they may not. At the very least, should you decide to accept their payment without a valid ID and/or their signature is missing on the back of their credit card, let that customer know that this is a “one time pass” and they must be able to provide both next time they make a purchase. You might be hesitant to do so, but letting the customer know that you are pursuing this policy to protect your customers. For example, costs associated with theft (including credit card fraud) must be covered by increases in pricing.
When accepting credit card payments over the phone or online.
The best way to avoid credit card fraud when taking payments over the phone or online is to get all the information you can to identify that the person making the order is, indeed, the owner of that credit card. This means reading off the name exactly as printed on the card. It means not only the full credit card number, but also the 3 digit verification number on the back of the card.
Often a purchaser will want the order shipped to another address. This is why you need to ask for both the billing address and shipping address. It is also why having an address verification feature is critical.
Many credit card processing companies monitor purchasing patterns at your place of business. For example, should there be a sudden increase in the number of credit transactions that can serve as a red flag and you will receive an alert. However, taking steps to avoid theft and fraud (not simply credit card fraud, but also shoplifting, employee fraud, etc.) should always be addressed proactively by small business owners themselves.
– Merchant Processing Resource
The Merchant Cash Advance (MCA) industry is riding high from a stream of recent publicity and investor interest. Billions of dollars are pouring into the market and some companies are desperately trying to upgrade their software platforms to keep up with the growth. With more exposure comes new curiosity, and not all of it is positive.
There is no widely used software platform in the MCA industry, which is a good thing and a bad thing. It’s bad in the sense that each company has more or less created their own database system, increasing the odds that some companies will have security flaws. It’s good in the sense that if one company suffers some kind of breach, the method used should not be applicable across the entire industry.
Don’t worry, we’re not posting this to scare merchants. In fact, we don’t recall a single MCA firm ever having suffered a public data breach, a statistic unheard of in other industries. So why bring it up? As MCA firms collect more data and handle more money, the more likely they will become attack targets by hackers. The more valuable the stash, the more sophisticated the attacks. Major players like Heartland, TJX, and Global Payments have had sensitive information compromised on hundreds of millions of customers. The moral of the story? Prepare yourself as much as you can.
If you think it can’t happen to you because your system was developed by a third party, you’re wrong. It’s time to get tested. A Penetration Test, as defined by wikipedia is:
a method of evaluating the security of a computer system or network by simulating an attack from malicious outsiders (who do not have an authorized means of accessing the organization’s systems) and malicious insiders (who have some level of authorized access).
Some may be inclined to compare a Pen Test to sitting in the waiting room of Student Health Services. You’re scared of what they might find and maybe you’d rather not know, but not getting tested at all is the worst thing you can do.
One such Pen Test was performed by an MCA firm months ago that had just purchased a customized software system from a third party. We will not name the firm or the software provider.
After a year of designing, testing, and writing fat checks to a prestigious group of software developers, the MCA firm had finally implemented a state of the art system that would propel them to the next level. After a month of using it, they asked a new hire to do some tests to make sure all of the basic features were working. The bells and whistles were decked out to the nines but no one had tested the easy things like going through the motions of resetting their password if they forgot it.
The new hire noticed something slightly off with the basics and reported his findings to the executives. Interested, but not really worried, they gave him permission to act as if he were a disgruntled employee. Turnover was high in the telemarketing department and there was occasionally a person that would shoot off a couple of dumb e-mails on their way out. But now with a system in place, could they do real damage?
The disgruntled employee test was really a simple Pen Test and this firm is eternally thankful that it performed one. Within 7 minutes, the new hire was able to access and modify every piece of data in the system. He was able to exert administrative power without having administrative level access. The worst part of what he did? There was no way to prevent against this mess because of how the software was coded. The best part of what he did? It was only a test and all modifications were immediately reversed.
It took a long time for the MCA firm to take a corrective course of action. Whether they ended up patching the software or tossing it altogether, we won’t say. What’s important is that they were able to identify these flaws on their own and early on. Many companies in this industry have long-term funding projections that exceed $1 billion. At that size, there will be much more to worry about than disgruntled employees. The bad guys will be lined up around the block in cyberspace trying to get in. SQL injections, buffer overflow attacks, DDoS Attacks, and much more will be lighting up those systems on a daily basis. Most MCA account reps advise their merchants about PCI compliance, but today we’re reminding you to take your own advice.
In-house Penetration Testing for PCI DSS
Penetration Testing Guide and Samples
Security Assessment-Penetration Testing and Vulnerability Analysis
Cost of a Data Breach
Estimate Your Risk Exposure
Global Payments Breached
Pass it on.
– Merchant Processing Resource
You may have considered taking part in a “daily deal” program to increase sales at your small business. As always, you want to do your homework before jumping in. Lucky for you Constant Contact just published a post where they share information they gleaned as to “how and why” people use daily deals.
The research firm Chadwick Martin Bailey sent out a survey on behalf of Constant Contact asking 1,433 consumers over the age of 18 and came up with some pretty interesting results:
- Consumers who sign up to receive daily deals end up purchasing them
- Recommendations from friends make consumers more likely to purchase a deal from an unfamiliar small business
- Personal endorsements drive deal purchases, especially for women
- People are willing to share a deal if it’s great, regardless of whether they are a customer
- More than 1/3 of consumers are more likely to buy a deal from a local small business
- For nearly 60% of customers, even a good deal experience doesn’t automatically equal loyalty
- More than twice as many consumers share deals via email than on social networks
- Deals for restaurants and entertainment are the most commonly shared
- 92% of consumers think local deals are here to stay
- Consumers think deals help attract new customers to local businesses
A lot of this information isn’t new. For example, the fact that women are more likely to make a purchase based on a “personal endorsement.” However, it should be noted that not too long ago that endorsement didn’t need to be “personal.” According to some statistics, an online recommendation from an unknown consumer was trusted by 70% of online consumers. However, what is of real interest to small business is the fact that this survey indicates at least one-third of those seeking online “daily deals” are more likely to buy something from an equally local small business (i.e. your small business.)
On the “not so great” side of the coin is knowing participating in daily deals isn’t a sure fire way to inspire customer loyalty. Again, this isn’t surprising. Think about it. Consumers who use daily deals are consumers who buy based on price. More than that, the fact that 60% state a daily deal doesn’t inspire loyalty indicates that it is likely that this 60% are consumers that always buy solely based on price. This means the minute your price isn’t the lowest they will skip town in a heartbeat. On the other hand, all is not lost. There’s that other 40% of daily dealers you should be following up on in ways that DO create customer loyalty. So daily deals do, in fact, provide an opportunity to create repeat business.
However, perhaps the most significant finding from this survey is that almost 100% of the people who sign up to receive daily deals purchase daily deals. Wouldn’t it be great if 92% of those you just sent emails translated into buying customers? This is a phenomenal statistic. Again, you can’t count on someone buying based on price to be loyal, but a mechanism this motivating to consumers represents an avenue to market to those who may otherwise not consider your local small business when making their buying decision.
– Merchant Processing Resource
“This morning I woke up, brushed my teeth, and hopped in my hovercraft to go to the office. As soon as I arrived, I began my routine of playing ping-pong against my co-workers while computers performed the automated tasks I had set for them. Then I went to the gym, came back, and learned that our web portal had generated 12,000 leads, closed 7,000 deals, and funded 5,000 merchants. It was an exhausting day…” — A Senior Account Executive from the year 2013.
We’ve been offering insight on the 2012 invasion of Silicon Valley into the Merchant Cash Advance (MCA) industry. Excuse us, it’s called the “merchant financing industry” now. California technology companies are bringing money, yes, but most importantly, bringing their treasure trove of technologies to companies that were mostly satisfied with the status quo. But are America’s small businesses ready to do business Silicon Valley style or have MCA companies had it right all along, to operate in the way that small business is most comfortable with?
Two weeks ago, California enacted a law that will allow computerized driverless cars to drive on the road. Cars that drive themselves… this is business as usual in parts of California where everyday things such as gasoline, wires, and paper money don’t exist anymore. There, it is believed that clipping coupons from newspapers is something that the Pilgrims did on the Mayflower. There, applying for a small business loan should be as easy as using your brain waves to telepathically connect with a bank’s computer and having the funds instantly transferred to your bank account. There, is a sense that the rest of the country is just like them…. except it’s not.
If you’ve ever had the pleasure of being an MCA underwriter, you know why antiquated funding companies aren’t going to go quietly into the night. We got to speak with one veteran on condition of anonymity. His words:
We had a guy with good credit, processing $15,000 a month in credit card sales, looking for $20,000. He’d been in business for fourteen years and it seemed like a home run but it took seven weeks to close. He didn’t have a printer or a scanner and he had to drive twenty miles to the nearest Fedex/Kinkos every time he wanted to send us something. On his third trip, his ’94 Corolla broke down and we had to wait a few days until he could find a friend’s car to borrow to send the documents.
These situations do not occur every day, but it is evidence that automation will not singlehandedly knock everyone else out with one punch. There is a technology gap in America. Statisticians point out that 78% of Americans use the Internet, but there is a whole generation that doesn’t trust it with their most sensitive information or have the capabilities to use it to its fullest extent. Would a Silicon Valley takeover of the MCA industry alienate them and leave many of America’s small businesses once again without a shoulder to lean on?
Program or be Programmed
The title of this segment here is the title of a book written by Douglas Rushkoff. An article on CNN commented at length about it and its revelations about the digital age. Americans need to learn all the basics when they’re young. Your PHPs are just as important as your ABCs and 123s. CNN interestingly states:
It’s time Americans begin treating computer code the way we do the alphabet or arithmetic. Code is the stuff that makes computer programs work — the list of commands that tells a word processor, a website, a video game, or an airplane navigation system what to do. That’s all software is: lines of code, written by people.
Just a couple of years ago, I was getting blank stares or worse when I would suggest to colleagues and audiences that they learn code, or else. “Program or be programmed,” became my mantra: If you are not a true user of digital technology, then you are likely being used by digital technology. My suggestion that people learn to program was meant more as a starting point in a bigger argument.
According to Calacanis, each employee who understands how to code is valued at about $500,000 to $1 million toward the total acquisition price. One million dollars just to get someone who learns code.
Read those last two lines? Each employee that understands how to code is worth up to $1 million. Are they seriously teaching people in school that Microsoft Office proficiency is a leg up in the business world?
Am I Already a Dinosaur?
No! Don’t let those 10 year olds with a software empire get you down. Anyone can learn and you need not spend $30,000 a year on college tuition to do it. Codecademy can help complete beginners learn code for free. Get real good at it and you may earn yourself a $50,000 salary increase.
Silicon Valley with their exotic computer languages and cars that drive themselves may present a challenge to the MCA industry, but many firms will be able to hang on for a long, long time. Some people still pay by check at the grocery store and yes, many business owners would rather not use online banking, no matter how safe they’re told it is. But there will come a time when being bilingual means being able to write Java and Perl. Oh there will come a time when driving twenty miles to Kinkos in a car that one must drive themselves to fax a document that will never again exist on paper, will be an experience we confuse with the Pilgrims trip on the Mayflower.
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Article condensed 10/8/12
John Tozzi of BusinessWeek is just about the only journalist that follows the Merchant Cash Advance (MCA) industry. We use the verb “follows” loosely since he manages to write maybe one article per year on the subject. Rarely flattering, he does at least provide something that other writers do not: Substance. In his lastest piece, Wells Fargo Plays Both Sides of the Cash Advance Debate, Tozzi reminded us of something we’ve failed to address in this blog: big banks aren’t just becoming interested in MCA, they’ve already been involved in it for a long time. It also made painfully clear a message we’ve been trying to communicate for years, that ultra low interest rates are simply not feasible in small business lending.
Tozzi accuses Wells Fargo of sponsoring a small business lender that is directly attacking MCA companies while at the same time financing the companies being attacked. California based Opportunity Fund recently began offering a loan program that is…wait for it…repaid by withholding a percentage of credit card sales. They call it EasyPay and they’ve made no effort to hide their belief that they’ve achieved some kind of higher moral ground by charging only 12% APR. In their press release yesterday, they pounced on the competition:
While similar card-based payment systems exist in the private sector in the form of merchant advance loans, they routinely carry exorbitant interest rates that range from 104-177 percent. By contrast, EasyPay loans carry an annual interest rate of just 12 percent.
Wells Fargo awarded them cash and their “hypocrisy” is apparently history. Why? Wells Fargo has also backed prominent MCA providers RapidAdvance and Capital Access Network. This might come as news to some people, but not to us. What Tozzi may not realize is the main driver of the MCA industry has been and continues to be…banks. Sorry to break it to the small minority of people that suspect MCAs are part of some shadow banking system. Most small businesses are unaware that their funds may indirectly be coming from Capital One, Community National Bank, or even Wells Fargo!
And let’s come to terms with another hard fact about small business lending. Opportunity Fund is proof that you can charge 12% a year and be guaranteed to lose money. In the BusinessWeek interview: “At that rate, the nonprofit is not covering its costs, says Marco Lucioni, the lending director who created the product. Opportunity Fund subsidizes the loans to keep them cheap.”
Subsidies? Whhaaaaa??? Oh you didn’t know? Opportunity Fund is a registered 501(c)(3), a charity. Don’t get us wrong, we love charity and we think it’s wonderful that small businesses in California may be eligible for an EasyPay loan. We can’t help but be bothered though that a charity is attacking the private sector for charging “too much” when they acknowledge that their own rate of 12% (more than double the allowable interest rate on an SBA loan) is entirely unprofitable. We’ve made this charge over and over and over again. The world we lived in where business loans regularly came in at 5% annually was really just an artificial market caused by the SBA’s agreement to reimburse banks for all defaulted loans. But in the real private sector where there is no tax payer default guarantee, or charitable donors to put downward pressure on cost, it becomes clear that the MCA industry is the free market as it should be.
We also reject the characterization that MCAs are “expensive” since there are literally hundreds of funding companies and a thousand ways to structure a deal. That’s the problem with journalists that only drop in once a year or so, Tozzi has no idea how much has changed. Merchant Cash Advance simply means short-term business financing. The costs may be the equivalent of 1% APR or 200%. It could be a purchase of future sales or a fixed daily repayment loan. It might have everything to do with credit card sales or nothing to do with them at all.
The use of the split-funding method by a charitable business lender definitely highlights just how mainstream the ideas of the MCA industry have become. Hopefully they are prepared to deal with the rapidly evolving technology environment. They just might learn there’s a reason that Wells Fargo is also playing the other side. Companies like RapidAdvance and Capital Access Network are well-oiled machines and are respected by the small businesses that fund them. Tozzi calls this awkward. We think the banks in the diagram would beg to differ…
Follow the money and you’ll see why the MCA industry is a bet anyone would make.
– Merchant Processing Resource
Notice: the diagram may illustrate relationships that are out of date and omits that nature of the financing arrangement.
What’s new in the Merchant Cash Advance arena?
FundersCloud is making waves in the industry with their Peer2Peer/Crowdfunding platform. We’ve finally gotten a chance to speak to their team, do a walkthrough, and aim to release an independent review of their cloud next week. However, for the moment we would like to take this time to gloat that another one of our predictions is being proven right.
On December 1, 2010, we explained that the Direct Funder model was quickly becoming a thing of the past. (The Direct Funder Model is Sooo 2009). How many of your friends and colleagues have at some point considered leaving their current job to go and start a funding company? Tired and worn down agents are all prone at some point to say “screw this! I want to be the funder so the agents can send the deals to ME instead!” Now it makes increasingly less sense to start a funding company. Why would you do that when you can just syndicate on your own deals or on the deals of other funders? You can earn the same return they enjoy but without having to pay the nasty overhead. In some aspects, being the funder has disadvantages, unless they’re making a hefty amount on management fees.
ISOs Facing Extinction
According to an article in ISO&Agent Magazine, it’s not practical to compete on just price anymore:
The internal threat lies in continuing to base the ISO business model solely on selling card services at the lowest price and failing to offer the latest payment technology, Helgeson cautioned the packed session room.
“They should be talking innovation,” Helgeson said of ISOs. “If they’re only talking rates, they’re already out of business”
Basically, if two merchant account representatives walk into the corner deli and one offers to lower the processing rates by 15 basis points and the other offers a state of the art POS cloud that can accept payments through the merchant’s smartphone, home computer, and in-store touch screen device, what’s going to happen? So many merchants have been tricked into higher rates under the guise that their rates would be lower that they’re beginning to tune out the low rate pitch already anyway. They want the technology now.
Could the same issue begin to plague the Merchant Cash Advance industry? In the last two years, new funders have popped up with the strategy to acquire marketshare by undercutting the competition. That works until the next guy undercuts the first guy, and the next guy undercuts the second guy. Pretty soon, we’ll have funders purposely operating in the red just to have a share of the market. Some are bleeding red ink already but not because they want to be. 🙁
They key is to give merchants added value with the financing program. This doesn’t mean trying to sell them insurance and warranties and trying to pass this off as some kind of value. Those are junk costs and extra fees for the funder, not value for the merchant. Anything you can contribute that would drive more customers to their business or make their business operate more efficiently is value.
Ways Merchant Cash Advance Companies Can Provide Additional Value to Their Clients:
- Provide them with POS software
- Provide them with SEO services to increase their exposure to customers in search engines
- Create a custom tailored marketing campaign for them to reach more customers
- Create and execute an e-mail marketing campaign for them that would be sent to either previous customers, potential customers, new customers, etc.
- Rent a few billboards and allow merchants to opt-in to have their business advertised on these billboards
- Copy Groupon
- Etc., etc., etc.
If you can’t come up with anymore ideas here on your own, you’ll probably be out of business by 2015. If the items you add to this list include ways to make yourself more money and not the merchant, you’ll probably be out of business by 2015.
In our own opinion, the petition set up to automatically e-mail the Huffington Post in response to their article about businesses having no choice but to pawn jewelry was a success. The Huffington Post may feel differently because they didn’t respond to us at all.
It figures that websites that receive millions of views daily really don’t bother to care about actual facts or information. They’re entertainment sites and for-hire PR mechanisms. Every time we see a friend’s company mentioned in the news, we shoot them an e-mail or call them up to offer them congratulations on getting noticed. They always respond with some version of, “Don’t congratulate me. I had to pay $30,000 to some PR company to try and buy placement.” Oh well… At least there’s the Merchant Processing Resource to fulfill all your Merchant Cash Advance information needs. 🙂
When we tried out Square a few weeks back, we couldn’t believe how easy it was to set up and use. We figured nothing else would come close, but we were wrong. ROAMpay is awesome! We dare not claim one to be better than the other because both platforms are different.
Square has no activation fees or monthly fees but is limited in the sense that Square must also be your merchant processor.
- PLUS: Money is deposited the next day!
- PLUS: No monthly fees or setup fees.
- MINUS: The processing rates are non-negotiable.
- MINUS: You must use the Square POS technology to manage all your payments.
ROAMpay has a small activation fee and monthly fee to use but you can choose from a variety of merchant processors.
- PLUS: You have a variety of processors to choose from and therefore the ability to negotiate your rates.
- PLUS: You can supplement the ROAMpay mobile unit with your normal credit card terminal or desktop POS. They can all work together with the same merchant processor.
- MINUS: Most merchant processors charge regular monthly fees in addition to the ROAMpay fee.
- MINUS: You are not guaranteed to get overnight deposit. This is up to the processor to approve.
The MINUSes for ROAMpay are not necessarily negative marks. If you are a small business owner that already has a traditional merchant account, you can easily add mobile processing to your existing mix of payment methods. Nothing is different aside from the costs we mentioned.
Once you’ve got the swiping unit, the setup on your phone is unbelievably simple. You can even track cash payments through the POS interface and issue instant e-mail receipts to your customers. For instance, if you’re at a trade show, street fair, or similar event and a customer pays you with cash, those transactions can also be recorded and processed professionally through your phone. All historical transactions both cash and plastic can be accessed, reviewed, refunded, or voided if need be.
We don’t have a relationship with ROAM Data so Santa took the big risk that we’d dislike the product and put it on the Merchant Processing Resource’s naughty list. But that didn’t happen because this product is NICE!
Sean describes the experience of receiving and setting up ROAMpay in a 45 second video he created below:
To learn more about ROAMpay, visit ROAM Data’s official site.
Mobile Card Reader and POS
Reviewed by: Sean Murray
Rating: 5 out of 5 stars
Date of Review: January 4, 2012
Square is easy, extremely easy. The process of taking it out of the box and moving forward step by step until I was able to process my first transaction took a total of 11 minutes.
I’ve been accustomed to the payments industry standard of 1-3 days to approve and activate a merchant account. This is a whole different playing field entirely. The card reader fit right into my iPhone 4, which is currently using iOS 5.0. I downloaded the Square software from the App Store and minutes later I was processing. No instructions are necessary. The entire setup is intuitive.
The fees are fairly competitive and less expensive than PayPal. There is supposedly next-day deposit, a feature that is not even common amongst regular retail merchant accounts. I’m impressed all around.
I don’t work for Square and the last product review ( MacPOS ) I did was not very positive so I’m giving you my straight, unedited, unbiased opinion. For further information, you can contact me at Sean@merchantprocessingresource.com or visit Square at SquareUp.com
If you actually noticed the time displayed on the top of my iPhone in some of the frames, there is a gap of time longer than 11 minutes. I had to take a very important call in the middle of the process, plus I went back and redid some of the photos and screenshots. Don’t hold it against me.
Website: Square Card Reader
Description: Mobile Card Reader and POS
Reviewed by: Sean Murray
Product Reviewed: Square
Date of review: 12/14/2011
Rating: 5 out of 5 stars
It’s okay, not great. The biggest downside is the ugly interface, which gives the impression that the software functionality must also be subpar. While that does not appear to be the case, it certainly is a distraction during the POS experience.
White borders, mismatching shapes, and overpowering Quick Key instructions:
Description: POS system for Apple computers. Not actually made by Apple.
Reviewed by: Sean Murray
Product Reviewed: MacPOS
Date published: 12/13/2011
2 out of 5 stars
A quick review by sean himself…
So being the merchant processing savvy person that I am, I got a trial copy of the software and fiddled with it for about an hour, when I decided it was just as simple, fluid, and appropriate as we both hoped it would be. I wouldn’t call myself an expert on the software now but I am confident enough to provide an introduction on what it can do.
Below is a 23 minute step-by-step video that explains the software as if you had just purchased it today. It differs from the tutorials on LightSpeed’s own website because I stripped out the demo bundled features they use to show it off, none of which would have any relevance to your actual business. I don’t normally do reviews so hopefully you can deal with my style of instruction. 🙂
Description: POS Software for Mac and iPhone
Review by: Sean Murray
Product Reviewed: LightSpeed POS
Date of Review: 12/09/2011
Rating: 5 out of 5 stars
According to their Twitter Feed, Square, the iPhone, Android, and iPad Card Reader has announced the removal of the 15 cent transaction fee. The card swipe rate will remain at 2.75%. For low ticket, high volume businesses, this will significantly improve margins.
Square is a revolutionary service that enables anyone to accept credit cards anywhere. Square offers an easy to use, free credit card reader that plugs into a phone or iPad. It’s simple to sign up. There is no extra equipment, complicated contracts, monthly fees or merchant account required.
Co-founded by Jim McKelvey and Jack Dorsey in 2009, the company is headquartered in San Francisco with additional offices in Saint Louis and New York City. They can be found at: www.squareup.com
Posted on May 6, 2011 at 12:18 AM
We’ve heard of Square, we’ve read about Square, and we think the Square concept is cool. The writers of this blog have yet to encounter a business actually using one though. On March 2nd, Square announced that $1 Million was being processed through their device on a daily basis. That’s not a whole lot but we’re interested to see if it really catches on.