Why I am Starting BlueHill Payments: No More $10 Minimums
Over the past couple years credit card processing has become a big industry. Companies like Stripe, PayPal, and Adyen have made it easier than ever for tech companies to start accepting payments online. This change has been long overdue as building a robust payment system is a solution they need in the modern era and building your own system is a technical challenge that not all startups and companies are willing to accept for themselves. But this brings us to the beginning of my story where one day I went to my favorite restaurant on my college campus with my roommates (shoutout Sushi Ichiban) and I saw this sign:
After seeing this sign I started to notice them everywhere. There are many different flavors of this sign, but you may have experienced the real world effects of this when you go to a small shop and try and buy something for under 10 dollars using a credit card. Many small businesses will either not let you pay via card or they make the customer pay an enourmous surcharge to cover their costs.
At some point I started to wonder why are these mostly small businesses charging their customers proportionally higher fees for low dollar value transactions.So I started my research. I found out that prior to 2010 it was actually against the rules of the card networks for merchants to refuse transactions below 10 dollars for credit card transactions. The Dodd-Frank Wall Street reform act mitigated this pressure for merchants by explicitly allowing these signs up to $10. This value is set by the Federal Reserve which has the right to increase it. This likely means that merchants may want and benefit from minimum credit card transaction sizes being more than 10 dollars, but this is the most they can legally do. But why have this sign in the first place?In order to explain why these signs exist in the first place we will need to go a little bit in depth on how credit card processing works at a high level for those unfamiliar with the topic. Each transaction for most processors has two types of fees: per transaction fees & percentage fees. These fees will be something like 2.99% + 30 cents per transaction. This fee structure is usually fixed for small businesses and they have little room to negotiate if any. Larger businesses on the other hand often have more leverage to negotiate their rate to something lower. In essence the way the industry currently works is the more you process the lower your fees which puts small mom-and-pop shops and other small business at a significant pricing disadvantage.But this still does not answer why “The $10 dollar minimum problem” is so common in small shops around the country. Well, it’s ultimately because the margins that many small businesses run on are razor thin. For example the average grocery store only has a 2.2% profit margin and the median profit margin for an independent florist is just 4.7%. When margins are this low adding another 1–3% of expense per transaction hurts the business’ income. But while stated rates may only seem like they are 1–3% the effective rate that businesses pay may be much much higher.
Example
Take for example a 10 dollar coffee shop transaction:
- Standard Pricing 2.99% + 30 cents per transaction
- Total Cost of Goods with Fees: $10.60
- Effective Fee: 5.99%!!!!
This is a much higher rate than the advertised rate. The average local coffee store has a profit margin of less than 6% so eating up that margin on credit card processing fees is simply not viable.
But as consumers shift their spending habits from cash to cards it is becoming increasingly important for small businesses to accept new types of payment to stay in business. In fact according to US Bank less than 50% of Americans carry cash regularly. And now with contactless payment methods such as Apple Pay, Google Pay and Samsung Pay there is additional fees incurred by small businesses. It is clear that credit card payments are what consumers want and as they adopt the next generation of contactless payment it is essential that these businesses adapt to the fees that come along with these payment methods.
As such small businesses are faced with a new set of problems:
- Stay Cash-Only and Churn Existing Customers & potentially turn away new customers
- Accept Credit cards and absorb the cost from fees lowering your profit margin
- Pass fees onto the customers and increase the cost of goods being sold increasing the price of your goods for customers making it even harder to compete with the big players.
None of these options is particularly appealing. But as I mentioned earlier the high fees that small businesses pay are not the same as larger companies despite many brick and mortar stores having a considerably lower transaction fraud risk than many online software businesses.
So what now?
Well, thats where BlueHill comes in:
We believe that small businesses should not be paying higher fees simply because they are small businesses. Instead of making it harder for small businesses to compete with chains and bigger companies we should be making it easier. BlueHill will use novel technology to optimize credit card payment and contactless payment fees to help small businesses focus on their business and not how they get paid. Ultimately we want a level playing field between big business and small business by making it more affordable for these businesses to accept payments and getting rid of the $10 minimum signs wherever they may be.
We believe that small businesses should not be paying higher fees simply because they are small businesses. Instead of making it harder for small businesses to compete with chains and bigger companies we should be making it easier. BlueHill will use novel technology to optimize credit card payment and contactless payment fees to help small businesses focus on their business and not how they get paid. Ultimately we want a level playing field between big business and small business by making it more affordable for these businesses to accept payments and getting rid of the $10 minimum signs wherever they may be.
Our Mission:
To offer a simple and flexible payment solution to make it more affordable than ever for small businesses to accept any payment method so businesses can focus on their goals instead of how they get paid. We will democratize digital payments to be easy and accessible to more merchants.
Let’s get rid of the “$10 Minimum” signs once and for all!
