We have come a long way since the earliest systemized credit payment processing platform. The Charga-Plate was a dog tag like piece of metal that left a customers information on an ink ribbon when pressed. Today the international payment processing system enables hundreds of billions of dollar of transactions every year. Unfortunately, it has become totally convoluted and overpriced.
Albert Wenger had a great post today describing the problems he has with the current payment processing industry. I want to focus in on one of these problems – CHARGES. The fee system is so complex that it has taken me the past year to figure out how it works. Here is what I have figured out to date – every transaction we process at TaskUs is used to pay five parties:
1) Authorize.Net – Approves the credit card transaction and submits it to the cardholders bank.
2) Issuing Bank – Fronts the money for the credit card holders (Citibank, Bank of America, Wells Fargo)
3) Credit Card Brand – Visa or MasterCard provides the network to link and process the transaction (AMEX acts as Credit Card Brand and Issuing Bank).
4) Card1 – Deposits the money in our bank account and sends us a nice paper summary of the money we make every month.
5) Us – The company who provides the actual service the customer paid for.
Seems like a whole lot of cooks in one kitchen doesn’t it?
What this means is that credit card fees for merchants (especially small merchants like us) are high. We pay between 2 and 3.5% + $0.20 per transaction. But our average ticket price is over $100. Which means our net fees are between 2.2% and 3.7% of revenue. Not fun to give up, but manageable.
Now consider the case of a micro-merchant, someone whose average ticket is $5 or less. For example a photographer who wants to sell a photo for $1. If this photographer were to work with our merchant solutions they would give away between 22% and 23.5% of their revenue!
There are better options for the micro-merchant – Amazon Flexible Payments and PayPal Micropayments would charge 5% + $0.05 for this same transaction – or 10% of revenue. But, as Wegner point’s out in the comments section of his post, these solutions require that you use their networks. They cannot be seamlessly integrated into a merchant’s website in the way Authorize.Net is in ours. Far more egregious from my perspective is that this merchant is charged 10% of revenues!
Google has recently announced a micropayment solution for content providers. But it would take 30% of revenues, in the exact same split the Apple iTunes store uses with app developers and music companies.
I would like to see a start up enter the foray in the way PayPal did in the 90’s. But I fear that taking on the payment processing world require serious connections to the vested interests that profit from things remaining just the way they are – expensive and unmanageable for micro-merchants.