I had occasion to recently interview Alan Homewood, CEO and founder of 2Checkout.com (2CO). 2CO is a This Columbus, Ohio-based payment processor charges $49 USD as a setup charge, then 5.5% + $0.45 USD per sale. 2CO is technically a reseller – it buys your software, subscription or product at a discount, and then sells it for the Suggested Retail Price (SRP).
2CO, as you will read was a self-funded micro-ISV when it started in 1999. As of today, 2CO has handled $138,145,161.94 worth of sales this year, including sales for my micro-ISV.
Q. In today’s business environment on the web, what’s the three best reasons for doing business with 2CO.
A. Probably the three best are the ease of signing up, the low cost of entry for startup, self-funded entities, and 2CO was the same thing, so we understand the business.
A. Yeah, I started the company in 1999 myself, when I saw the cost of getting paid on line was quite steep for a small company that may or may not have large sales, or may take a while to start selling. There’s the merchant account that’s $500 and $50 a month, the SSL certificate, the dedicated servers you really should have to store sensitive information like credit card numbers, the technical resources to manage the servers, and in a lot of cases a shopping cart. I decided there needed to be an alternative where you didn’t have the upfront costs, and paid a little more each transaction, to hit that niche market.
Q. What’s your history on this? Is 2CO your first business or your third or… ?
A. Personally, I was an Oracle consultant, with a billing background, an anti-fraud background, a varied background, and I became interested in web businesses, and that’s where the company came from.
Q. Can you give me an idea of how big 2CO now is?
A. Right now we have roughly 60 employees, we’re all located here in Columbus [Ohio], and at last count we had about 40,000 vendors, and we’re adding about 2,000 a month, and we do roughly $17 million a month in sales.
Q. I can see that at a certain price point it’s more economical to bring payment processing in house. What’s your ideal size client here? How big is big for you?
A. We do have clients at a certain level, but really at $10,000 and below of sales a month is kind of where the break point comes in. Right around that number, I can bring some of these costs in house and save money, I can pay to do these things directly. Something people don’t realize often is that there is a lot of processing that goes on on the backend of processing credit cards. There’s a lot of overhead and headache people don’t calculate in. I roughly say that around $10,000 [sales per month] is the level it might make sense to take a lot of the things we do for them inhouse. Particularly if they are going to grow and grow and grow.
Of course, we have quite a few clients that stay with us at higher levels because the expense of monitoring fraud can be significant.
Q. Besides the ease of entry and low costs, two things I wondered about was credit card fraud and potentially taxes. Can you give me a bit of an education there about what you guys do – especially about fraud?
A. We have a seasoned fraud staff and tools developed in house over years to help identify fraud. And we pay for a lot of other sources where we get information. We take a lot of that burden away from our clients, most of which are small businesses. They need to concentrate on running their businesses, not being an expert in the myriad ways someone may try to defraud them. There’s a massive amount of credit card fraud that goes on on the Internet.
Q. How massive is massive?
A. Just in the U.S last year, 400 to 500 million in losses sustained by merchants; that’s not even counting the amount of fraud they stop at the door, or the cost of battling the fraud.
Q. Can you give me an idea of what percentage that translates to?
A. I’d say that on a daily basis we catch five to ten percent of transactions as fraudulent. If you are not a bit prudent on the front end, you can catch even more than that. It depends on the product. Some vendors will have 1 in 5 orders that come in being fraudulent.
Q. The other question was taxes. Do you get into collecting taxes, or is that something that’s not happening on the internet?
A. It is happening on the internet; actually we absorb some tax costs and pay taxes for our clients. In the U.S., if you are in Ohio, and you sell to someone in Ohio, and you have a presence here or in whatever state you sell in, you are required to pay taxes. But the way we are set up, our relationship with our sellers and vendors is that they resell through us. That basically means that whoever you are selling to someone in Ohio, and then we resell the products. That puts the tax liability on us. At this point we just absorb it, we don’t pass it on.
Q. I guess sales tax in Ohio is a lot lower than in California! [Sonoma, CA has an 7.75% sales tax, but internet sales are exempt statewide.]
A. We pay quite a bit a month for sales that are in Ohio to people in Ohio.
Q. Two more questions: What mistakes do you see startups making that they could avoid?
A. I guess the advice I would give is to not give up. It can become difficult early on for a small company. It takes time to grow. In most cases it takes time to grow slowly, and that can become frustrating to a smaller entity.
I guess another problem for smaller entities is that they can become defrauded, become the victims of fraud very easily online. That’s definitely something to be careful of. And to test the waters online – some things definitely work for some entities and don’t work for others. For instance, entities may believe that it’s a great use of my investment to pay for pay-for-click advertising. That can quickly add up to a lot of money that doesn’t product any results. In some industries it may provide great results.
One of the most important things to do, at least for startup online businesses, is to mine the information they get from people coming to their web site and to constantly ask their clients and customers what they are looking for and try to get information from people who don’t buy as well.
Q. One other question. I noticed you made a point of saying all of your employees are there in Columbus, Ohio. A lot of financial services companies outsource to India and other places. Is ther something here you want to say, or is it that’s just how things have worked out?
A. Well, it’s a conscious effort. I know that has worked out for some companies, but I prefer to keep jobs here in the community, as long as it’s feasible for us. I like to employ people locally, have them here in the office, be able to meet with face to face. I know it [outsourcing] works for some companies; it isn’t my ideal situation.