The Durbin Amendment and Small Ticket Sales

In the world of credit card processing a small ticket transaction is any credit or debit card sale of $15 or less.  Until recently Visa & MasterCard have reserved a special interchange category specifically for these transactions, but with the advent of the Durbin a few things have changed.  If you recall from my recent post about the Durbin Amendment, the amendment only affects debit cards that are issued by banks with at least $10Billion in assets. To make the distinction Visa and MasterCard have split debit interchange into Regulated and Unregulated categories, the former being the Durbin rate.  Depending on your processor’s billing model you should see these categories listed on your monthly merchant statement.

Before I go further, due to a number of questions I have had on the topic, it deserves to be mentioned that a debit card transaction is not limited to Pin-Based transactions. Whether the card is swiped, key-entered, web based or pin-based, it is considered a debit card transaction and will be subject to the new rates.

If you are a small ticket merchant— that is if your average ticket is consistently $15 or less (see your merchant statement) — you might be wondering how this affects you. We already know that the Durbin was intended to save merchants money, so what can you expect?

Here are the facts: 

• An estimated 70 - 80% of debit cards are issued by banks with $10Billion in asests, so the majority of debit sales will fall into the regulated category. 
• Regulated small ticket interchange is: 0.05% + $0.21
• Unregulated small ticket interchange is: 1.65% + $0.04

When we do the math we find that the total cost per transaction is equal when the transaction is $10.63. Therefore, if your average ticket is $10.63 or greater, you will ultimately benefit from the Durbin. If it is lower, you will see a slight increase in your overall monthly cost. 

Suggestions for mitigating interchange price increases: 

• You are allowed to post a minimum sale of up to $10. 
• Consider introducing new products that would increase your average ticket.
• Offer a discount on cash transactions to encourage cash payments.
• Install an ATM. There are many service models available and it may not cost you anything to install one. 
• Launch a gift card program and incentivize gift card usage. This has the side benefit of increasing brand loyalty. Starbucks is a great example of this approach. 

As always, if you need help or have any further questions, please don't hesitate to email me. At Gravity Payments we are always eager to help. 

The Durbin Amendment and You

Based on my interactions with merchants over the last several months it occurred to me that while most have heard about The Durbin Amendment, many do not know what impact, if any, the Durbin will have on their business. Since we are steadily approaching D-Day (The Durbin goes into effect on October 1st, 2011) the purpose of this post is to shed some light on the topic and arm you with the information you need to assess your processing program.

For clarity, let's start with two quick definitions:

Interchange: The rate set by card-issuing banks for all card based transactions. Interchange varies by card type (rewards, debit, credit, corporate, etc), method of transaction (internet, card swiped, key-entered) and industry (retail, restaurant, supermarket, etc). Interchange is essentially the wholesale cost of all card based transactions.

Durbin Amendment: An arm of the Dodd-Frank financial reform act, this amendment reduces the interchange that card-issuing banks can collect on debit card transactions (pin and signature). The new interchange rate is .05% and $0.21 per transaction. Banks with less than 10billion in assets are not affected.

In a nutshell, this means that the wholesale cost of accepting a debit card has been cut by roughly 40%. That's good news for merchants, right? Well, that depends. The most important thing to note is that the Durbin is bank legislation, not processor legislation. Processing companies are in no way required to pass on any of the savings to their clients and many could view the Durbin as a vehicle to immediately boost revenues.

So, how do you know if you will benefit? For the answer to that question you need look no further than your merchant statement. If you are on an Interchange Pass Through program you will immediately benefit when the change takes place. If you are on a Tiered Rate program (your statement may reflect different rates for qualified, mid qualified, non qualified, transactions) it is up to your processor to adjust your rates to reflect the Durbin savings. I should mention that tiered programs are not inherently bad programs to be on, but in this instance it does mean that your processor will need to be proactive if their intention is to pass the savings on to you.

To put this into a dollars-and-cents perspective, lets consider an analysis that I recently prepared for a local retail merchant on a tiered processing program:

Tiered Rate for Debit: 1.88% + $0.20 per transaction

Debit volume: $13,000

Avg ticket: $22 (roughly 590 transactions)

You can see that they were set up to pay roughly $0.61 per debit transaction. With the Durbin, the cost per transaction on the wholesale level will be $0.22, for a difference of $0.39 per transaction. With an average of 590 debit transactions per month, that's $230 per month in savings potential.

At Gravity Payments our mission is to build longstanding relationships with our clients. In light of that objective we are committed to passing on 100% of the Durbin savings to all of our customers. If you would like help evaluating your current program and determining what impact the Durbin could have on your bottom line, please feel free to contact us. We look forward to hearing from you.

The Hidden Cost of POS Systems

Point of Sale (POS) systems are quickly replacing traditional cash registers and standalone credit card terminals in restaurants and retail stores all over the country, and for good reason. The benefits of a carefully chosen POS system are far reaching. A POS system can help analyze sales data, fine tune menu offerings or inventory, handle payroll and employee scheduling, manage inventory, and much more.

While we all expect an advanced system to require an upfront investment, it is less commonly known that substantial ongoing fees are often part of the package. In one recent analysis that I prepared for a local restaurant owner, fees totaled over $7,000 per year! With that said, I hope to offer insights that will help you avoid, or remedy, these hidden fees so that you can reduce your expenses and free up your capital. 

What are the hidden POS fees you might be paying?

To get to the bottom of this we need to first take a look at your credit card processing program. Many processing companies have adopted a business model that replaces a direct sales force with a network of POS dealers. These dealers sell POS systems and credit card processing as a package, offering various upfront incentives like a free round of gift cards and/or discounted technical support. As a part of this agreement, the processing company pays the dealer up to 50% of the monthly revenue earned on your account. While this business model does provide some general benefits, it is not a merchant-centric model where satisfying your needs is the key motivating factor. Instead, this model promotes a processor monopoly where lack of competition drives your prices higher and the service level lower.

While everyone expects processors to be able to make a reasonable return on their services, the POS dealer/processor relationship can often drive the prices up by over 100% what you would be paying if there was competition for your business. This is due to the revenue sharing agreement (often up to 50% of the processor's profits) which the POS dealer benefits so greatly from. Typically, this revenue sharing model will result in $1,000's per year in higher costs for you, the merchant.

Also, you can be made to feel trapped into your processing relationship, even if the customer service, deposit schedule, or any number of other factors are not to your liking. Taken to the extreme, to discourage customers from shopping for a better rate—and potentially eliminating the sweetheart deal the POS Dealers are enjoying—many dealers will claim that the POS system is only compatible with their processing vendor, when in fact any number of processors can integrate with that POS system with ease.

What can you do?  

Whether you are shopping for a new system or have an existing POS, your associated credit card processing program deserves to be evaluated. Navigating and understanding all of the fees on your merchant statement can be difficult, and your options may not seem clear. We would be happy to review your program, detail out opportunities to reduce your expenses and discuss all aspects of your business to help you make an informed decision.  Contact US for more info. 

To rent, lease or buy, that is the question....

Whether tis nobler to suffer the slings and arrows of... oh, right. Lets get on with it....

In order to process credit cards, most small to mid-size businesses utilize small credit card processing terminals that capture credit card data and transmit that data to a processing bank. Given that the cost of a terminal can range from $400 to $1000 depending on functionality, the question often comes up, is it better to rent, lease or buy? As it turns out, each method has its strengths and weaknesses which I explain below.

For the following examples I’ll use a price point of $500.

Buying
If cash flow is adequate I highly recommend this method. If cash flow is tight and you’re more concerned about short term cash availability than a few extra dollars in long term profit, steer clear of buying.

PROS: Best overall value
CONS: Most cash flow intensive

Total cash out up front: $500
Total cost of ownership: $500 + maintenance

Renting
Renting is the least cash flow intensive option because not only do you have no upfront costs, but you can often times cancel at any time given reasonable notice. For someone who just needs to accept credit cards on a temporary basis or someone who does not want any long term commitments, renting is a great option. For someone who intends on accepting credit cards indefinitely, renting can be an extremely expensive option. For example, a terminal that retails at $500 typically rents for between $20 and $35 per month. I know many business owners who have been renting their terminal for 10 years and have paid for their terminal 5 times over!

PROS: Not cash flow intensive, flexible, little to no risk
CONS: Pay indefinitely without owning, much more expensive than buying

Total cash out up front: $0
Total cost of ownership: Unlimited

Leasing
Leasing has a bad reputation due to the unsavory methods many salespeople employ when selling a lease option. However, if you are dealing with a trusted source, are concerned with cash flow and would also like to eventually own your equipment, leasing might be a great option for you. For a $500 terminal a typical lease is $20 per month for a term of 48 months. At the end of the agreement you may call your leasing company and request to buy it out. A standard buyout is around 1/10th the retail cost of the terminal.

PROS: Not cash flow intensive, option to buy
CONS: 48 contract, more expensive than buying

Total upfront cost: $0
Total cost of ownership: Monthly $20 X 48 = $960
Buyout $50
Total: $1010.00

So you see, each method has it's perks. If you need some new gear, contact us and we'll work with you to find the most cost effective method of acquisition.

Merchant Cash Advance: Get into the Cash Flow

From time to time in life and in business we all need some extra cash to cover expenses. I'm sure we've all been there, and I'm sure we will all be there again. That being said, I was interested to learn about a study commissioned by New York based Capital Access Network, Inc (CAN). The Study was conducted nationally among small to mid size business operators who accept credit cards as form of payment. For the sake of brevity I'll just highlight some key points:

77% of business polled used credit cards to make purchases over $5000 two or more times per year and make only minimum monthly payments.

50% of those individuals did not understand the long term implications of making large purchases on a credit card.

A purchase of $5000 with an 18% APR can amount to an actual cost of $18,000 and would take 46 years to pay off if only the minimum monthly payment is made

73% of those polled where not aware of all of the financing options available to them.

What this study indicates is that business owners are not fully aware of the tools available to them in times of monetary need. I'd like to do my part in correcting that - if you need money for new equipment, advertising, pay roll, cash flow or anything else and if traditional lending methods are not readily available, you do have another option:

Introducing the Merchant Cash Advance

Merchant cash advances are simple and they work like this: the cash advance provider purchases (advances you money for) a specified amount of your future credit card sales at a discount. Collection of the purchased credit is processed automatically through your credit card processing provider. The merchant cash advance provider receives a small, fixed and agreed upon percentage of your daily credit card sales. Since it is a set percentage the provider only gets paid when you do - I.E, when you're really busy your payments are larger and when business is slow your payments are much less. The best part is, you'll know exactly what the total cost of the funding will be upfront.

It's quick, easy, predictable and more affordable. For goodness sake, don't finance your next large project on a credit card--unless of course you want to earn a lot of mileage and can pay the balance off in full in a short amount of time!-- Learn more about cash advances and apply here.