“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