Bay Area firms carve out socially responsible niche within financial industry

Starting a company at the tail end of a recession is a risky bet for any would-be entrepreneur. But for a single mother of three who is living in Section 8 housing and has been making ends meet by carefully rationing her (now exhausted) unemployment checks, it’s a high stakes gamble.

Jessica Nowlan, 32, prefers to call it “a leap of faith.” The single mom launched Hope Solutions last year—a company that equips small businesses with payments processing and e-commerce capabilities—despite having no savings, no business loan and just 6 months of experience in the merchant services industry. “This is not the ideal way to start a business,” said Nowlan.

Today, she has about 50 clients—mostly very small businesses—but said that she needs about 250 more to become financially healthy.

Hope Solutions grew out of Nowlan’s own short-lived experience as a sales agent for a national merchant processing company. Tasked with finding new clients and setting up their credit processing systems, Nowlan grew disenchanted with the nature of her job, which she said included misleading business owners into buying costly services they didn’t need—and, sometimes, couldn’t afford. Such practices, she later learned, were not particular to her own company, but endemic to the industry as a whole.

Merchant services is a part of the credit card industry that flies under the radar of most consumers, but it’s familiar to business owners. Before retailers can take credit cards or web developers can accept online billing, for example, they require a host of services and equipment: debit machines, e-commerce gateways, technical support and financial backing, among others. Big banks and credit processing firms like the one for which Nowlan worked deal with the set-up and administration of these payment systems—for a percentage fee that is lopped off the top of every transaction.

That’s where things tend to get muddy. Shop owners seeking merchant services deal with many of the same questionable business practices endured by consumers seeking credit cards: Banks may charge a host of dubious fees, agents may exploit customer naiveté to up-sell accounts and customers may buy into a sales pitch that may be much different than what’s detailed in the fine print of their contracts.

Over the last two years, as public trust has eroded and consumers have increasingly chosen to divest from corporate financial institutions, business owners have similarly looked for alternatives to big bank merchant services. Nowlan thought she could satisfy that demand by starting her own firm. “I thought, wouldn’t it be cool if I could create my own credit processing company that would really meet people’s needs,” she said.

In 2010, she launched Hope Solutions. She started small, taking on one client, then using that revenue to take on another, until she was able to rent a “smallish, kind of funky,” one-room office in the Laurel neighborhood of East Oakland, as well as hire a part time administrator.

Though the demand for alternative merchant services firms is increasing and her business is growing with it, she said that she’s facing uphill trudge in a competitive, old school industry. But Nowlan’s company, which she markets as transparent and community oriented, is one of a scant few trying to change the industry’s business culture—or, at least, carve out a socially responsible niche within it.

For Nowlan, “socially responsible” meant adopting a consistent fee structure that wouldn’t confuse or mislead her clients, tailoring payment systems to individual business models, and, above all, supporting homegrown small businesses. “When I first started, people said that was stupid—that there’s one bottom line in this industry and that’s money” said Nowlan. “What I’m trying to do really goes against the grain. We don’t buy (sales) leads. We don’t randomly cold call anyone. We set up pricing so that so everyone can participate.”

A key part of her business model is transparency—fully disclosing all fees as simply as possible. When business owners first set up their credit processing systems—which can consist of physical equipment like debit machines, point of sale software, online payments platforms and more—the experience can be overwhelming, Nowlan said. Further complicating the process are the complex and varying fee structures involved.

Whenever a customer swipes a credit card, for example, the merchant pays a transaction fee—but that fee varies depending on the type of business, the type of card, its issuer, whether the card accrues rewards, and other factors. Visa alone has established more than 300 different fees based on a variety of scenarios, which the company details in a 9-page merchant handout. Mastercard’s similarly convoluted fee structure is detailed in a 170-page merchant handout.

“People don’t understand it all,” Nowlan said, adding that sales agents in the industry are “trained to sign people up without disclosing all fees and it’s so complicated that people just end up trusting you.” As a result, she said, small business owners buy into costly services that don’t financially benefit their businesses, and end up locking themselves into long-term equipment leases.

Nowlan, on the other hand, doesn’t lock her clients into equipment leases and frequently adapts her services to whatever equipment they already have. Her fee structure is outlined in a simple, one-page handout available on her website, and she visits each merchant personally to explain how the fees, system and other details work. Sometimes, she even refers prospective clients to competing payment platforms, if it’s the more cost-effective option for them than her own services.

“It makes sense for some people,” Nowlan said of popular e-commerce platforms like Square, which allows businesses to take payments by Iphone or Ipad. “Not for a supermarket or a brick and mortar store. That’s where we have to look at each business model.”

In the Bay Area, Occupy protests in Oakland and San Francisco, which galvanized consumers into divesting from big banks, have prompted many small business owners to seek out alternative merchant services, like Nowlan’s. Sandy Dolan, who owns a gift shop called Bells and Whistles in Oakland, says that the Occupy protests convinced her to transfer her business accounts from Wells Fargo to a local bank. Then, when she discovered that her credit processing services, also administered by Wells Fargo, were costing her much more than she expected, she switched to Hope Solutions.

“We were very naïve,” Dolan said, about her early attempts to establish a credit processing system. “Wells Fargo set us up with all of these accounts and we were paying so much in fees that we weren’t even aware of. What they verbally offered [seemed like] the best deal, but the reality was very different. We didn’t realize that for the size of our business, we were getting charged for things we didn’t even need.”

Since switching to Hope Solutions, Dolan said she’s paying less in fees and has a better understanding of what she’s paying for. “The fees are up front,” she said. “What we sign up for is exactly what we pay… We’re really happy.”

Nowlan isn’t the first entrepreneur to try to revamp the wayward merchant services industry. Four years ago, Jeff Marcous, a financial services veteran, founded Dharma Merchant Services in San Francisco—the largest, if not the first, socially responsible company to emerge in the credit processing industry.

While his company, situated on the 15^th floor of a high rise in San Francisco’s financial district, seems worlds apart from Nowlan’s, they are both part of a fledgling niche of financial firms advocating for greater corporate responsibility within the credit processing industry. Though they are few yet—a handful among thousands of traditional firms—their model is gaining traction, he said. He calls the effort “commerce with compassion.”

“The industry has a long tarnished reputation for deceptive business practices,” said Marcous, adding that growing public distrust of financial institutions is increasing the demand for alternative financial services—even within industries like his own.

His company—which consists of just six employees— has more than 2,000 client accounts across the country, almost all of them companies engaged in environmental sustainability efforts, like the Rainforest Action Network, Green America, and Oakland’s Numi Tea. It’s also a certified “benefit corporation,” a new business classification signed into California law by Gov. Jerry Brown in October, which allows corporations to legally prioritize charitable activities.

Dharma employs many of the same policies of transparency and accountability as Hope Solutions—in fact, Nowlan based her own business, in part, on Marcous’s model—while also reinvesting a portion of its profits into charities selected by its clients. This year, the company donated $30,000 of its profits to non profit organizations chosen by account-holders.

Neither Hope Solutions nor Dharma offer the lowest pricing in the industry, opting instead for competitive rates tailored to different business models. For business owners like Dolan, who process a high volume of in-store purchases and need a robust point of sale system, Hope Solutions is cheaper than its big bank competitors.

But for entrepreneurs like Jennifer Heller, whose Oakland-based web development business takes in far fewer individual payments and requires an e-commerce platform, Hope Solutions ends up being more a bit expensive than more conventional alternatives like PayPal. The personal attention and transparency of the process, though, is worth the extra expense, Heller said.

“I didn’t know what I doing,” Heller said of her early attempts to set up online billing for clients. “Figuring out that all that stuff was way more than I could possibly do while trying to start my own business. Jessica came out and explained it to me very patiently.”

Despite her base of loyal clients, Nowlan said that growing distrust of financial institutions takes a toll on her business, as well.  Some local merchants would rather accept cash only than set up a credit processing account with a firm they’ve never heard of. “If you’re a small business, you’re getting two to four calls a week from merchant services. People get sick of being lied to,” she said. “If I call and say ‘We’re Hope Solutions…’ it’s, like, ‘click.’”

Stiff competition from larger companies like Visa and Wells Fargo is also a barrier for the business, she said. “I’m competing with huge companies. My own brother is a Citibank rep and his space is the Oakland metro area.”

Marcous agrees that the industry is difficult to break into, at first. He had decades of industry experience, contacts and capital when he started Dharma four years ago, yet it took more than two years to turn a profit. “It was tough,” he said. “It took longer than I expected to get our name out there and get established, but now we have some pretty big clients.”

The trick, Marcous said, was actively “going after” eco-friendly businesses and non-profits already committed to furthering environmental sustainability. Once he established Dharma within that niche, clients started seeking him out, he said. Now, he and his five agents do little, if any, client recruiting of their own, he said.

Nowlan has had to get creative, herself. This month she won a contract to create and administer the Oakland Grown Gift Card, a community gift card shared a number of local businesses in an effort to keep retail dollars circulating within the city. Though she isn’t profiting from the card, she said, the opportunity is giving her a foothold within the community, and helping her to create personal relationships with local businesses whose owners can then refer her services to others.

“It’s starting off slow,” she said of the gift card, which is now accepted at 20 businesses in Oakland. “But as we grow it and as people embrace it as a way to re-circulate money, we can get more businesses and hopefully make the program more sustainable.”

It helps that her company is based in the Bay Area, where socially responsible and sustainable business models were en vogue well before the rest of the nation went green. Marcous attributes his own success, in large part, to his decision to launch Dharma in San Francisco. “I don’t know if this model would have taken off so well if we had been in Arkansas,” Marcous said.

If the merchant services industry—and the credit industry as a  whole— are ever to change for the better, it makes sense that the transformation would begin in the Bay Area, he added.

For Nowlan, the area has a different allure. “I’m raising my children in Oakland, I live in Oakland and I feel really strongly about strengthening our city,” she said. “We need to be doing our business to business services locally and shopping locally and creating job opportunities in Oakland. We are committed to growing here.”