The Horrors of Credit Card Processing

[BradZimdack]

Bitcoin has seen plenty of scandal in recent weeks with things like the Mt.Gox and MyBitcoin catastrophes, but these episodes have been totally within the realm of normalcy compared to what happens every single day to conventional merchants who accept credit card.  The Visa/MC monopoly controls business much like the mafia do.  And like the mafia, these things aren't discussed much.  So here are few of the horrors of credit card processing, especially relating to internet based sales, that you might not be aware of:

* That 3% rate you see quoted everywhere is a lie.  Card-not-present transactions (i.e. anything online) are billed at a much higher rate.  Rewards cards, business cards, and any of dozens of other types of cards are billed at different rates too.  A more typical base rate is going to be around 4.25%  On top of that, there are authorization fees both to the gateway and the processor, which will total about $0.60 per transaction.  That puts total fees on a $9.95 sale upwards of 10%.  Keep in mind that's coming off of gross.  Even the IRS doesn't charge this much because they're just grabbing a share of your profit.

* Chargeback fraud is getting out of hand.  Once designed as a failsafe to protect against stolen cards, the chargeback is now being used as a catch-all for unreasonable customer demands.  Wanted the product in a different color?  Charge it back.  Found it somewhere else for a better price?  Charge it back.  Changed your mind about a purchase?  Charge it back.  Simply want to have your cake and eat it too?  Charge it back.  There's no reasonable time limit either.  We've received chargebacks up to a full year after the purchase was made.

* In addition to losing the money from a sale and the goods or services your customer stole, your processor will also hit you with a chargeback fee.  These fees range from $20-40 per incident.  Think about that in terms of how many new sales you have to make just to cover the cost of that fee.  You'd probably lose less getting mugged in an alley.

* Credit card authorizations occur within seconds, very much like an unconfirmed bitcoin transfer.  At the end of the day, a batch is processed and sent to the processor with that day's transactions.  The processor typically holds that money for a week before it gets deposited into your bank account.  A week!

* Get too many chargebacks in too short a period of time, and your processor will shut you down or start suspending deposits.  How many is too many?  That's arbitrary (despite whatever you may have heard about a 1% limit).

* The processors can do anything to you without notice.  They can shut down your account for no reason without even telling you.  They can withhold deposits to your bank account.  They can increase their rates.  They can refuse to process certain transactions even after they've been authorized without even telling you.  They can implement a "reserve" on your account where they withhold some portion of your money (like 20%) just for "safe keeping", again, without even telling you.

* If you complain about anything, or if you encourage your customers to pay by other means, you can be shut down without notice.

* With that one week delay on your deposits, getting shut down means losing an entire week's gross revenue.  We have a client who got shut down about a month ago and still has more than $30,000 stuck in limbo.  The former processor is claiming we have to wait 270 days before they will even consider releasing the funds.  There aren't even any written contracts or bank statements to substantiate our claim.

* To even get processing, the principals of the company must pass personal credit checks and the products/services offered must meet various arbitrary and unpublished requirements.  You can be rejected simply because your product is "too commonly available," or conversely, "too unusual".

I could go on, but I think you get the point, so I'll stop here for now.  Successful businesses just have to fight through this as best they can by passing as much of the cost onto their customers and employees as possible, and that's not good for anyone.  Bitcoin can solve every problem on this list.  If the user base grows enough, merchants will flock to it.  And they'll even be able to offer huge discounts to their customers for using it.

tl;dr:
The Visa/MC monopoly is choking the life out of us in ways many people don't realize.  Bitcoin has the potential to save us.

[kiwiasian]

You have to take into consideration the size of Bitcoin compared to CC transactions, which still puts Bitcoin in the "lots of fraud" zone.

[Reckman]

+1 so true

Don't forget how shitty they can be to the consumer as well

Bitcoin just needs to enter a realm where its easy enough for mass adoption

[BookofNick]

+1. Just yesterday I received a chargeback of $400 for a swimming pool drain and cleaning that I performed over two months ago. I'm not set up to take CCs, so I go through PayPal where ppl can use their CC even if they don't have a PayPal account. I was on the phone with payPal for an hour, the solution they gave me? Call your local authorities. Such a joke. We need Bitcoin, for this reason and more.

[evoorhees]

Bitcoin will succeed because of the following mechanism:

1) Merchants will slowly start adopting it because they can eliminate charge-back risk completely. Using a service like Bit-pay, they can receive USD still with this benefit.
2) Merchants that accept BTC will start realizing it reduces their cost of business. They will start preferring BTC payments because it's cheaper for them to operate.
3) Merchants will thus slightly lower prices for customers paying in BTC
4) Customers will see that prices tend to be slightly lower if paid in BTC, and thus they'll become increasing interested in using this means for payment online.

I think this mechanism is what solves the "chicken or egg" problem that Bitcoin as a new currency faces. It's pretty compelling, and the OP's points underscore the market need.

[molecular]

Thanks a lot to the OP for stating all these horrible facts. This is really good ammunition.

While bitcoin might solve all these problems, we still are in danger of letting the pendulum swing the other way. Customers deserve protection from fraudulent merchants (or non-merchants in some cases). In the end, the customer will decide which payment method to use and having to trust the merchant or do checking on him beforehand, then having to hope for delivery is quite a drawback.

How will we protect the customer from being ripped off my merchants?

[hugolp]

Thanks a lot to the OP for stating all these horrible facts. This is really good ammunition.

While bitcoin might solve all these problems, we still are in danger of letting the pendulum swing the other way. Customers deserve protection from fraudulent merchants (or non-merchants in some cases). In the end, the customer will decide which payment method to use and having to trust the merchant or do checking on him beforehand, then having to hope for delivery is quite a drawback.

How will we protect the customer from being ripped off my merchants?

Scrow system.

[gusti]

Thanks a lot to the OP for stating all these horrible facts. This is really good ammunition.

While bitcoin might solve all these problems, we still are in danger of letting the pendulum swing the other way. Customers deserve protection from fraudulent merchants (or non-merchants in some cases). In the end, the customer will decide which payment method to use and having to trust the merchant or do checking on him beforehand, then having to hope for delivery is quite a drawback.

How will we protect the customer from being ripped off my merchants?

that's easy, you can always make some due dilligence about the merchant you are buying
believe it, chargebacks are an unnecessary evil

[Meatpile]

Thanks a lot to the OP for stating all these horrible facts. This is really good ammunition.

While bitcoin might solve all these problems, we still are in danger of letting the pendulum swing the other way. Customers deserve protection from fraudulent merchants (or non-merchants in some cases). In the end, the customer will decide which payment method to use and having to trust the merchant or do checking on him beforehand, then having to hope for delivery is quite a drawback.

How will we protect the customer from being ripped off my merchants?

Scrow system.

But then how do we stop getting ripped off by the scrow sytems?? nooo its a circle jerk of infinity

[BTC_Junkie]

The big question I have is how do you convince the users to adopt BTC?  Offering a 5% discount (most likely the high end, of the discount range) will only be attractive to a certain group of people considering the additional hassle involved, compared with swiping a credit card.

[Shortline]

It's obvious that credit card companies are difficult to deal with. Nobody likes them, everyone hates them, and everyone mistrusts them. The fact is that it's not exactly about credit cards - we're dealing with an entirely different currency here. Dollars to bitcoins, that's the comparison, not credit cards to bitcoins...

As a strategy, it would be better to focus on how you can get bitcoins into people's hands more easily. Getting rid of them isn't really that difficult, it's getting them in the first place that's hard.

[BradZimdack]

The big question I have is how do you convince the users to adopt BTC?  Offering a 5% discount (most likely the high end, of the discount range) will only be attractive to a certain group of people considering the additional hassle involved, compared with swiping a credit card.

This is indeed the big question.  So far, I have convinced four vendors to start accepting bitcoin.  They are each offering discounts in the amounts of 10%, 15%, 50% and 50%.  (The stores that are offering the 50% discounts are doing that by pegging 1 BTC to $20.)  Unfortunately, almost no one has used bitcoin despite these incredible discounts they're offering.  The barrier to entry on the consumer side is still too high.

I'm working with two other vendors to begin accepting bitcoin soon too.  One will likely be offering a 20% discount but they aren't willing to proceed until they can point their customers to an easy way to get started (such as an online wallet or bank that lets you easily fund your account).

[molecular]

The big question I have is how do you convince the users to adopt BTC?  Offering a 5% discount (most likely the high end, of the discount range) will only be attractive to a certain group of people considering the additional hassle involved, compared with swiping a credit card.

This is indeed the big question.  So far, I have convinced four vendors to start accepting bitcoin.  They are each offering discounts in the amounts of 10%, 15%, 50% and 50%.  (The stores that are offering the 50% discounts are doing that by pegging 1 BTC to $20.)  Unfortunately, almost no one has used bitcoin despite these incredible discounts they're offering.  The barrier to entry on the consumer side is still too high.

I'm working with two other vendors to begin accepting bitcoin soon too.  One will likely be offering a 20% discount but they aren't willing to proceed until they can point their customers to an easy way to get started (such as an online wallet or bank that lets you easily fund your account).

http://textcoin.co.uk/ it awesome, and also the bitcoin ATM (links to videos here: https://bitcointalk.org/index.php?topic=1958.msg452908;topicseen#msg452908)

[BTC_Junkie]

The big question I have is how do you convince the users to adopt BTC?  Offering a 5% discount (most likely the high end, of the discount range) will only be attractive to a certain group of people considering the additional hassle involved, compared with swiping a credit card.

This is indeed the big question.  So far, I have convinced four vendors to start accepting bitcoin.  They are each offering discounts in the amounts of 10%, 15%, 50% and 50%.  (The stores that are offering the 50% discounts are doing that by pegging 1 BTC to $20.)  Unfortunately, almost no one has used bitcoin despite these incredible discounts they're offering.  The barrier to entry on the consumer side is still too high.

I'm working with two other vendors to begin accepting bitcoin soon too.  One will likely be offering a 20% discount but they aren't willing to proceed until they can point their customers to an easy way to get started (such as an online wallet or bank that lets you easily fund your account).

http://textcoin.co.uk/ it awesome, and also the bitcoin ATM (links to videos here: https://bitcointalk.org/index.php?topic=1958.msg452908;topicseen#msg452908)

Wow, that concept is very interesting... Do you know why they only offer really small BTC amounts?

[defxor]

If the top post can be readily verified or somehow otherwise accepted as true (I'm assuming a CC merchant doesn't want to put his business on the line?) it should at least go on the wiki and maybe even bitcoin.org

[error]

If the top post can be readily verified or somehow otherwise accepted as true (I'm assuming a CC merchant doesn't want to put his business on the line?) it should at least go on the wiki and maybe even bitcoin.org

I see no reason to doubt it. These things are very common knowledge.

[BitPay Business Solutions]

The Visa/MC monopoly is choking the life out of us in ways many people don't realize.  Bitcoin has the potential to save us.

Brad this is exactly the reason why we started Bit-pay.  I've been a merchant accepting credit cards online for 10 years.  I have never won a single dispute, not one.  And the fees go up and up every year. 

[BitcoinRigs.com]

Credit cards are the biggest fraud of the century.

Here's just one of many examples:

http://www.zug.com/pranks/credit/

[defxor]

If the top post can be readily verified or somehow otherwise accepted as true (I'm assuming a CC merchant doesn't want to put his business on the line?) it should at least go on the wiki and maybe even bitcoin.org

I see no reason to doubt it. These things are very common knowledge.

I'm not doubting it, but it needs to be sourced in some form of another if we want to actively use it to push Bitcoin (e.g bitcoin.org, the wiki).

I sincerely doubt it's _that_ common knowledge. Outside of the US you rarely hear consumers talk about chargebacks even.

[Maged]

If the top post can be readily verified or somehow otherwise accepted as true (I'm assuming a CC merchant doesn't want to put his business on the line?) it should at least go on the wiki and maybe even bitcoin.org

I see no reason to doubt it. These things are very common knowledge.

I'm not doubting it, but it needs to be sourced in some form of another if we want to actively use it to push Bitcoin (e.g bitcoin.org, the wiki).

I sincerely doubt it's _that_ common knowledge. Outside of the US you rarely hear consumers talk about chargebacks even.

It's common knowledge to anyone it applies to (merchants). Thus, their is no reason to use this information to push bitcoin, other than to possibly create a chart showing how Bitcoin is better. Our current PR pretty much already does that.