Wednesday, October 07, 2009

The Vampire Squids Leeching Small Business

Small business is plagued by innumerable parasitic fees, taxes and charges. Here's another insidious one: credit card transaction fees.

Correspondent Don H. recently alerted me to yet another parasite sucking off small business: credit card companies (surprise!). One of the primary themes of this blog is the way that small business is being undermined to the point of collapse in the U.S.

When readers write in to tell me taxes aren't that high in the U.S. compared to other nations, inevitably they are not self-employed or a small business owner.

There is a deep disconnect between the phony "we support small business" propaganda and the reality that tens of thousands of small businesses--a larger source of employment than global corporations who happen to be headquartered in the U.S.--are hanging on by the thread.

In the propaganda, the U.S. is an entrepreneural heaven where anyone can become the next Bill Gates. The reality is that a high-cost partnership of State and state-protected cartels is sucking the life out of small business with endless junk fees (licensing, permits, surcharges, business taxes on gross income, etc.), skyrocketing healthcare costs and an assortment of other overhead costs--such as outrageous credit card transactions levied by a cartel.

I have long suggested that the U.S. economy is crumbling because small business is being choked to death by high overhead, high rents, high taxes, rising junk fees and insane "healthcare" (a.k.a. sickcare) costs. The mainstream media can spew all the propaganda it wants about "when America emerges from recession," but small business will be missing in action, and all those storefronts will still be empty regardless of the glowing propaganda.

Here is Don's report:

If you want to publicize a real "vampire squid" sucking the life blood out of a system that would make even Goldman Sachs blush, you ought to do an expose of the credit card processing racket that small businesses are subjected to.

As a owner operator of a self storage facility I do everything from mowing the grass and changing garage door springs to renting units and doing the banking. Due to the recent downturn, our vacancy rate has skyrocketed and I've started looking into some areas of my operation that I usually don't have time to.

Do you know that there are over four hundred different transaction types with different rates that processors charge, and there is no way to know the rate you are being charged before processing it? For one type of transaction I discovered I was being charged 7%! That's an outrage! Imagine what the credit card industry's profits would be if every transaction fell into that category - heck, imagine what they are now. No wonder they're such advocates of a "cashless society".

Additionally, the industry is deliberately set up to confuse the average small business owner and is rife with all sorts of scam artist reselling the processing services of the few providers. Due to its complexity I would bet that there isn't one out of a hundred small business owners that actually understand how the system works, and the industry does everything it can to keep it that way. Small businessmen just watch the squid suck a couple of hundred bucks a month from their accounts and consider it "another cost of doing business". Like elderly people that due to age have a reduced understanding of what is going on, small businessmen are distracted by the myriad of other concerns that actually running their businesses entails. And just as unscrupulously as those that prey on the elderly, the credit card processing industry preys on small businesses.

As I mentioned, there are over four hundred different fees that can be charged depending on the type of card used and transaction method you use to process the sale. That's real transparency isn't it? Granted, the highest charges are for the most risky transaction types, i.e. phone authorizations with out the cvv code and zip/address information, and a legitimate argument can be made for charging a higher rate for these. This is the type of transaction I was referring to when I said my costs for them were approaching 8% of the sale. Debit cards and a swiped credit card with a customers signature do cost the merchant the least, but it's still pretty stiff at about 3%.

The real problem is that very few small businessmen know how the credit card processing industry works and the industry intentionally makes it very difficult to figure it out. Like insurance, its almost impossible to compare apples to apples when shopping rates. Additionally, your processor continuously sends you four page micro font addendums to your agreement that, if you bother to spend the next few days going through them, are tacking on additional fees and or raising rates. It's a great business model - the longer you stay with them the more they screw you.

Quite frankly, I don't know how small businessman can get the industry to lower fees, it's kind of a David and Goliath situation. The only suggestion I have is for merchants to become better educated as to how the system works and have some sort of industry requirement to provide the rate and fees structure in a standardized format that allows for easy comparisons. Then, if the merchant doesn't bother to check his costs and shop his rates - oh well.

Thank you, Don, for this insider's report.

I've been away from my desk for a week so I apologize for the tardy email responses.

Permanent link: The Vampire Squids Leeching Small Business

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

Thank you, Grant P. ($20), for your ongoing extremely generous donations to this site. I am greatly honored by your support and readership.

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