CREDIT CARD PROCESSING PART 3 - THE OTHER STUFF

Here is a list of questions we have learned to ask when shopping for credit card processing:

1. Who are the gateway and processing companies?

2. What are the setup fees?

3. What is the monthly fee?

4. What is the statement fee and does it increase with low volume?

5. What is the discount rate?

6. What is the fee per transaction?

7. What is the monthly minimum?

8. What are the contract term and the early termination fee?

7. How long does it take the for the funds to appear in my bank account after approval? (Usually 48 hours. However, some processors only deposit funds every 14 days!)

8. Whom do I contact when I have questions or problems?

The PayPal Model

PayPal, ProPay, and 2checkout are third-party processing services. These companies accept online credit card orders on behalf of you or your company. Like processors, they charge small setup fee, a per-transaction fee, and a discount rate per transaction. Unlike processors, you do not have to open a merchant account and you pay no gateway fees, monthly fees, or statement fees. If you are just starting out and you only do credit card sales online, you might check out these services to see if they meet your needs until online sales take off.

We have a relatively low volume of credit card transactions overall. However, because we accept credit cards from direct retail sales and from our wholesale customers as well as online through our shopping cart, we cannot use PayPal. These services are intended for online shopping cart sales only.

CREDIT CARD PROCESSING PART 2 - THE MONEY

The Reseller

Resellers make their money from software you probably don’t need, monthly software “maintenance” fees, card processing supplies, card processing machines, and probably commissions from the gateway and processing companies they represent.

Most resellers charge a “setup” fee. I don’t know if this is a reseller charge, a gateway charge or a processor charge. I think it all depends on the underlying agreements between the reseller, gateway and processor.

Some resellers can also help you install a shopping cart. We build and maintain our own websites. We had no shopping cart experience, and one of the benefits of going with our first reseller, Merchant Express, was that they provided a shopping cart and installed it for us for a nominal fee. When we switched processors, we were able to do the necessary recoding of the shopping cart ourselves in a few minutes.

The Gateway

That “monthly fee” that is quoted when shopping for credit card services is the gateway company’s fee. They do not make their money any other way. As I mentioned previously, it may be possible to negotiate directly with gateway for a lower rate. This fee is usually $15 to $20 per month.

If you work directly with AuthorizeNet, they charge a setup fee. Because we had an existing account (we had to close that one due once again to Pipeline Data Processing’s terms), we could open a new one at a steep discount.

The Processor

The processor sets your per-transaction fee. This fee is usually a set amount per transaction (e.g., 10 cents per transaction) plus a “discount rate”. The discount rate includes the fee the credit card companies charge and a bit on top of that for the processor. The discount rate varies according to the number of transactions processed per month. From what I can gather, it appears that the transaction fees vary not because of the amount the credit card companies charge, but because of the amount the processor charges on top of that.

Many processors have a monthly minimum. So, if you have a very low volume of transactions, you will most likely pay the monthly minimum instead of an amount per transaction. You need to do some math to determine whether you will get hosed by the monthly minimum requirement versus having enough transactions to get the regular per-transaction free and discount rate. If you only take credit cards online, not in person, the way out of the minimum monthly trap is to use a service such as PayPal that does not require you to open a merchant account with a processor. I will talk more about the PayPal model in part 3.

Credit card companies and processors also charge different fees for different types of credit cards. I have never delved into this matter and I don’t intend to any time soon. Apparently, for a very high-risk, unsecured card, the fee per transaction can be around $10. I have asked around, and I have found no vendors who had incurred such a fee, so it’s probably pretty rare.

Another fee the processor charges is the “statement fee.” I don’t know why you are charged to receive your statement every month. We no longer pay a statement fee with our new processor, Nova. Our old statement fee through Pipeline Data Processing worked out to $19.99 per month, which is astronomically high. I don’t recommend Pipeline Data Processing for a number of reasons, mostly having to do with money. Statement fees tend to run from $8 to $12 per month.

Still another fee the processor charges is the dreaded early termination fee, same as your cell phone provider. Before you sign up for services, it is important to know what the contract term is and what the early termination fee is. We were recently hosed by Pipeline Data Processing (3 years and $300), but most are not this drastic. Our current agreement is 2 years and a $95 early termination fee.

CREDIT CARD PROCESSING PART 1 – THE PLAYERS

In the world of wholesale and retail, there is an alternate universe. This is where credit card processing resides. Right alongside cell phone service. We just recently switched our processing services. It was ugly. I resolved to finally demystify credit card processing for ourselves, and vowed to share the information with everyone I could as a public service.

I am sure some of you had this system down pat within 10 minutes, understand it intuitively and wonder what all the fuss is about and why I am devoting blog space to credit card processing. Some others of you will worship the ground I walk on after this little series. I will update credit card processing on the blog as I learn more, but I think I now have the basics down.

I have posted the separate blog entries at the same time so that you don’t have to wait for the information. This first part will introduce you to all of the players involved in processing a credit card transaction. The second part will cover fees, and the third part will cover the questions we have learned to ask when shopping for credit card processing, The PayPal system, and anything else that might be helpful.

Processing a credit card transaction involves five to six different entities:

1. The reseller

2. The gateway

3. The processor, and possibly a separate billing company

4. The credit card companies

5. Your bank

I will now attempt to explain each of these entities, in order of their importance, not as listed above.

The Processor

This is where it’s at. This is the company that receives your credit card transaction request from the gateway and then passes the transaction along to the Credit Card Interchange (a network of financial entities that communicate to manage the processing, clearing, and settlement of credit card transactions) for approval and payment, receives the approval, and then transmits approval information back through the gateway to your terminal or computer. The part up through receiving all approvals takes about three to six seconds. Getting it into your bank account takes from 48 hours to 14 days, depending on the processor. Go figure.

The Gateway

Just as you sign up with AOL or Comcast or some other company to access the Internet, so you sign up with a gateway company such as AuthorizeNet or LinkPoint to access the credit card processing “Internet”. These companies take your transaction information and forward it to the nether regions for processing. They do not process anything or take a fee per transaction; they just receive your transaction information and pass it along to your processing company.

The gateway company also sends confirmation emails to the customer (you can customize them) and emails confirming the transaction to the merchant. Your shopping cart is hooked up to the gateway so that when a customer enters financial information on your website, it is automatically sent to the gateway and on to the processor, the merchant receives an email notice of the transaction from the gateway, and the customer receives a customized email confirmation.

There are several gateway companies and some processing companies have their own gateways. It seems that most resellers utilize AuthorizeNet. If you know of any others, please add a comment to share your information with others.

Because of our low volume, when selling retail we use a manual credit card imprinter and then enter the transactions on the computer later. To enter the transaction, we go directly to the gateway (AuthorizeNet), sign in and then enter the information directly to AuthorizeNet’s system via Virtual Terminal on their website. The transaction then goes into the system and to our processor, Nova, for the actual processing. More information regarding software and entering transactions is below in the Reseller section.

The Reseller

This is the company that packages credit card processing and gateway services and sells you those along with all of the other retail kitsch that comes with processing credit cards.

Instead of having to look for a separate gateway and processor on your own, the reseller does that for you. Most resellers represent a certain gateway/processor combo. The reseller takes your information, opens accounts with the gateway and processing companies on your behalf, sells you software you most likely don’t need, sells or leases you machines of various kinds, supplies those little Visa/Mastercard signs and stickers, supplies credit slips and other supplies, and handles your questions, problems and complaints. As far as I can tell, the reseller usually only represents one gateway/processor company combination.

It is important to note that the reseller usually does not set the fees for credit card processing, nor does it actually collect them. Resellers typically have deals with the processors and they can offer special fees or deals to you, the merchant, based on these underlying relationships. The reseller makes its money on things like processing machine sales and leasing, software for entering the transactions, monthly fees for software maintenance and upgrades, shopping cart services, and miscellaneous other fees and services.

A word about software. If you enter your transactions manually online, I am going to discourage buying software to enter your transactions from your reseller. Why? Because it’s expensive and unnecessary in most cases. The software a reseller sells does exactly the same thing that AuthorizeNet’s Virtual Terminal does--sends the information into the gateway--and Virtual Terminal is a free, web-based application (see previous information). Resellers have quoted us $149 to $230 for the software and most want a monthly “maintenance” fee of $8 to $20. Once your account is set up through AuthorizeNet (you can create an account directly with them or through a reseller), you should be able to access Virtual Terminal and use it. I don’t know if other gateways have similar systems available.

Merchant Express and Costco are the two resellers with which we have experience. Resellers are all over the web. This is a commission-driven business, so beware of the person on the other end of the phone. You will most likely end up with someone who resembles the stereotype of the used car salesman. Many banks are now contracting with resellers and their associated gateway/processor. That way, they can still offer credit card processing to their business customers without having to maintain their own complex, expensive processing/gatway apparatus.

Purchasing Services Separately

We just discovered that you can put together your own package of gateway and processor, if you dare. I was recently able to go directly to AuthorizeNet, set up a new account and then because of our low volume, get a monthly fee quote directly from AuthorizeNet that was $5 per month lower than what the reseller was quoting. I then had to get a couple of codes and numbers from the processor and enter them into my account information on the AuthorizeNet website to allow the processor and AuthorizeNet to talk to each other, and it was relatively easy to do. I probably won’t be purchasing services separately anytime soon, but I mention it for those of you who might want to try to do it.

Now that I have succeeded in giving you a mother of a headache, I will end with a quick summary of what actually happens when you swipe a card or enter a transaction on your computer:

1. Card is swiped and information is transferred to the gateway company. Alternatively, information is entered directly into the gateway.

2. Transaction information is sent to the processor.

3. The processor sends the information on to the Credit Card Interchange.

4. The approval/rejection information goes back to the processor.

5. The information then goes from the processor back to the gateway.

6. Acceptance/rejection information is transmitted from the gateway to the merchant.

The above all happens in about 3 seconds.

7. After about 48 hours to 14 days, money is deposited into the merchant’s bank account.

For a graphic representation, here is a website that you might find helpful:

www.authorize.net/resources/howitworksdiagram

TRADE SHOWS - PART 4

Ah, Christmas/holiday shows! They sound great. Lots of sales opportunity. Lots of public exposure. We took a look at the finances and how much we could afford to lose, and we signed up for a couple of local ones. These were large (650 and 450 vendors) regional shows, somewhat expensive ($850 and $675, respectively, and the $850 gave us better ratios than the $675 show), and lots of time on one’s feet. We don’t know if we will ever do another one.

The event coordinators of these larger shows cruise the summer fairs looking for suitable vendors, which is how we got into these shows in the first place. We now think, though, that if a large show coordinator is still trying to fill slots for a late October or November Christmas show in July or August, beware. It harkens back to the point about vendor turnover. Large turnover or lack of interest from previous vendors means these companies have to be out diligently cruising for a new crop of suckers like ourselves. This is when getting information about vendor turnover, public turnout, and advertising avenues is more important than ever before committing financial resources. You might even get last year’s exhibitor list and call a few of them to learn about their previous show experiences. Experiences can vary widely between vendors depending on what they sell, but you can still get a very good idea of the overall trends by talking to a few of them.

We got lucky and broke even only because one show’s gains covered the other show’s losses. Once again, we did not follow our own advice about researching the shows (we had not yet devised our own advice at that time). However, given what other veteran vendors were saying at these shows, I don’t think our research would have done us much good. 2007 has not been a good year for most vendors, regardless of their successes in 2006, and most of them indicated they did quite well in 2006.

Our big learning experience was that attendee entry fees are an effective barrier to public purchasing. One show’s entry fee jumped from $7 in 2006 to $12 in 2007. The second, smaller show charged $14 per person. We heard from many attendees that this dampened their buying enthusiasm. So, the combination of economic downturn, a dour public and ridiculous entry fees did not bode well for our 2007 experiences.

Our second lesson was that our previous market research was reflected in these shows. When researching future shows, we will take a look at the typical attendee and see whether it fits our target demographic. Restated in English, we will take a look at whether the types of people attending the show are those who would normally be interested in our product. Despite the fact that these shows draw a lot of people, the show’s location, where and how the show is advertised, and other factors influence the type of attendee. What’s good for one vendor may not be good for another.

With that, best wishes this holiday season and I hope you all go charging into a new year of great successes!

TRADE SHOWS - PART 3

Our resolve to do no more public shows lasted until July, when I participated in the West Seattle Summerfest, part of our local community festival. It sounded fun, it would be downright economical for the exposure we got, and I wanted to get out and do something other than what I was dealing with in the office. What fun! Long, sunny days, chatting with friends and acquaintances who happened by, being part of the local community, all in all, a very good time. The show cost $345 and about 15,000 people attended, so the ratio of attendees to cost was great. We made a little money and the show had no associated travel costs, so no financial losses to worry about. Even though we love what we do, the day-to-day grind can take its toll. I found this show to be a great antidote to the grind and a good way to recharge my batteries. I am looking forward to participating again this summer.

Even though we did not make a lot of money, this show had repercussions later on in November and December, when people would stop by the booth at other shows and remember us. We love hearing this. It is said that it takes seeing or hearing about a product seven times before a person thinks about buying it. For now, I am thrilled with two times!

For larger shows, the applications can be found online and submitted usually 11 months in advance (for some very popular shows, you need to apply this early), and fees are due for many at least six months in advance. For a startup, it is difficult to gauge what will happen a week from now, let alone 11 months from now. Most street fair applications are not available until January (I will start collecting and processing online applications the first week of January this year). All monies are due usually only a month or two before the show. Besides the fun in the sun, the fees are lower, the time frame is more startup-friendly, and there are numerous street fairs to choose from in the summer months. In addition to your booth display, most of these shows require you to supply your own canopy.

So, if you are thinking about a relatively low-risk way to economically introduce your product to the buying public, do lots of convenient market research, and practice your sales techniques, you might take a look at summer fairs in your area.

TRADE SHOWS - PART 2

Our products have pretty broad appeal. When we first started thinking about trade shows, we were quite excited about the prospect of selling our wares to the public at such a venue. The public would love our products! We would sell out of stock! It would be great! What’s not to like?

So, we manufactured lots of stock, rented a truck to hold it all, reserved three hotel rooms for ourselves, and spent five days selling, uh, enough to make back about one-third of what it cost us to attend the show. Needless to say, we were not sold on public trade shows after this experience.

Using the analysis points mentioned in the previous posting, the analysis went something like this:

1. The “price per hour” was $23. That was sales approximately one unit per hour or so to try to cover costs, which sounds doable. The show hours were good—morning and evening hours, weekday and weekend dates.

2. The “attendance per dollar” was good. We had been told that approximately 30,000 people usually attended the show and the booth fee was $1,200.

3. We did not ask for vendor return information from the show management.

4. Advertising for this show was via several main channels. Additionally, this show was a popular one that had been going for many years.

5. The show location was great—easy to drive to and park, but also reachable by light rail and bus.

So, we should have done better than we did, right? Our Bin Buddie product was very popular with campers. This was a Sportsmen’s show. The analysis was pretty good. So where did we go wrong? The following:

1. We had a good grasp of our target audience, but we learned it was more narrowly defined than we thought. This show was in Portland, Oregon, and drew from southwest Washington, Portland and northwest Oregon. We have learned that this audience’s income and education level was not our ideal demographic, regardless of the fact that they all participate in outdoor activities. Our other efforts to date have borne this out.

2. Wrong gender. Our product is an “organizational” product. Most, but not all, men run from it at the first sniff. This was a show where men were the major purchasers. Women were present, but women shopping with men usually means that men will make the decisions, and it won’t be to look at Bin Buddies. We encounter this dynamic with all public venues at which we sell our products.

3. People come to these shows to look and score freebies, not necessarily to buy. If they do buy, intuitive, impulse-buy products do best.

We limped home from this show, licked our wounds, and reviewed our lessons learned. We resolved to do no more public shows—we could not afford any more major financial losses like this. There were, however, several positives that came out of this show:

1. As time passed, the information gleaned from this experience was most valuable when refining our sales and marketing efforts.

2. Approximately 30,000 people were exposed to our products. We got some into the hands of the general public, which is always good.

3. We made some price adjustments based on feedback we received. The adjustments have proven to be a good move.

4. We got a lot smarter about attending public shows, smarts we would not have developed had we not attended this show.

I will discuss our next effort in the next installment of my Trade Show series.

Our resolve to do no more public shows lasted until July, when I participated in the West Seattle Summerfest, part of our local community festival. It sounded fun, it would be downright economical for the exposure we got, and wanted to get out and do something other than what I was dealing with in the office. The idea was met with heightened skepticism, but I smiled sweetly and got permission to go despite misgivings.

TRADE SHOWS--PART 1

I have read about other people’s trade show experiences, and I have now had enough of my own to have actually have some information to pass on. The first installment is general information about shows—how to find them, when to think about them, costs, questions to ask, and any other general information that comes to mind. I will save my personal experiences for the second installment and beyond.

First off, just what is a trade show? I define them rather broadly to be a temporary marketplace (other than a weekly market) at which products are displayed and sold. The audience can be either the general public or a subset of the general public (street fairs, holiday shows, hobbyists, crafters, ski bums, etc.) or non-public shows open only to industry buyers (every industry has at least one show per year).

PUBLIC SHOWS

Why participate in a show open to the public? Here are just a few:

1. Participating in trade shows is a viable business model, and many businesses at public shows do just shows all year long. These are the vendors you see regularly at state and county fairs, and they travel the country selling at public shows of various kinds.

2. To gain exposure for your product(s) and to introduce the public to your company.

3. To do market research, practice sales skills, etc.

Shows open to the public require stock on hand to sell, and require that you have it with you in the booth or can easily be restocked. We only do local shows that allow us to restock easily if needed. That way, we do not need to rent a truck to store stock on the show premises. We learned this hard way, which will be more fully covered in the second installment.

We participate in public shows in the local area in order to 1) make a little extra money; 2) to gain exposure and introduce the public to our products; 3) to conduct market research; and 4) so that I can develop my sales/people skills. Nowadays, our goal is always to break even, and we don’t always make our goal.

We have participated in four public shows so far, three of which we have been invited to after an event manager saw our booth and products at another show. Beware that it is the job of these people to fill the booths at their show, not to make sure you have a good or profitable experience. There is a great deal to consider prior to putting down money for a show to which you have been invited. Put aside the pride and go into it with your eyes open. I list some questions to ask below.

NON-PUBLIC (BUYER) SHOWS

We have decided to participate in non-public shows open only to buyers in order to 1) introduce retailers to our products and 2) to generate orders from these retailers. No product is sold during the show; only orders are taken. There are some non-public “cash and carry” shows throughout the year, but these are less common.

Buyer shows require a completely different booth design and configuration for us, but they do not require stock on hand at the show. Our booth design for these shows is portable enough to fly around the country, and for 2008 we have several of these shows lined up in different parts of the country.

RESEARCHING SHOWS

When researching shows, I head to the two websites listed on the right, www.tsnn.com and www.tradeshowweek.com. I have found these two to be pretty comprehensive listings, and I always check both of them because their categories are a bit different and they don’t contain exactly the same information. To use the tradeshowweek site, click on Directories and then Tradeshow Directory.

When researching local shows not listed on the two aforementioned websites, I rely heavily on the web, especially listings in the local newspaper or a site that lists community events throughout the year. For fun, I like to participate in school bazaars, and I have to contact individual PTAs to find out about these opportunities. Other local shows in which I participate or plan to participate are local summer street fairs in different neighborhoods, a weekly Sunday market, the annual women’s show (bigger show than most local ones) and local “specialty” shows such as hobby shows, recreational shows, etc.

BOOTH DESIGN AND COSTS

Keep your booth design simple and inexpensive. You can do a lot with what you have around the house to begin with. Tablecloths from discount stores are a great bargain and hide just about everything. You want your design to be easily portable and easy to set up and take down. We design our own booths for both public and non-public shows. Fixtures for our public show booth have cost about $75 so far, and we have contributed some items from home (card table, chairs, tv trays). I can fit the entire booth and stock in the back of my Toyota pickup.

We do outdoor events regularly (weekly markets) and those tents you see run about $100-$200. Side panels for the tents, essential for inclement or very sunny weather, run around $40 per panel. In addition to side panels, you will need weights to hold the tent down in case the wind picks up. You can make weights (Seattle can get windy, so I use 20 lbs per leg) out of just about anything or buy them specifically for the tent. My weights are bricks held together with and wrapped completely in duct tape because they are cheap to make, compact and easy to transport.

I recommend a sign for your booth for public shows. Our 8x2 vinyl signs have cost us approximately $125 and $175 each. We use them for both indoor and outdoor shows. If your sign is handmade or smaller, it will be probably a good deal cheaper.

We are now designing and constructing our booth for the buyer shows we will participate in this year. We have budgeted $500 for this booth. We will be using a lot of materials from the local kite shop, which will save us tons of money. When in need of supplies and fixtures for something, we brainstorm to consider how to get what we need most economically. We get ideas from the most unusual places!

So, you have looked up some trade shows. Now what?

Booths cost money. Sometimes lots of money. My lowest so far has been $250 for a weekend I will be spending with hobbyists. Our highest fee is $2100 for a non-public show. Buyer shows are more expensive than public shows. Our average for public shows so far is $900 and for buyer shows about $1900. A buyer show in New York City will run you at least $3,000. These fees must be paid well in advance, so you need to plan for them.

You need to sign up to exhibit at a show well in advance, usually at least six months in advance, which means you have to be on the ball and perhaps start researching and planning shows during the development phase. We did not research buyer shows or sign up for any for our first year of operation. We probably could have exhibited at some buyer shows this year instead of waiting. However, this first year has allowed us to work out early operational bugs, work out manufacturing, and to gather information and knowledge we will need to play with the big boys in 2008.

One piece of advice I see is to attend the show in which you want to participate sometime in the future. This is not always possible or, in our case, not always economically feasible. If you can do this, by all means do it. If you can’t attend a show in advance and talk to the vendors, or even if you do, I recommend posing the following questions to the event managers when signing up for a show:

1. What has been the attendance the last 3-5 years? (or whatever attendance figures you can get) The show managers like to fudge these numbers.

2. What percentage of the vendors return from year to year?

3. What are the hours the show is open?

4. What is your advertising plan/strategy for the show? You are paying these people to drive traffic to the show, so you want a strong advertising strategy on their part.

Once we have the answers, we consider the following:

1. For public shows, booth fee divided by total number of hours the show is open. Kind of a “price per hour” measure. So far, our “price per hour” has ranged between $11.50 and $28. This give us an idea of how much stock we have to sell to break even. Typically, the more local the show, the more bang for your buck (street fairs are cheaper than regional shows). Additionally, we look at whether the show is open a variety of hours, midmorning to past dinner time to allow the greatest flexibility.

2. Total past attendance versus booth fee. We compare between shows. One show wanted $800 for an audience of approximately 600 attendees. Another show wanted $675 for what turned out to be 8,000 attendees. You need to know when you are getting took. I utilize a little formula that gives me a ratio for quick, easy analysis.

3. Vendor return percentage. This tells us how satisfied the vendors are with the show management and attendance. Other vendors are also a valuable source for this kind of information, and we get friendly with those around us when at the public shows.

4. Advertising—Are multiple mass channels being utilized (local newspaper, radio advertising, billboards, television)? This is extremely important for driving traffic to the show.

5. Show location. Is the show in a venue that is easy for people to reach by car and public transportation? Is parking convenient, free or reasonably priced? We have discovered that downtown Seattle is no place for a public show. The location (convention center) is inconvenient to drive to and parking is expensive.

6. Entry fees. Fees charged to the general public have been getting quite steep. Too steep and the public will not come, or will come and not buy because they have spent all of their money on entry fees.

That’s it for the first installment. I will be recounting some of our experiences, mistakes we made, and lessons we learned in the second and further installments.