No cash? No problem! Local businesses turning to mobile credit card processing
San Street employee Aaron Smith waits as customer Gretchen Sleamon pays for her order using an iPad and a Square device at Mark's Carts in downtown Ann Arbor on Thursday afternoon.
Melanie Maxwell I AnnArbor.com
But instead of becoming a cash-only business — something Saborio didn’t consider an option since credit cards account for half of the coffee shop’s sales — he turned to a mobile payment application called Square.
The San Francisco-based company, which enables businesses to accept credit cards anywhere on a smartphone or iPad, was founded in 2009 by Twitter co-founder Jack Dorsey.
The Square card reader plugs into a smartphone or tablet.
Photo courtesy of Square
In the Ann Arbor area alone, there are 1,000 Square users, ranging from street-side vendors to small businesses and artists, said company spokesperson Lindsay Wiese.
The concept is simple: A user creates a Square account after downloading the free application, and then receives a small, square card reader that plugs into the mobile device. The reader accepts all major credit cards and none of the customer’s information is stored since the data is encrypted on the card reader. Square then takes a flat 2.75 percent processing fee for each transaction the merchant makes.
Paypal's concept, called PayPal Here, was announced in March and takes a 2.7 percent cut for each transaction. This past week, Point-of-sale company VeriFone announced its product, SAIL, in an attempt to cash in on the growing industry. SAIL has the same 2.7 percent fee, but is also offering the option of 1.95 percent rate for users who pay an additional $9.95 per month.
In comparison, the fee structure for a traditional credit card processor can be more complicated. A merchant pays for the hardware, a start-up fee, a cancellation fee, and then a per-transaction fee that varies depending on the credit card type.
“(Traditional processing) is just mind-numbing,” Saborio said. “There are all these different transactions and rates for different cards.”
Because traditional card processors have higher rates for certain credit cards and a per-swipe fee, Saborio estimated he is saving $400 a month by using Square — despite initially being charged a $735 cancellation fee by his former processing company.
“For a business like mine where you’re doing a lot of transactions under four dollars, it really adds up quickly,” he said. “I was paying upward of 5 percent of my total sales for processing.”
For Jordan Ceresnie, co-owner of the Cheese Dream food cart in downtown Ann Arbor’s Mark’s Carts, without the ability to accept mobile payments, he’d turn away dozens of customers a day and lose hundreds of dollars in sales. Street vendors typically cannot use traditional credit card machines because they require a landline.
“For me, that’s huge,” he explained. “I’m a small business owner just starting out.”
He said after Square removes the 2.75 percent fee, the company direct deposits sales into his bank account, which become available the next business day. The application also has built-in analytics that allow him to track his sales history.
“At the end of the day, I’ll look and see how much I made and what time was the busiest for credit card sales. It’s really great and really user-friendly.”
Nick Wilkinson, the owner of Mark’s Carts A2 Pizza Pi food cart, agreed: “If I don’t take credit cards, I lose sales. The last thing you want to do is turn people away.”
Wilkinson accepts mobile payments on an iPad, where he can swipe the customer’s credit card and then hand them the tablet to sign. It provides an option to tip on the screen and receipts can be texted or emailed.
“I’ve found that with Square, more people using a credit card pay a tip than people who pay in cash,” he said. “Also, less people are carrying cash these days.”
Iorio's Gelateria co-owner Nick Lemmer uses Square on an iPad to check out a customer.
Melanie Maxwell | AnnArbor.com
The benefits, he said, are that it’s easy to use and the application is constantly updated.
“They’re always looking to improve things and they’re very responsive,” he said. “It’s so nice because I can access our analytics online and see how the store is doing on my phone while I’m in class when I shouldn’t be looking at it.”
He also said it’s become a “spectacle” with his customers who haven’t witnessed mobile payment technology.
“People love it. Seeing us use the iPad for our payments; they get so into it,” he said.
Lizzy Alfs is a business reporter for AnnArbor.com. Reach her at 734-623-2584 or email her at lizzyalfs@annarbor.com. Follow her on Twitter at http://twitter.com/lizzyalfs.
Comments
mjf
Wed, May 16, 2012 : 11:37 a.m.
Sorry for my finger dyslexia... $2.50 Hot Dog $2.43 payment from Square. $2.43 $2.50 original - $0.07 fees 2.75% (swiped) Dad's Dogs
UlyssesWrong1
Tue, May 15, 2012 : 4:19 a.m.
You can actually get one of these devices for free from Squareup's site promoting the technology if you're interested. It's cool, but not practical and really just an example of a new useless application for smart phones and other mobile devices that's becoming trendy.
Kellylynn Trammel
Mon, May 14, 2012 : 7:45 p.m.
Too many fees, not enough security!
treetowncartel
Mon, May 14, 2012 : 3:20 p.m.
Oh, and Cash is King!
treetowncartel
Mon, May 14, 2012 : 3:20 p.m.
So do these vendors need a policy to comply with the FTCA Red Flag Rules?
bunnyabbot
Mon, May 14, 2012 : 1:33 p.m.
As a small business owner this is what I have to say. Accepting credit cards costs a small business money, for many transactions this is the cost of doing business for amounts of money people wouldn't normally be carrying around in cash. Using credit cards is a convenience mostly for the customer. I am retail, I will not take a credit card for a $4.00 purchase. Some people try using thier card for a $2.00 or less purchase. That is absurd. If you don't have $2.00 in cash in your pocket you shouldn't go shopping. If you really want to support LOCAL business and not some huge global banking structure use CASH for purchases under $20 and especially for purchases under $5.
JimB
Wed, May 16, 2012 : 1:30 p.m.
You can't help using plastic for small transactions when using up $ on a gift card or pre-paid debit card.
bunnyabbot
Mon, May 14, 2012 : 8:42 p.m.
thank you BBS, as an owner I am well aware of what small businesses face as "costs of doing business" that is why I refuse a shopping bag (unless I am buying meat products or cleaning products and don't want to contaminate my other items) and use a reusable shopping tote, actually a lot of people in A2 say "no bag". I also try to pay for as much as possible in cash and budget accordingly. My debit or credit cards are go to for larger purchases. the "shop local" movement and the people that support them should realize that credit cards companies market themselves like any other service, to make money and that someone (the shop owners) have to pay for it.
Billy Bob Schwartz
Mon, May 14, 2012 : 3:15 p.m.
Bunny....Cash? Do they still make that stuff? LOL I would be embarrassed if I used a credit card for something under ten bucks. IMHO, this credit-card-for-small-payments is, well, really goofy.
mjf
Mon, May 14, 2012 : 11:50 a.m.
I have been using Square for well over a year now. It's quite simple for a business owner with small or few credit card transactions. I sell hot dogs. I charge $2.50 and if someone chooses to use their credit or debit card to buy the hot dog I get $2.34 deposited in my bank account. Seven cents, thats all seven cents to be able to make a sale that may have walked on by if I didn't accept credit & debit cards. I pay no monthly fees, have no monthly minimums, and I do not have a charge per swipe. Square was created for businesses like mine. Marc Freund Dad's Dogs
bunnyabbot
Mon, May 14, 2012 : 1:49 p.m.
7 cents? or 16? 2.50-2.34 is 16.
Useless
Mon, May 14, 2012 : 1:33 a.m.
The Square device, used as mentioned in this story, is not PCI (Payment Card Industry) Compliant. Although the hardware itself might be secure, attaching it to a iPad or iPhone that is connected to the internet through wireless, with other applications running on it is not secure and does not meet the rules PCI Compliance.
Tesla
Sun, May 13, 2012 : 5:28 p.m.
People use their credit card for a four dollar purchase? LOL
rm1
Mon, May 14, 2012 : 3:45 p.m.
>> People use their credit card for a four dollar purchase? << Yes, for some time. Fast food outfits like McDonalds years ago began encouraging credit card payment. And starting a year or more ago, payment at Ann Arbor's electronic parking meters can be made with Visa or MC. Since such machines occasionally won't take enough coins, and won't give them back to you, yielding only a credit slip redeemable at one office downtown (for which you'd probably have to pay to park), paying with plastic seems the better idea
mjf
Mon, May 14, 2012 : 11:51 a.m.
All of the time.
JimB
Mon, May 14, 2012 : 3:46 a.m.
Using your card generates points that can be turned into cash back.
Stephen Lange Ranzini
Sun, May 13, 2012 : 10:25 p.m.
@snark12: NFC enable cell phone purchases won't take off due to two reasons: 1) Metcalf's Law (without a large network of merchants who accept it, why go through the trouble of signing up to use such a service? 2) The current generation of cell phones are not secure (as have all previous generations). While they could be made secure and I have a customer who has developed a working version of a military grade secure network built with Android phones, no one has stepped up to the plate to offer such a service (yet). Putting serious money into an insecure mobile phone network would be a very costly error for the firms foolish enough to do it.
snark12
Sun, May 13, 2012 : 9:38 p.m.
Yes, because for small purchases there is often now no need to sign anything and using a card is faster than cash. Wonderful when going through the airport, for instance. The next Big Thing will be using NFC-enabled cell phones to make these purchases. You wont even need to reach for your wallet. It's possible now with a handful of Android devices but it hasn't taken off the way it probably will in the future.
Tesla
Sun, May 13, 2012 : 7:02 p.m.
Why don't you carry 20 or 40 dollars in your wallet for things like this or other times when you need a few dollars and credit cards are not an option. Plus now you know you are costing the business owner a lot of money each time you charge your coffee. Grow up.
HeimerBoodle
Sun, May 13, 2012 : 5:58 p.m.
I regularly use credit/debit cards for purchases under $5. Why on earth would I bother hitting up an ATM for cash (and potentially paying a higher fee than the amount I need to spend) when I don't have to?
Tesla
Sun, May 13, 2012 : 5:30 p.m.
Bonus points for A2.com for squeezing in another gratuitous mention of their favorite eatery this side of Zingermans. Nicely played.
jns131
Sun, May 13, 2012 : 3:43 p.m.
I saw that a few months ago. Totally blew me away. A lot of people are not using checks anymore. Too much can go wrong. Cute device. Still like my on line bill pay.
Red Floyd
Sun, May 13, 2012 : 2:44 p.m.
It seems like these processing companies must be losing money on small transactions. Can anyone explain the simple mathematics behind this for the fourth time? :)
Mikey
Sun, May 13, 2012 : 2:47 p.m.
the processing company is the one entity that consistently makes a profit (or at the very least - revenue) from EVERY transaction regardless of the amount; the merchants with thin profit margins may in fact be losing out (although, i don't fully buy into that....) in addition to the fee collected from each transaction, the bank collects a "fraud fee" to help cover fraudulent purchases.
Mikey
Sun, May 13, 2012 : 2:41 p.m.
I am more apt to buy from a merchant who accepts credit / debit card as form of payment; If a business owner can't profit from a smaller electronic transaction -- then adjust your prices accordingly. By the way, Square is primarily backed by JP Morgan Chase, so its hardly an "alternative" to traditional processing methods; big banks control the payment processing industry.
Stephen Lange Ranzini
Sun, May 13, 2012 : 5:28 p.m.
@Mikey: what if there is a profitable market selling lots of digital items for $0.01 but no takers at $0.30? For example, selling news articles, stock quotes, weather reports, & etc.? The lack of a cost effect micro-payment network holds back many business models and was a big part of the collapse of he first Internet bubble.
BigMike
Sun, May 13, 2012 : 1:33 p.m.
Hey @Stephen Lange Ranzini, do those processors LOSE MONEY on smaller transactions? Just asking .... :-)
bunnyabbot
Mon, May 14, 2012 : 8:33 p.m.
at billy bob, actually it is not under a penny. forgive me, maybe the misunderstanding was my puncuation: If someone pays for a $4.00 purchase with a card they are looking at 29 cents swipe fee plus 10.8 cents at 2.7% fee. combined for an almost 10% of the sale (or 39.8 cents)"convenience" . 10% is a pretty high "cost of doing business" that isn't rent or labor or cost of goods. hope that helps. 39.8 cents from $4.00 is almost 10%
Billy Bob Schwartz
Mon, May 14, 2012 : 3:05 p.m.
Bunny: "plus .108 cents" That's way under a penny.
bunnyabbot
Mon, May 14, 2012 : 1:47 p.m.
bigmike. the businesses lose money on small purchases paid for with a card regardless if it is credit or debit. If someone pays for a $4.00 purchase with a card they are looking at 29 cents swipe fee plus .108 cents at 2.7% fee. combined for an almost 10% (.398)"convenience" . 10% is a pretty high "cost of doing business" that isn't rent or labor or cost of goods. Card users want "points or miles" or be able to track thier spending. Small businesses want to stay in business. all credit card transactions are vulnerable. Last year both visa and mastercard had thousands of users info hacked.
alan
Sun, May 13, 2012 : 2:47 p.m.
Thanks, it must be coffee time.
Red Floyd
Sun, May 13, 2012 : 2:45 p.m.
Alan...BigMike was totally kidding dude... :)
alan
Sun, May 13, 2012 : 2:43 p.m.
That was his point. They pay a fee for each transaction but don't charge enough to pay their fee.
Stephen Lange Ranzini
Sun, May 13, 2012 : 1:20 p.m.
@Richard Wickboldt & @Michelle: As noted above in my initial post, these processors LOSE MONEY on the merchants profiled in the article who are doing lots of transactions under $4. If the average sale of a merchant using these systems isn't at least $10.74 if they are being charged 2.7% per transaction, or at least $14.87 for those merchants being charged 1.95% per transaction, they LOSE MONEY.
Michelle
Sun, May 13, 2012 : 12:41 p.m.
85% of payments in Ann Arbor are done with debit cards. As Richard said, 2.7% is like being robbed. After the Durbin amendment passed in October, the pricing for debit cards was reduced for regulated banks. If your processing company has not given you the discount for the pricing, demand it or switch. Processing with Square is unpredictable and risky, given the facts that are stated in their agreement: 'At any time and from time to time, we may temporarily suspend or delay payments to you and/or designate an amount of funds that we must maintain in your Square Account or in a separate reserve account (a "Reserve") to secure the performance of your payment obligations under this Agreement.' Basically giving them the right to hold your money at any time, for any reason. And it DOES happen. 'We have implemented technical and organizational measures designed to secure your personal information from accidental loss and from unauthorized access, use, alteration or disclosure. However, we cannot guarantee that unauthorized third parties will never be able to defeat those measures or use your personal information for improper purposes. You acknowledge that you provide your personal information at your own risk.' NO security guarantee....... 'We use your Personal Information to provide you the features and functionality of the Service, and may share it with our trusted third parties' Sharing your information..... 'PAY WITH SQUARE IS PROVIDED ON AN "AS IS" AND "AS AVAILABLE" BASIS. USE OF PAY WITH SQUARE IS AT YOUR OWN RISK.' There's more in the agreement. Considering a monthly fee isn't so bad when you figure your customers' and your information is at risk....... I have customers using secure mobile processing with half the prices of Square and no monthly fee.
Gorc
Sun, May 13, 2012 : 1:56 p.m.
Plus, the Durbin Amendment only effected debit cards…not credit cards. If your a customer pays with a credit card there would be no savings to the merchant due to Senator Durbin.
Gorc
Sun, May 13, 2012 : 1:12 p.m.
The Durbin Amendment will not help the merchants who accept cards from banks with less than $10 billion size. The new interchange rates only effect the larger banks, not the smaller financial institutions. Plus, smaller transactions are more costly under the Durbin Amendment because of minimum flat fees that were set. Most of the business mentioned the a2.com article are smaller business with typical lower sales amount per swipe. In the end, Senator Durbin did not help the small business owners or the general public. In due time, the small banks (credit unions and community banks) may have to charge their pricing strategy in order to stay competitive.
A2comments
Sun, May 13, 2012 : 12:25 p.m.
A quick Google search shows that Square may be making money and that ultimately they may be trying to become their own network: http://www.quora.com/Square-company/Can-Square-make-money-with-its-new-pricing and that merchants need to be cautious: www.cardpaymentoptions.com/credit-card-processors/square-review/
A2comments
Sun, May 13, 2012 : 11:50 a.m.
"none of the customer's information is stored since the data is encrypted on the card reader." Up until a few months ago, Square's reader was not encrypted, and it took them a year to launch the encrypted reader after their new investor, VISA, required it. To me the issue with all these different forms of mobile processing is that you don't know what the retailer is using and have no idea if it is encrypted or not. Or, if they are on a public wifi network or a private secure one. Or if they have another app on their device designed to collect the data. Or, what they are doing with your email address you gave them for the receipt. That said, many small retailers are using outdated wired equipment that is not PCI compliant anyway.
Richard Wickboldt
Sun, May 13, 2012 : 11:32 a.m.
2.7% per transaction is like being robbed. No wonder the 1% keep getting richer. In this modern day of technology where a transaction is totally electronic and pretty much automatic. The actual cost of handling a transaction is mere pennies. Gone are the days when there were hundreds of people in the Visa/MasterCard back offices where manually handling the ledgers. Now it is just a computer. But they keep charging is for nonexistent labor. Also with the cost of money so low why are we also being charged for such high cost of credit and it's services.
Useless
Mon, May 14, 2012 : 1:30 a.m.
Jim is right - the fees wildly fluctuate on a multitude of factors - and there many people that get a cut of the fee, the bank, the third party processor, MC/Visa/AMEX, etc. Not quite sure what Stephen is talking about.
Stephen Lange Ranzini
Sun, May 13, 2012 : 5:14 p.m.
@JimB: All processors whether owned by a bank, non-bank or credit union, that join a payment network, pay the same transaction rates to VISA and other credit card networks, although some networks like Amex, having smaller volumes charge even larger amounts to cover their higher costs (the network effect has a powerful impact on costs). They can't discriminate except to give volume discounts or that would be an anti-trust violation. The rates I've mentioned as the minimum fees, $0.29 per transaction, apply to all, but banks and credit unions with smaller volumes might pay more if they work through a processor and don't join the network directly. You are correct, the whole business model of most credit card processors is that they make their profit on the ancillary or "hidden" fees charged to a retail merchant. While you are correct that debit card transactions pay a smaller fee, that fee was recently set by Federal Reserve regulation at a rate of $0.21 plus .0005% per transaction, or about $0.23 for the $4 transactions mentioned above. Many in the banking industry commented when the regulation was proposed that these rates are actually under the total cost of providing the service. As a result, debit cards which were generally free before, are now a cost center and fees are being imposed on retail consumers for a service that was previously free. The Durbin Amendment was pushed by Big Box retailers so they could increase their profits and shift those additonal costs on consumers. Again, if the average debit card transaction isn't at least $7.64 they will lose money, unless there are other hidden fees, if the stated rate to the merchant is 2.70% (2.70% + 0.05% = 2.75%; $0.21 / 2.75% = $7.64). There is no profitable business model selling goods that cost under $5 using the current credit card and debit card payment networks. A new kind of network for micro-payments with a different business model is required.
JimB
Sun, May 13, 2012 : 3:32 p.m.
Steven, your're wrong. Card processors have a multitude of fees based on the situation. They charge a fee based on the purchase amount. It goes up if the card numbers are manually punched in rather than swiped because it's deemed a more risky transaction. It goes up again if the batch of transactions isn't sent to them to be processed on the same day because it's deemed aged and more risky again. It goes up again if the card is a debit card rather than a credit card. And again for lower transaction amounts. ETC ETC ETC.... They may also charge other monthly fees such as a paper statement fee and so on. Believe me, the processor isn't losing money here. This business is also very competitive because it's very profitable. Processors are constantly trying to get a business to switch by phone solicitations or salespersons prospecting. They offer 'teaser rates' much like a bank and then dig in once you switch. Lastly, we are only talking about the processor here; what about the credit card companies themselves? They all charge fees to the merchant. This is a big business.
Stephen Lange Ranzini
Sun, May 13, 2012 : 1:16 p.m.
@Richard Wickboldt: As noted above, these processors LOSE MONEY on the merchants profiled in the article who are doings lots of transactions under $4. If the average sale isn't at least $10.74 if they are charging 2.7% per transaction, or $14.87 for those merchants being charged 1.95% per transaction, they LOSE MONEY.
Jimmy McNulty
Sun, May 13, 2012 : 12:55 p.m.
Richard, that is the "cost of doing business" as they say, and business is not a charity as you and the OWS crowd would like to believe.
Gorc
Sun, May 13, 2012 : 12:43 p.m.
Mr. Wickboldt - There are more expenses involved other than just the processing of the transaction between the merchant and the bank. There is research and development to make the system more efficient with processing more transaction within the same time period. The cost to improve security to help decrease fraud and the cost of the fraud itself. There are marketing cost associated with promoting the service. And these are just to name a few.
Stephen Lange Ranzini
Sun, May 13, 2012 : 11:07 a.m.
Because the VISA and other credit card networks charge merchant acquirers like Square, PayPal and VeriFlne a fixed charge of approx. $0.29 per transaction, these transaction processors will lose money on all merchants whose average ticket size is $10.74 if they are charging 2.7% per transaction, or $14.87 for those merchants being charged 1.95% per transaction. Their current business model appears to be "lose money on each transaction and make it up on volume!" What is needed badly in our country is a micro-payment system as convenient as something like email or texting which fully leverages Internet technology so that each transaction has zero cost. This has not been a technology problem for the past 13 years (I received patents from designing a highly secure micropayment system that ran on email rails back in 1999), but a social and political problem driven by Metcalf's Law. Since I was President of a bank and technologically savvy I thought that I could solve this problem, and perhaps if I had the money I could, but it's an extremely challenging task not to be underestimated. My current focus is on leveraging health information exchange infrastructure to create that network effect and automate heathcare payments as the initial market. 95% of healthcare payments are ultimately made with a paper check. Healthcare is the largest industry in the U.S. but the least electronic for settling payments. Metcalfe's Law states (1) the cost of a network is directly proportional to the number of devices installed, but (2) the value of the network was proportional to the square of the number of users. VISA, other credit card networks, telephone networks, ATM networks and the Apple iTunes Ap Store, are all examples of very valuable networks which have achieved critical mass and therefore become extremely valuable. For more on Metcalf's Law and Network Effects, see http://en.wikipedia.org/wiki/Network_effect
bunnyabbot
Mon, May 14, 2012 : 1:37 p.m.
businesses can call thier credit card processors to request a "account review", you can get the swipe fee and % lowered as easily as asking. (I have done so and I "review" every six months just to see if I can get it lowered a bit more). there is no better "micro" payment system than CASH
Stephen Lange Ranzini
Sun, May 13, 2012 : 10:36 p.m.
@Brian Genisio wrote: "What are the specific social and political issues that get in our way?" Beyond Metcalf's Law, the top two reasons (there are several) are: 1) The mega banks have been actively blocking the development of such a system, because it is not in their best interest. They have a high market share of the existing payment systems, but may have a small market share of any new payment system. 2) Any successful payment system that develops will be under intense scrutiny with respect to anti-money laundering regulations and fears by some government agencies of its potential use by terrorists. Terrorists currently fund their operations through credit card based hacking and fraud schemes, among other techniques.
Brian Genisio
Sun, May 13, 2012 : 5:16 p.m.
"What is needed badly in our country is a micro-payment system as convenient as something like email or texting which fully leverages Internet technology so that each transaction has zero cost." Yes, Yes, Yes! Not knowing anything about the financial system, I have never understood why this doesn't happen. This doesn't seem like a technical problem to me... we have the transfer capabilities from a technological perspective. What are the specific social and political issues that get in our way?