Let’s Put $15 Million Per Year Back into Retailer’s Pockets…And 7.5 Million Into Advocacy’s.

There are any number of things National Bicycle Dealer Association Executive Director Fred Clements doesn’t mince, and words are some of them. Ask him about the effect of credit card fees on retailers’ already modest profit margins, and he’ll tell you flat out: “It’s a black hole of conspiratorial behavior on the part of the credit card industry.”

Credit card transactions now make up more than half of all bike shop purchases, Clements says. Not only does your LBS pay between 1.9 and 3% on the post-tax retail value of every transaction, but there’s also a dizzying array of per-transaction fees (10-15 cents apiece), monthly program charges and other hidden fees, not to mention the cost of the machines and phone lines themselves…  just to turn that piece of plastic in the consumer’s wallet into a piece of revenue for their businesses.

A Little Trick I Like To Call “Math.”
Let’s call it 3% on average when everything’s said and done. And what that means to bicycle retailers is that three points of already-scarce profit margin goes missing from every credit card transaction. And, as you might expect, that’s three margin points they’d very much like to get back.

Total gross sales for the USAspecialty retail sector in 2010—bikes, equipment, rubber, service, apparel— runs about $6 billion. If half of that sum is purchased with credit/debit cards at 3%, that’s ninety million dollars a year in pure profit being siphoned away from your friendly local bike shop and directly into the pockets of credit card companies, transaction facilitators, and what the industry calls “authenticators” (bottom-feeding denizens of the financial waters with deceptively bland monickers like VeriFone or ACH).  Which, as we’ll see in the next paragraph, is about eighty-nine and a half million dollars too many.

Fwolla the Dwolla
2009 was a really crappy year for the bike business—probably the worst in its 150-year history. But it was a pretty good year for a gentleman named Ben Milne. Ben founded a company called Dwolla (the name itself is a portmanteau of Dollar and Web, but don’t let a dopey name sour you on a smart concept). Dwolla uses its own systems to securely process transactions for a lot less than the big guys charge.

How much less? A quarter.

Not “one-quarter less than the big guys.” Or even “one-fourth of what they’re charging.” But a real, honest-to-god quarter. Two bits. A couple of dimes and a nickel. So if a thousand-dollar bike purchase takes $30 off the retailer’s bottom line, the same purchase made via Dwolla only costs him 25¢. Unless it’s a small purchase, say less than ten bucks. Because in that case, my friend, the whole thing’s free.

You can read some good articles about the Dwolla model here and here.

So What’s The Catch?
The only real thing holding the Dwolla model back is what game theorists call appropriating value and you or I might call the “What’s in it for me?” problem. Because, unlike the traditional credit card machine, creating a Dwolla transaction requires both the merchant and the customer to have Dwolla accounts.

From the retailer’s point of view, the incentive is obvious: 3%. From the consumer’s point of view, not so much. The buyer, after all, not only has to sign up for the Dwolla service, but also foregoes the convenience of not having to actually pay for his purchase until the credit card statement comes in the mail.

But what if the retailer shared some of that value with the customer (or in game theory jargon, allowed the consumer to “appropriate” some of it)?

Now you’ve got the basis for a win-win situation.

A Modest Proposal
Let’s go back to our thousand-dollar bike example for a minute. Would, say, 1% (ten bucks) off the purchase price be enough to answer the “What’s in it for me?” question and incentivize the customer to open a Dwolla account and have the funds taken out of his bank immediately? Maybe not.

But what if the retailer offered to donate 1% of the consumer’s purchase price to World Bicycle Relief or People For Bikes in exchange for taking part in the two-minute online Dwolla registration process? Heck, if I know anything about cyclists, you’d have to hold them back from vaulting over the counter and commandeering the computer screen for themselves.

Now if we were talking about pizza parlors or used car dealerships, there’s probably not enough incentive to go around. But there are four things that make the specialty retail bike business uniquely suited to the Dwolla-style transaction model:

  • Local bike shops are exactly that—local—and unlike Big Box Stores or national chains, customers have a vested interest in helping their local retailer succeed.
  • Cyclists themselves benefit directly from investment in advocacy. And they know it.
  • Because it’s such a strong win-win, the model would enjoy support from consumer magazines and other key opinions makers. And the whole thing could even be done under the aegis of Bikes Belong, the industry’s advocacy organization.
  • For all three reasons listed previous, the model would almost certainly not be of interest to companies like Amazon.com or Wal-Mart, creating even more reason for cyclists to  spend their hard-earned dollars at their local bike shop.

Ricky, Don’t Lose Those Numbers
If just half the nation’s 3,000 specialty retail bike shops choose to participate (and to put two additional points directly on their bottom line, who wouldn’t?)  and half of their consumers opted in, the $90 million pie we were talking about at the top of the page shrinks by three-quarters, to a more modest $22.5 million. With two slices of that pie going to retailers and one to advocacy, we’re talking about  $14,985,000 distributed among 1500 retailers ($10,000 dollars of pure pre-tax net profit apiece) and $7,493,000 to advocacy. And that’s only the first year. Customers who’ve opted into the program will tend to stay in (after all, the biggest obstacle is two minutes of online registration and it’s all for a good cause, right?) and more will join them. Because cyclists win. And retailers. And advocacy organizations.


The only folks who don’t win, in fact, are the transaction companies, because of the  $22.5 million that won’t be siphoned into their pockets anymore. And don’t you think that’d be a horrible shame?
Me neither.

About Rick V.

Rick’s quarter-century of experience includes executive stints building brands as Director of Global Marketing for Specialized Bicycles, VP of Marketing & Product for Veltec Sports, and Director of Airborne Bicycles. Outside the corporate world, he's worked as an award-winning copywriter and creative director for advertising, collateral, web, and multimedia agencies in the Hi-Tech, Sporting, and Consumer Products industries.

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13 Responses to Let’s Put $15 Million Per Year Back into Retailer’s Pockets…And 7.5 Million Into Advocacy’s.

  1. Ray Keener March 1, 2012 at 8:34 pm #

    Hey Rick:

    This was a real eye-opener. Although I gotta say, given human nature and all, the leap from Makes Total Sense to Making It Happen can be daunting.

    It would take a champion of the idea to make it happen. Throw out the ball, no way. I nominate you. A RickNickel for every transaction!

    Cheers, Ray
    charter member, BITSFYOG Club

    • Rick V. March 1, 2012 at 8:55 pm #

      You’ve absolutely nailed the $46 Question, Ray. My thought was that advocacy groups would want to champion it and industry press would want to support it, but time will tell. Also the RickNickel sounds like a hella good idea. But then, Micropayments is another great idea that never caught on, either.

  2. Blayne Puklich March 2, 2012 at 11:09 am #

    Very interesting idea. As retailers we spend money to be able to accept credit card payments (which the majority of consumers now use), but there’s not much value to the retailer. The money retailers spend pays for the rewards systems credit card companies put into place, among other things.

    However, as a consumer, it’s awfully nice to get those credit card rewards.

    My fear is that it will take more than the advocacy hook to get this going. The barrier to this new payment method might still be too high.

    Any other ideas? I’m coming up blank right now.

    • Rick V. March 2, 2012 at 11:46 am #

      Thanks, Blayne. You bring up a really interesting interesting point, and probably one I should have mentioned in the main post: the only advantage to retailers from consumers buying with credit cards is if they buy something they wouldn’t have otherwise. And if that “something they wouldn’t have bought otherwise” is less than the 3% aggregate cost you have to pay to accept those credit cards, they’re a net loss for you as a retailer.

      But it’s a lose-lose proposition: if you refuse to accept credit cards, or tack on a fee that represents the cost to you in honoring cards in the first place, you’ll almost certainly lose business. Which brings me to your major point on the question of whether consumers would embrace Dwolla-style transactions in exchange for funds given to advocacy (value appropriation), and if so, what would that value need to be?

      The good news is it’s cheap to find out. The cost to implementing Dwolla is zero in practical terms, and every dollar saved is, well, a dollar saved. In fact there’s no functional reason for the bike industry not to implement it. The only open wuesdtion, really, is whether the 1% figure I ballparked earlier is the right amount. And guess what?
      We can monkey with that number all we want and we still save money versus the credit card status quo.

      Hope this helps.

      • Steve March 12, 2012 at 8:47 am #

        I think the value to retailers in accepting credit cards isn’t exactly in increased sales, it is in lack of decreased sales from consumers who prefer the ease of using a credit card and/or don’t carry cash.

      • Todd G March 13, 2012 at 5:48 pm #

        Hey Rick,
        Don’t you think being in the field of marketing and all that if there were people out there marketing for Dwolla it would make a difference? The old adage people don’t buy life insurance they are sold it holds true here.

        Many businesses view this as a monumental task,switching over. Consumers have to be sold on the idea. Its not a problem that the money comes out of the account immediately. Count how many people use plastic checks or debit cards now. That is not the problem.

        Call it the 2% solution! If Dwolla would give 2% of its gross revenues to marketing companies to sign -up businesses and consumers,consumers and businesses would be “sold” on the concept.

        What is the market for 2% of credit card transactions? Assume 25% of credit card users use Dwolla and 25% of debit card purchasers use Dwolla? Cha -ching!!!! Just pay me 1/2 of 1 cent of every transaction over $10. Just ask Dwolla to pay an affiliate fee of 2%(same as 1/2 of 1 cent of the $.25 transaction fee). A small price to pay for marketing would you agree?

        I can think of several ways to entice people to sign -up if its my marketing company selling “what’s in it for them”.

  3. Brian March 2, 2012 at 1:45 pm #

    I couldn’t find the instant “link to Facebook” button or email this to a friend button. Brilliant idea.

    • Rick V. March 2, 2012 at 2:23 pm #

      Thanks for the heads-up; I’ll ask Laura to add that functionality.

  4. John March 9, 2012 at 1:22 pm #

    Credit card companies prohibit surcharges for the use of credit cards. So they would likely frown on any attempt to rebate fee savings back to the customer (or anyone else) as effectively a surcharge on credit card users.

  5. lee March 13, 2012 at 11:54 pm #

    The problem is that it takes 2 days to link your bank account to Dwolla. So, going to a bike store, signing up, and paying in one trip can’t happen they way you described it. The customer needs to sign up and link their account to their bank days in advance.


    • rickvosper March 14, 2012 at 9:30 am #

      You’re right Lee; most folks would tend to infer that you could register for Dwolla and use your acocunt right away. I should have been more explicit.

      What would have to happen is that the cycling industry (presumably the people who benefit, those being retailers and advocacy groups) would have a Dwolla “registration drive” to get cyclists signed up. Then, when those cyclists went to buy something they could use Dwolla as a payment option and the 1% (or whatever it ended up being) would automatically go to advocacy.

      Thanks for pointing this out.


  1. Could Dwolla help bike shops and create a new revenue stream for bike advocacy? | Bicycle News - March 13, 2012

    […] new service that offers a lower cost way to process credit card transactions. The title of his blog post about it is what first caught my attention: “Let’s Put $15 Million Per Year Back into Retailer’s […]

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