Are You Prepared for the Credit Card Fraud Liability Shift?

On October 1st of this year, Visa, MasterCard, Discover and American Express are changing the way they will respond to certain types of payment fraud. From that point on, if merchants are not accepting EMV chip cards (i.e. they don’t have a terminal capable of processing these payments), then they will be held liable for any card-based fraudulent activity made with EMV chip cards used at their business.

The use of EMV chip cards has been rapidly expanding worldwide. Outside of the U.S., currently 44% of all cards have an EMV chip, and 74% of all credit card terminals are capable of processing EMV chip cards. The goal of October’s credit card fraud liability shift, is to encourage merchants to update their point of sale payment processing systems so that customers can make credit card payments with added security.

In contrast, to the standard magnetic strip cards that do not encrypt payment information, EMV chip cards store payment data on an encrypted computer chip embedded in the card. Instead of swiping a chip card, customers insert the card into a slot and leave it there until the transaction is complete. The encryption makes it much harder for credit card information to be stolen during a transaction and reused by thieves in the future. If a merchant is not yet equipped to accept chip transactions, customers can still use their chip embedded cards by swiping it. But in this case, the customer won’t get any of the new security benefits.

Why Small Business Owners Need to Respond

Many business owners may be tempted to simply ignore the rule change because they think that fraud would never occur at their business. Yet the truth is that many businesses are currently processing fraudulent transactions; they just don’t know it. The majority of the time the fraudulent charges are actually being handled by the banks without the involvement of the merchants themselves. By ignoring the push to upgrade their point of sale payment processing, smaller merchants will be exposing themselves to a potential financial loss. This loss can quickly outweigh any money the merchant was trying to save by not upgrading.

The bottom line is that these changes will come whether or not small business owners are willing to adapt to them right now. But, it definitely pays to respond to them as quickly as possible.


How the Credit Card Industry is Sucking Small Businesses Dry

Earlier this year I posted a series on credit card reform and suggested that it would be a rough road ahead for many small business owners… unfortunately I was right.

Though the credit card reform act of 2009 may have put a spotlight on some of the obscure and outright abusive business practices embraced by the credit card industry, most of the attention has been duly heaped upon the consumer. But the truth is that small business owners are getting the worst of the credit reform fallout, and unlike consumers, they are being hit on all sides.

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In October, the National Small Business Association presented the results of a survey it conducted to determine the usage of credit cards among small businesses as a quick source of financing. It also provided a telling snapshot of the way credit card companies are treating their small business clients.

According to the NSBA survey, in April of this year 59% of small businesses have used credit cards to finance their operations in the past 12 months; this is up from 49% in December 2008. Underscoring the struggle of most small businesses to get adequate financing in an economy that has gone belly-up, this increase in credit card usage is occurring even as more small businesses report that credit card terms have gone from bad to worse. In fact, according to the NSBA survey in the last six months alone, 75% of the small businesses reported that their credit card terms had worsened.

One of the most difficult changes to swallow has been a flurry of credit limit reductions. In the past year, 41% of the small businesses surveyed stated that their credit limit was reduced- often without any overt reason. Not only do these credit limit reductions effectively reduce the amount of available financing, but they can also negatively effect a business’ credit score by creating a higher outstanding debt-to-credit ratio. Since the business is then considered to be more risky, it prohibits financing from other sources.

Other reported changes in credit card terms include: an increase in the interest rate (63%), switching from a fixed to variable interest rate (23%), and increasing the minimum amount due each billing cycle.

All of this comes at a time when fewer small businesses are paying off their credit cards each month. This year 40% reported paying their monthly credit card balances in full, down from 50% a year ago. And this is exposing countless small businesses to the same unscrupulous business practices that have gained so much attention over the last few months. Of those who carry a balance: 33% reported receiving statement after due date, 48% reported that the due date seems to randomly change, and 57% reported receiving statements too close to the due date to have it mailed on time.

What’s more, since some companies advertising business credit cards are in fact (according to the fine print) offering little more than a fancy personal credit card, such practices can be devastating to the business owner’s personal credit rating.

But the credit card industry does not stop there when it comes to small businesses… According to the survey, 57% of small businesses accept credit card payments from their customers. Each time a customer swipes a card to pay for goods and/or services, the merchant pays a small processing fee to the banks and and credit card networks. These so- called merchant interchange fees have tripled in cost since 2000 cutting into profit margins at a time when every cent counts.

Bottom line for small business owners: when it comes to the credit card industry, the cards are stacked against them.

The Credit Card Reform Bill: Expect Many to Try Credit Card Alternatives

This post is the final part of a four-part series on credit card reform.

In the three previous posts, I discussed the possible affect of the credit card reform bill that was passed by the US Senate earlier this month. The bottom line for consumers and small businesses is that this new legislation will probably not have the desired affect its supporters had hoped for, and it may even lead to some negative consequences, such as smaller credit limits, higher fees, and less credit availability.

In response, many consumers and small businesses in search of credit will turn to credit card alternatives. Some will make this switch by choice, while others will do so because they have no choice.

Whichever category you or your small business falls into, you might as well familiarize yourself with some of the more popular credit card replacement options:

Credit Unions

Credit unions are basically small banks that are cooperatively owned by their members and run by the community at large. These local banks are generally more personable and they have the added benefit of limited interest charges as well as a vested interest in supporting the local community. They are a good place to turn for small business loans as well as personal lines of credit.

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Debit Cards.

Debit cards work just like credit cards and are accepted everywhere that credit cards are accepted. The only difference is that the money that you spend is immediately deducted from your bank account. Keep in mind, however, that if your card is lost or stolen, you risk losing the balance of money in your account.

Prepaid Credit Cards.

Like debit cards, prepaid credit cards work just like credit cards and are accepted everywhere that credit cards are accepted, but you have to put money into the card before you can use it. The major benefits to this method include more control over how much money is being spent and greater safety should the card be lost or stolen. The major drawback is that many prepaid cards charge a monthly fee in addition to a fee on transactions.

Bank Overdrafts.

A bank overdraft is a line of credit, much like a credit card, except it is directly connected to your bank account. A bank overdraft allows the account holder to overdraw the account up until a predetermined limit that is set by the bank. The outstanding balance may then be carried over from month to month, but it will accrue interest charges.

Charge Cards.

Charge cards work just like credit cards except the monthly balance made be paid in full each month. Unlike credit cards, charge cards do not have a monthly spending limit, and you can make an unlimited number of purchases. Many charge cards come with a yearly fee, and impose hefty penalties when the balance is not fully paid.


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The Credit Card Reform Bill: The Effect to Small Businesses?

This post is the third of a four-part series on credit card reform.

The consumer reaction to the credit reform bill has been taking the spotlight ever since the legislation was approved by the US Senate two weeks ago. Though the changes proposed in the new legislation will have some effect on consumer credit card usage, the under-emphasized fact is that smaller businesses (particularly those in retail) stand to bear the brunt of the fallout.

What makes small businesses special is that they are involved with credit cards both as a source of quick financing and as a way to extend credit and convenience to customers.

There has already been movement among the major business credit card issuers to drop their small business customers, or at the very least raise interest rates while reducing credit limits. My guess is that after the legislation goes into effect small businesses with good credit will see their rates continue to rise (albeit with greater disclosure) while their credit limits will continue to shrink.

Many of the “riskier” small businesses- those with bad credit and poor sales, or even those who have missed a couple of payments (how many small businesses out there these days don’t fit into this category?)- will have their accounts closed. In other words, they’ll just be dumped.

On the other side, the credit reform bill may result in a reduction in consumer spending by encouraging credit card holders to use cash or other credit card alternatives. Moreover, we can probably expect an increase in fees charged to retailers for processing credit card transactions.

None of this is good news for small businesses.

So what can small businesses do in response to the new credit card legislation? For one, small businesses must pay attention to any changes in credit card fee structures and incentives programs and then tailor their own credit terms and business practices around them. They should also look for alternative sources of quick financing, such as factoring receivables or turning to a community bank. It may take a little work, but it could shield a business from all the fallout.

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