FUTURE OF FUNDING #9 – END OF CREDIT CARDS
Karl Dakin
I help you overcome challenges to raising capital. Take advantage of my Motivated Money Method to identify those investor candidates that are most likely to invest. Top expert in fundraising.
QUICK CALENDAR
TUESDAY, NOVEMBER 19, Successful Funding show, 8 am Mountain Time / 10 am Eastern Time – Dr. Tom Frey – Future of Entrepreneur Funding
WEDNESDAY, NOVEMBER 20, Belize Real Estate and Life Styles show, 8 am Mountain Time / 10 Eastern Time
WEDNESDAY, NOVEMBER 20, Don Cohen show, 9 am Mountain Time / 10 Eastern Time
THURSDAY, NOVEMBER 21, Community Revitalization show, 8 am Mountain Time / 10 Eastern Time
ASK CAP
?CAP, my artificial intelligence (AI) avatar, is available on my website 24/7/365 to answer your questions for free on matters related to funding.
?I developed CAP with a license from Knowledge Avatars to answer frequent questions about funding and save myself time to answer the harder questions.
?I asked CAP, “How does the use of credit cards negatively impact small businesses?”
CAP responded:
“Credit card use can negatively impact small businesses through high transaction fees, which reduce profit margins. Additionally, delayed payments due to processing times can affect cash flow. Moreover, chargebacks can lead to financial loss and increased administrative tasks. These factors can hinder a small business's ability to manage its finances efficiently and invest in growth opportunities.”
FUNDING HAPPENINGS
Brent Wistrom publishes a newsletter on funding called The National Beat as part of the Business Journals offerings. Although this publication is primarily focused on the very top of the capital market with billion-dollar investments, it often contains information useful to smaller opportunities. Referenced articles commonly point to a Business Journal for a local geographic area that wants you to pay a subscription fee to get the details, but this enables us to use other social media, press releases or websites to get the same information for free.
FUNDING POINT – FUTURE OF FUNDING #9 – END OF CREDIT CARDS
Next Tuesday, at my Successful Funding show, I will have as my guest Dr. Tom Frey, who is a world-class futurist. We will be talking about the future of funding. Tom has a rare ability to see today’s trends 10 to 25 years into the future and see where these trends converge and can have a major impact on individuals, businesses, and governments.
?I am hoping for the end of credit cards. This ubiquitous part of our everyday life represents a tax on every transaction paid with a credit card. I do not believe that credit card users – both customers and vendors – are getting fair value for the service offered.
?A credit card transaction supposedly represents a temporary extension of credit from a third party. The third-party charges interest on this loan with rates up to 30% annually, making it one of the most expensive forms of funding available.
?But wait! The third-party, commonly via a fourth party or credit card processing business, charges the merchant a processing fee of 3% to 5.5% of the dollar amount of the transaction for paying the vendor while waiting for funding from the third party. Think of it as a short-term loan on top of a longer-term loan bundled with an administrative fee.
?From a theoretical perspective, it makes sense for a business to facilitate a purchase where the purchaser is using the credit of a third party. The time value of money must be taken into consideration. There is also the expense of setting up a system where convenience is offered to a vendor and to a customer to facilitate the transaction with the establishment of relationships, communication channels, equipment, and operations. There is also the risk that the credit extended by the third party is insufficient; the customer has an issue with the transaction and seeks a refund and other related costs associated with the transaction.
?From a practical perspective, the pricing of credit card processing comes apart from closer examination.
?Credit cards compete with debt cards and ACH bank transfers to bank transfers where there is no risk and the associated fee of transactions paid in this manner is substantially lower. Depending upon the company processing these types of payments, one might see a fee of $.25 per transaction; otherwise, it might result in processing fees in dollars, tens of dollars, or even hundreds of dollars. These fees are paid by the vendor, and therefore, the customer is blind to this added cost, which has been added to the price of their purchase. Every merchant accepting credit card payments automatically adjusts their pricing to reflect this increase in operating expense. You have seen this where merchants offer a ‘cash discount’ when selling their products or services. It is not actually a discount but a ‘true price’ that gains the merchant their desired profit margin without having to bump the price to cover the cost of the credit card processing fees.
?At first blush, all of the difference in cost is attributed to the existence of credit. However, this should be covered by the interest charged by the third party, not by the fee charged by the fourth party (payment processing company).
?The charging of higher than appropriate processing fees is a fiction that is demonstrated by every credit card company offering ‘cash back’ to their customers. They would not be able to return this money if they had true costs associated with processing the transaction. This becomes a game where the credit card company and the associated payment processing company take out fees today, use your money without paying you for the use of your money, thereby making more money, and then return you a portion of your money like they were doing you a favor.
?If these credit card companies simply charged the vendor a lower fee, then this could be reflected in lower prices for their customers.
?So, stop! What is the cost of money when a credit card is used? The customer who has the credit card and who has a loan from a third party is not only paying a high price of money for the use of that credit card, but they are also paying higher prices for the products or services in the markups by the vendors.
?Now consider how much money that might be. A vendor accepts a credit card payment electronically. This results in a payment into the vendor's bank account after a period of time that may be days, but it could possibly be achieved in hours and no longer than overnight. If virtually the entirety of a credit card processing fee is whatever category of expense we want to label it, then the aggregate cost of money over a year is absurd. A 3% processing fee that is covered by the third-party credit card company within one day translates into 360% interest per year.
?It becomes easy to see how a credit card company can give cash back when they are using the vendor’s money, which is now embedded into the product/service price.
?When this entire system was developed, it represented a major improvement in the management of sales transactions. Despite the costs of setting up accounts, purchasing credit card point-of-sale equipment, and other expenses, it achieved convenience whose benefit justified the cost.
?Times have changed and will continue to change. Today, all I need to do for a credit card purchase is to touch a smart card to a pad, and the transaction is completed. This reflects a long history of innovations that suggest the entire concept of a credit card and associated processing fees should be outdated. Fintech can complete processing in a heartbeat with no true risk associated with the transaction. There still remains a risk that the card holder may not pay the card, but this is covered by the interest rates on the card. There is no longer any justification for anything other than an exceedingly small admin charge.
?Going further, the opportunity exists within fintech to blend the finances of an individual or business so that credit card transactions are not treated as a singular or siloed type of financial activity. Any person or business that has assets and uses credit of any form should have the potential to ‘bundle’ their credit card transactions with other credit relationships.
?I expect that in the near future, credit cards will be bundled with home mortgages, car loans, insurance policies, and other credit relationships where a ‘savings’ will occur. Anyone who has seen a State Farm or Progressive insurance advertising has seen the 15% reduction in cost from bundling home insurance with car insurance. The same can happen with credit cards through the use of fintech, which may or may not make use of digital currency.
?The only question will be who will make the first move on this occasion.
?This change within the capital industry is of importance to me in my support of small businesses and communities because large businesses are already bundling in some manner, giving them a competitive advantage. In addition, vendor payment of processing fees serves to extract capital from a community where the money never returns to reduce the wealth of that community.
BELIZE REAL ESTATE & LIFESTYLES SHOW
NEXT WEDNESDAY, NOVEMBER 20, Boris Mannsfeld and I will host the inaugural Belize Real Estate & Life Styles show at 8 am Mountain Time / 10 am Eastern Time (this show is rescheduled from a few weeks ago). The program will provide insight into doing business and living in Belize.
You may view the show live or watch it later as a recording at:
SUCCESSFUL FUNDING SHOW
NEXT TUESDAY, Thomas Frey CSP will be my guest on the Successful Funding show at 8 am Mountain Time / 10 am Eastern Time. Dr. Tom Frey is a world-class futurist. We will be talking about the future of funding.
You may watch the show live or watch the recording at a later time at:
LAST TUESDAY, Andrew Sherbo with the University of Denver, Daniels School of Business, was the guest on my Successful Funding show. We discussed entrepreneur education. The conversation renewed the concerns from last week’s show with Eric Hanson on the need for greater financial literacy – personal, business, and community. Basic concepts such as return on investment (ROI) based upon the time value of money and the need for planning pointed to challenges remaining for educators.
You may see a video recording of the show at:
DON COHEN SHOW
YESTERDAY, I was the guest on the Donald Cohen show. We talked about strategy. The act of forming a strategy serves to guide an organization in future planning and operations – to point the organization in a specific direction. Strategy development is improved by having more people participate to create multiple perspectives based on a broader range of experiences.
If you would like to a recording, go to:
You may subscribe to this Weekly edition of my Instant Funding Newsletter, or you may subscribe to my Daily edition.
Karl Dakin, the Capital Coach
Dakin Capital LLC
Inventor at PITek.US
1 周Future of Florida
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1 周That's going to be Amazing program thanks for sharing this karl Dakin best wishes to each and everyone their ?????????????????????????
I help you overcome challenges to raising capital. Take advantage of my Motivated Money Method to identify those investor candidates that are most likely to invest. Top expert in fundraising.
1 周How would less expensive credit card transactions impact your business or your community?