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SMBs and Online Lending

SMBs and Online Lending

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The emergence of online lending platforms has transformed how SMBs can secure support. Today we will understand the advantages that online lending brings to SMBs and how it effectively addresses the obstacles they encounter when pursuing loans. We will also understand how SMBs and online lending is fast evolving and benefiting the merchants in the US and globally.

Why More Strict Financial Regulations are Pushing Community Banks to Offer Online Lending for SMBs?

Originally, all banks were local. There were even strict regulations prohibiting banking across state lines after the Great Depression. The fear was that if national banks failed, it could destroy the entire financial system. Of course, that was the same fear articulated during the 2008 Sub-Prime Mortgage Crisis.

Local banks have an advantage with respect to their community focus. They can shake the hands of the local barber, farmer or plumber and discuss their needs for raising money. This community focus allows for small business loans that are beneficial for the lender, borrower and community.

smb contributes the most in economy

Gradually, local banks began to expand with the relaxation of regulations during the 1990s. The community focus has not been lost, the majority of small business loans are still provided by the local banks. After the Sub-Prime Mortgage Crisis, tighter financial regulations were established which are now pinching the profit margins of many local banks.

Now, paperwork can be so costly at local brick-and-mortar banks that small business loans are simply not profitable.

What is the Answer?

Perhaps, online lending can be used to kill two birds with one stone.

By making a more affordable streamlined process, the community banks can create a cheaper online lending format that might be up to 75% lower. This allows for SMBs to continue receiving funding while improving their technological accessibility.

Many SMBs are owned by single proprietors. They can now complete the online loan process faster and receive cash infusions to keep their business growing more rapidly. As small businesses hire more workers – the entire nation benefits.

The World Wide Web continues to change how businesses are run. Affordable, accessible, and simple online loan application forms are a key benefit. Most individuals are simply sick and tired of filling out the same long, tedious applications in triplicate. SMB online finance is a win-win for all parties.

SMBs and Online Lending

The emergence of online lending has had an impact, on small and medium-sized businesses (SMBs). These innovative platforms have disrupted the lending landscape providing SMBs with access to much-needed capital. The days of complicated loan applications that often lead to disappointment are now a thing of the past.

Through lending, SMBs can now apply for loans conveniently from their office or home with a few clicks. The process is. Efficient, saving business owners time and effort. No longer do they have to wait weeks or even months for a decision. Many online lenders offer approval within hours or days.

One notable advantage of online lending is its flexibility. Traditional banks often have criteria for loan approval putting SMBs at a disadvantage. Online lenders recognize that each business is unique and consider factors beyond credit scores. Such as cash flow, sales history, and industry trends. When making decisions.

Additionally, online lending presents opportunities for businesses, with collateral or those who may not meet stringent requirements imposed by banks. This inclusiveness allows medium businesses (SMBs), in various industries to access the finances they need to expand their operations invest in new equipment or technology launch marketing campaigns, and hire more staff members. The possibilities are endless!

In addition to being accessible and flexible another notable advantage of lending is its transparency. Unlike banks that may surprise borrowers with fees and complex terms, reputable online lenders provide upfront information about interest rates and repayment schedules. This ensures that you know what you’re getting into before accepting any offer.

As more SMB owners discover the benefits offered by lending platforms it’s no surprise that this industry continues to thrive! Whether you’re starting your dream business or aiming to take your existing venture to heights consider exploring the world of lending—a modern solution designed specifically for small businesses like yours.

Benefits of Online Lending for SMBs

One of the significant advantages of online lending for small and medium-sized businesses (SMBs) is the speed and convenience it offers. Traditional loan applications can be a process involving paperwork and taking weeks or even months for approval. However with lending platforms SMBs can quickly and easily complete their applications, from their offices.

In addition, to saving time online lending also offers medium businesses (SMBs) a wider range of lenders to choose from. Of being restricted to banks or credit unions SMBs can connect with lenders from all over the country or even internationally. This increased competition among lenders often leads to terms and competitive interest rates.

Another advantage of lending is that it allows SMBs to secure funding even if they don’t have credit scores. Traditional lenders usually have requirements when it comes to creditworthiness, which makes it challenging for SMBs to qualify for loans. On the other hand, online lenders take a comprehensive approach considering factors like cash flow and business performance in addition to credit history.

Moreover, numerous online lending platforms provide repayment options specifically tailored for SMBs. These options can include extended repayment terms or adjustable payment schedules that account for fluctuations in revenue.

Online lending has transformed how SMBs access financing by offering approval times, a selection of lenders with improved accessibility regardless of credit score limitations, and flexible repayment options customized for their unique needs.

Obstacles faced by SMBs in obtaining loans

Small and medium-sized businesses (SMBs) often encounter difficulties when trying to secure traditional loans, from banks and financial institutions. These challenges can impede their growth potential. Restrict their opportunities.

SMBs often face a hurdle when it comes to getting financial support from lenders. Banks usually have requirements, such, as a track record of profitability, collateral, and excellent credit scores. Unfortunately, these are not always attainable for businesses.

In addition to these standards, the application process for loans can be quite burdensome for SMBs. It involves submitting paperwork and financial statements that provide information about their business operations. This can be time-consuming. Take away resources that could be better utilized in running and expanding their business.

Another challenge arises from the repayment terms offered by banks. These terms may not align with the cash flow patterns of SMBs. Small businesses often experience fluctuations in revenue streams, which makes it difficult to meet fixed payments.

Furthermore, it is worth noting that traditional lenders tend to adopt an approach when evaluating loan applications from SMBs. They might prioritize corporations or industries perceived as risky compared to smaller ventures or innovative startups.

Given these difficulties faced by SMBs when seeking financing through channels online lending platforms specifically tailored to their needs have emerged as a solution.

Stay tuned for our blog section where we will delve into how online lending has revolutionized access to capital, for medium-sized businesses!

Addressing the Challenges: How Online Lending Helps SMBs

Online lending has revolutionized the financing landscape for medium businesses (SMBs) in need of financial support. SMBs often face obstacles when it comes to obtaining loans but fortunately, online lending platforms have emerged as a solution, to these challenges.

One of the difficulties that SMBs encounter with loans is the arduous and time-consuming application process. Banks typically demand paperwork, financial statements, and collateral which can overwhelm business owners who are already juggling multiple responsibilities.

However online lending platforms offer an application process that’s both speedy and convenient. Business owners can complete an application form with a few clicks and submit their documents electronically. This streamlined approach saves them time and energy allowing them to focus on running their businesses of drowning in paperwork.

Another significant challenge posed by loans is the eligibility criteria imposed by banks. Many SMBs struggle to meet these requirements due to credit history or insufficient collateral. Recognizing that each business is unique online lenders take into account factors such, as cash flow analysis or social media presence when evaluating loan applications.

Moreover, online lenders offer flexibility in terms of loan amounts as compared to banks. They specifically cater to the capital requirements of small and medium businesses (SMBs) by providing smaller loan sizes that align with their needs. This enables businesses to access funding without burdening themselves with debt or borrowing more, than necessary.

Furthermore what sets lenders apart from institutions is the speed at which they evaluate loan applications. While decision-making processes at banks can take weeks or even months online lenders often provide funding within days of approval. This quick turnaround time ensures that SMBs have access to the working capital they need promptly allowing them to seize opportunities or address expenses without delay.

Additionally one of the advantages of lending is that it opens up opportunities for businesses in all industries regardless of their geographic location. Transactions occur digitally through platforms that can be accessed from, around the world.

Bank of America to pay $772 Million Penalty

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On Wednesday April 9, 2014 Bank of America settled a lawsuit and agreed to pay $772 million in penalties for deceiving millions of customers into buying costly and unneeded services when they signed up for credit cards.

The Crux of the Case

The Consumer Financial Protection Bureau said that Bank of America illegally deceived 2.9 million customers into buying extra credit card services those customers did not need and that Bank of America charged others for needless credit monitoring between 2000 and 2012.

“Bank of America both deceived consumers and unfairly billed consumers for services not performed,” Richard Cordray, director of CFPPB told the Associated Press. The settlement deal is the largest refund amount ordered to date by the CFPPB, and is the biggest settlement over credit card “add-on” services won by the federal government.

Bank of America will also have to pay an additional $20 million penalty to the Consumer Financial Protection Bureau and $25 million to the Office of the Comptroller of the Currency.

Delving into the details of the settlement, some of the misleading practices included Bank of America telemarketers telling customers that the first 30 days of a service were free when instead the customers were charged. Also, the bank led customers to believe that they were merely agreeing to receive additional information about add-on services, when in fact the bank was enrolling those customers into the services during calls.

Bank of America released a statement saying that the bank had already refunded money to a “majority” of the affected customers.

Bank of America’s Been to the Dance Before

This isn’t the first time Bank of America has been hit hard by its desire to charge customers fees. Back in 2011, when the Durbin Amendment going into effect was all the rage, Bank of America came up with a plan to charge their customers a fee for using their debit cards.

Bank of America stated its reason for this fee was to offset predicted losses the bank would incur because of the Durbin Amendment.

This went over like a lead balloon, and eventually Bank of America backed off this idea. It’s no mere coincidence that this fee and the resultant backlash heralds from the time period covered in the lawsuit. It seems back in those days, Bank of America was just really into adding fees for everything it could think of.

Transparent Pricing and No Fees

Host Merchant Services was hip to the pitfalls of fees right from its inception. HMS delivers personal service and clarity. The company promises no hidden fees. And a transparent pricing plan so that its customers are not saddled with all of these “add-ons” that Bank of America was so gung-ho about in 2011.  HMS  believes that when you get your statement every month, you should understand every item, and it should match what you were promised in the sales process.

Wal-Mart Sues Visa

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The swipe fee antitrust lawsuit that The Official Merchant Services Blog has been covering for a few years now has an update: Wal-Mart, accusing Visa of excessively high card swipe fees, is suing Visa for $5 billion. The action by Wal-Mart is being taken because Wal Mart opted out of the settlement of the class action lawsuit between merchants and Visa and MasterCard.

This follows our previous report of the Minnesota Twins also opting out of the settlement. Wal-Mart filed the suit Tuesday, March 25, in the U.S. District Court for the Western District of Arkansas, where Wal-Mart is headquartered.

Wal-Mart’s Side of the Suit

Wal-Mart, the world’s largest retailer, is seeking damages from price fixing and other antitrust violations that it claims took place between January 1, 2004 and November 27, 2012.

In its lawsuit, Wal-Mart contends that Visa, in concert with banks, sought to prevent retailers from protecting themselves against those swipe fees, eventually hurting sales. Wal-Mart stated in court documents: “The anticompetitive conduct of Visa and the banks forced Wal-Mart to raise retail prices paid by its customers and/or reduce retail services provided to its customers as a means of offsetting some of the artificially inflated interchange fees. As a result, Wal-Mart’s retail sales were below what they would have been otherwise.”

Wal-Mart contends that that the way Visa set up the swipe fees violated antitrust regulations and generated more than $350 billion for card issuers over the time period in question, in part at the expense of the retailer and customers.

Case History

The antitrust case against Visa, MasterCard and several issuing banks stemmed from the dispute relating to the percentage of credit card transaction fees that retailers must remit to the credit card processing network. The fees generally range from 1.5 to 3 percent and are shared with the bank that issued the card. Also known as “swipe fees,” these charges serve to underwrite the supporting infrastructure that allows businesses to accept and process credit cards.

Large retailers and supporting associations have repeatedly complained about the costs associated with accepting credit cards and the fees for merchant services. These grievances resulted in a number of lawsuits filed in 2005, which were eventually consolidated into a single case known as the Payment Interchange Fee and Merchant Discount Antitrust Litigation.

There were 139 parties involved as plaintiffs, and the case was active for over eight years. In July 2012, a settlement was reached that provided $6 billion in damages to affected retailers and another $1.2 billion for a temporary reduction in interchange fees. As a further concession, Visa and MasterCard eliminated certain rules for merchant services that prohibited surcharging, which is a practice that allows retailers to recoup credit card costs by passing them on to the consumer.

After a settlement was reached in the case, major retailers such as Target, Nike, Home Depot, Lowes, Starbucks and Best Buy ultimately opted out of the settlement. Major trade organizations, including the National Restaurant Association (NRA), have voiced significant opposition to the agreement. In fact, the NRA strongly encouraged its constituent members to reject the settlement and highlighted the potential negative impact it could have on the emerging mobile payments market.

The Saga

To review the full extent of this ongoing saga, you can read our previous coverage of this settlement:

Online Poker in Delaware

Online Poker in Delaware [2025 Update]

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On Tuesday, February 25, 2014, Nevada and Delaware lawmakers signed a landmark agreement to join the states together in online poker ventures, potentially increasing payouts for residents who gamble online. The Multi-State Internet Gaming Agreement signed by Gov. Brian Sandoval of Nevada and Gov. Jack Markell of Delaware established a legal framework for the first authorized interstate Internet gambling.

The legislation opened up a landmark new initiative for the two states. Delaware officials supported this venture in the hope that revenues from online poker in Delaware, blackjack, and slots would help boost revenue in the state’s three brick-and-mortar casinos. Competition in those real-world casinos has risen significantly because of the appearance of new facilities in surrounding states. This increased competition has affected overall state revenues from gambling and prompted Delaware lawmakers to seek out other revenue streams like online gambling.

Nevada has three online poker websites: Ultimate Poker, which is owned by a subsidiary of Station Casinos; WSOP.com, which is aligned with the World Series of Poker; and Real Gaming, which is owned by South Point. Delaware’s websites are controlled by the state’s three racetrack casinos and run on 888’s platform.

Online Poker in Delaware

The potential boost to Delaware’s economy from this move is unclear. Delaware officials predicted that online gambling would generate up to $5 million in state tax revenue in its first year. Those officials have since scaled back that forecast after some technical difficulties and slow take-up online.

Eilers Research gaming analyst Adam Krejcik told investors that Delaware’s current numbers “have been nothing short of a disaster.”

According to the Delaware Lottery, the state brought in $145,200 in revenue from online gaming in January, following $140,000 in December and $111,000 in November.

Nevada hasn’t broken out online poker revenues in the state’s monthly figures, but Union Gaming Group estimated the revenues were between $200,000 and $750,000 each month.

Online Poker in Delaware: Already Opposition

Opposition to online poker in Delaware

On top of the consternation over the economic impact of this partnership is mounting opposition to the law. On March 26, 2014 members of both parties in Congress supported a ban on online gambling. This bipartisan ban comes just mere months after Delaware’s online gambling system went live and a few short weeks after Delaware and Nevada signed The Multi-State Internet Gaming Agreement.

Both Republican and Democrat lawmakers introduced legislation in the House and Senate aimed at banning online gambling, setting the stage for a two-pronged battle in Congress. The measures are aimed at reversing a 2011 decision by Attorney General Eric Holder that a 1961 law used in recent years to curb Internet gaming only barred sports betting. The bills would broaden the prohibition to where it stood before Holder’s ruling.

The Other Shoe Drops

So after Delaware, New Jersey, and Nevada leaped into the space created by the Holder ruling, creating online gambling systems, both Delaware and Nevada teamed up to allow their customers to play against each other in a virtual environment. But before this entire endeavor really gets going, Congress is looking to ban it outright. One key component to why the customer interest is lackluster has to do with something extremely basic (and relevant to The Official Merchant Services Blog): Credit Card Acceptance!

According to uspoker.com, the lack of credit card acceptance is one of the biggest complaints about regulated online poker in Delaware, Nevada, and New Jersey. The Mastercard acceptance rate at regulated sites is higher than Visa, however, neither is high enough to be considered adequate for players and operators.

While this is all still new and getting off the ground, the trend in behavior shows at least one of the obstacles online gambling in Delaware faces. Regulated sites have higher fees, and that is there to help offset the risk of fraud. Essentially what happens with these kinds of sites is that they suffer from a much higher rate of chargebacks.

The Other Shoe Drops

A chargeback typically refers to the act of returning funds to a consumer. The action is forcibly initiated by the issuing bank of the card used by a consumer to settle a debt. Essentially what happens is a consumer disputes a transaction, and the credit card company’s bank responds by taking the money back from the merchant and returning it to the consumer. Customers dispute charges to their credit card usually when goods or services are not delivered within the specified time frame, goods received are damaged, or the purchase was not authorized by the credit card holder — the latter being the most common reason for a chargeback. The chargeback mechanism exists primarily for consumer protection.

Now in online gambling, the risk of a chargeback happening is much higher. Customers who lose money will oftentimes initiate the chargeback instead of taking the loss.

Card issuers have the right to block any transaction that the company does not consider legitimate. Online gaming transactions, even if explicitly legal, sometimes fall into this category. Chargebacks are expensive for banks. These costs are passed onto merchants and processors in the form of penalties and higher processing fees. Banks loathe chargebacks and online gaming has been associated with too many of them over the years. This is one reason credit card companies are not quick to approve these transactions.

But regulation steps in and alleviates these fraud issues. All of the concern related to abusive chargebacks is resolved in regulated markets because players cannot easily charge back a credit card transaction. The transaction is coded as a legitimate, regulated purchase. Many are considered cash advances.  The poker site can prove where the player was located at the time of the transaction and that the chips were received. Proper player verification also provides evidence that a charge was proper.

In Conclusion

The allure of online gambling is still high and Delaware is one of the states diving headfirst into the industry. But there are already obstacles facing the First State. A ban from Congress and all of the problems with chargebacks and fraud create a daunting road ahead for Delaware’s online gambling future. Teaming up with Nevada in a partnership to expand the competition was a good first step. But more states need to be involved if the fledgling endeavor is to really get going. That also helps with the fraud issues as it will take more states regulating online gaming to help make banks more comfortable with the industry. This will also help the profitability of processing these transactions.

Here Comes CoinSummit! [2023 Update]

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Today marks the start of CoinSummit San Francisco, a two-day event ”connecting virtual currency entrepreneurs, angel and VC investors, hedge fund professionals and others who are looking to learn and network in the virtual currency industry.” CoinSummit will take place on March 25-26 2014 at the Yerba Buena Center for the Arts in San Francisco.  Many in the bitcoin community have been waiting for this event for a while.

The event with feature notable entities in the virtual currency community that include Marc Andreessen of Andreessen Horowitz, Brian Armstrong of Coinbase, Nic Cary of Blockchain.info, and Tony Gallippi of BitPay.

The Official Merchant Services Blog has been tapped into the ongoing saga of Bitcoin since this article in November — delving into the fascinating gimmick of Bitcoin mining. Traversing the ups and downs of this unstable and chaotic currency led to the crazy month of February and then the fall of Mt. Gox. Since that fateful day, the virtual currency industry has been scrambling. And now we have this much anticipated summit of industry experts discussing the details and potential future of BitCoin and its competitors.

Don’t Miss a Moment of the Action

For those interested, a live stream of the event begins at 9 AM Eastern time today, and can be viewed here.

Points of Interest

So some of the things we’ll be hoping the Summit delves into are: The Mt. Gox crisis, its aftermath and the future of the currency exchange. Of course industry insiders are all going to be sharing their thoughts, rants and frustrations about MtGox. Many will be raging about the losses incurred by the public and so many bitcoiners, and how badly Mark Karpeles has handled this debacle. But more importantly the issue of malleability will be explained and also how the currency and its exchanges can survive well into the future.

Which leads right into the fact that the crisis didn’t imply a complete price crash for BTC, even after hundreds of millions of dollars in permanent losses. How will exchanges guaranty transparency? Audits? Open balance sheets? These are critical issues if Bitcoin is to be adopted by mass markets. So let’s hope the summit dives right into the answers for those questions.

And then there’s the heavyweight presence to consider. The “big 4″ (Coinbase, Blockchain.info, Bitstamp, and BitPay) will all be present at this summit through its founders. Let’s see if the industry leaders explain their current strategies and growth trends.

The competitors also have some spotlight. Ripple, DogeCoin, Litecoin, and Ethereum will be pitching the advantage of alternative options, but also talking about the future of Bitcoin through smart contracts and smart property, two functionalities many think will catapult BTC prices to new levels.

That’s a quick roundup of what to expect at CoinSummit San Francisco.

Terminal Retirements

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Following up on our recent blog about terminal of the future, the VX 520, today we’re going to let the other shoe drop. With the payment processing industry thrusting its spotlight onto security in the wake of the Target Data Breach, the PCI DSS and its upgraded protocols are getting a lot of attention.

Host Merchant Services has been ahead of the curve on PCI compliance, having instituted a PCI Compliance Initiative years ago. But the Payment Card Industry Security Standards Council is in a continuous state of refining their security requirements and best practices so we here at HMS have to remain agile and adept at navigating these changes.

EMV smart cards, a topic we’ve discussed in depth here, are prompting PCI DSS to reorganize large swaths of its standards, and as a result, retire various terminals. As more and more POS hardware adapts to support EMV chip cards and end to end encryption, manufacturers and software developers will have to put their older equipment out to pasture. With the release of EMV/Contactless terminal applications, many of the legacy terminal devices/applications do not have the memory capacity required in order to support the association mandates. As a result, TSYS has provided a preliminary end of life schedule for credit card terminal applications that will be fully retired.

This is something the PCI DSS has been preparing for, and as such they have a schedule implemented for the retirement of older equipment. Coming up next is the VX 510 Terminal and its VDID300 Application, scheduled for retirement on June 3, 2014. Also the VX 510 and VX 570 and its VXGFT02 Application will be retired that day.

Prior to this date, Host Merchant Services has terminal upgrades available for our merchants. While we will continue to honor merchant boarding for these devices until the effective end of life date, once that occurs these devices/applications will no longer be an option available within our internal systems and downloads will no longer be available for terminal updates, swaps or technical support. So upgrading should be a priority, and Host Merchant Services will make the process seamless and trouble-free.

The VX 520 Embraces the Future

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Sometimes the future just sort of sneaks up on you. Even if you’ve given yourself reminders, sticky notes, calendar alarms, and the proverbial string tied around your finger, the future still has a way of creeping up on you unawares.

Which is why Host Merchant Services is happy to offer its customers a payment processing terminal that comes with a reminder built in. Verifone with its VX 520 Terminal is here to prevent any memory lapses about the future from happening to your business and its PCI compliance needs. The VX 520 is PCI PTS 3.0 compliant right out of the box and is a forward thinking terminal designed specifically to be prepared for the PCI compliance mandates that are changing the rules of the industry.

Verifone terminals use end-to-end encryption with SSL v3.0 and 3DES to maintain the highest levels of security. This encryption, coupled with Master/Session and DUKPT key management, provide maximum protection from fraud and misuse of the terminal. The VX 520 terminal is also certified with PCI PED 2.0 approval.

All About Security

Security and secure transactions have been a hot button issue in the payments processing industry for the past few years. Everything from the Global Data Breach to Bitcoin to the Target Breach has people wondering about how secure their payment information really is. This is the root of the creation of PCI and its standards. In the ten years since the PCI DSS emerged as a consensus industry standard for the major credit card vendors, PCI DSS succeeded wildly in some areas – such as the use of endpoint security, encryption and network monitoring technology.

The Clock is Ticking

However, the success of PCI DSS in some areas highlighted others in which the standard had little to say or created perverse incentives—rewarding “compliance” over real security. Subsequent updates have attempted to right those wrongs. And the VX 520 is on the cutting edge of those PCI updates.

In January 2012 the PCI DSS released version 2.0 of their standards. And the VX 520 was built to be compliant to those standards and more.

In November 2013, the PCI DSS released version 3.0 of their standards. And again the VX 520 was compliant.

The 520, offered by Host Merchant Services, is a nimble processor that is ahead of the curve on security standardization. This is helpful because by December 2014, changes are coming from the credit card companies where older terminals will no longer be valid. Host Merchant Services offers a free terminal to new customers that sign up and are available 24x7x365 to help upgrade existing customers to terminals that will be PCI compliant.

Getting Secure and Staying Secure

Host Merchant Services knows that your business needs secure transactions to function. And we’re here to make the process of PCI Compliance easy, understandable and consistent for you each year. We offer the lowest PCI Compliance fee in the industry, at just $4.95 per month. PCI Compliance is essentially the process of adhering to the standards set forth by the Payment Card Industry Data Security Standards Council (PCI DSS). Essentially the standards are a set of requirements designed to ensure that all companies that process, store or transmit credit card information maintain a secure environment.

Secure transactions are important for merchants and a key element of the customer service Host Merchant Services provides. As part of our commitment to our Merchants and their transaction security, HMS offers a PCI ComplianceInitiative to anyone interested in processing with us. We are happy to offer this initiative as well as our free resources to help our merchants see what needs to be done to become compliant … and stay PCI compliant.

Mt. Gox

The Doom of Mt. Gox [2023 Update]

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February was the month that the all-seeing eye of the media turned its lidless gaze upon Bitcoin and the craggy peaks of Mt. Gox, the Japanese Bitcoin exchange site. Almost half a billion dollars went missing from Mt. Gox, the exchange was rocked, Bitcoin was scorched, and the site went bankrupt.

The Official Merchant Services Blog has been tapped into the ongoing saga of Bitcoin since this article in November — delving into the fascinating gimmick of Bitcoin mining.

Wait, What is Bitcoin?

Bitcoin is a virtual currency introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority and uses a public ledger to verify encrypted transactions. The flashy shiny aspect of it is it’s a currency that can be bought, sold and mined electronically. The famous internet comic strip Penny Arcade defines Bitcoin for its readers here.

Wrapped Bitcoin

In 2013 the currency captured the imagination of the virtual and business worlds by soaring in value, rising from $10 to $1,200 per coin. It surpassed the value of gold at its peak. And then i crashed down to $500.

The currency was also embroiled in the huge Silk Road scandal as federal authorities seized millions of dollars worth of Bitcoins when it shut down the notorious black market web site the Silk Road.

The real trick of Bitcoin and why it’s so fascinating to payment processors is that it’s a cryptographic protocol, or crypto-currency. The protocol creates unique pieces of digital property that can be transferred from one person to another. It’s essentially the legitimization of microtransactions linked to actual monetary value. Each Bitcoin is defined by a public address and private key, both long strings of numbers and letters giving it a unique identity in virtual reality. In addition to its digital fingerprint, Bitcoins also have a place in a public ledger. This blockchain gives the Bitcoin a physical identity. So Bitcoins bridge the virtual and the physical.

Mt. Gox: Hackers Gonna Hack

Hacker

But no matter how elegant and ingenious the actualization of Bitcoin is, the currency apparently can be hacked.

  • On February 25, Mt. Gox, the leading Bitcoin exchange located in Tokyo Japan shut down. It had discovered that hundreds of thousands of Bitcoins had gone missing, and more than $400 million had been stolen.
  • On February 28, Mt. Gox filed for bankruptcy and said it was under orders not to pay its debts. The exchange publicly apologized to users for “causing so much inconvenience.”

February was actually filled with problems for Mt. Gox and Bitcoin, as we reported previously.

Everything from Russia banning Bitcoins to China half embracing it just piled onto the Bitcoin craze. And then the hack and the bankruptcy happened. Since then, pieces of code showing parts of Mt. Gox’s Bitcoin source have cropped up around the web according to VentureBeat. Mt. Gox set up a phone support line but that got blitzed. Two other sites vied to fill the void of Mt. Gox, with BitStamp edging out BTC China for the title of largest Bitcoin exchange — for now. And then things got funny weird.

Virtual Theft

Mt. Gox

The authorities are now tasked with investigating the crime. And well, there’s this book, Halting State by Charles Stross, written in 2007. The premise of the book seemed so novel back then: A police officer is called to the offices of a big corporation because a robbery was reported. The robbery as it turns out took place in a virtual world, as the company runs a video game system with virtual currency. And then the novel goes on to explore technology, and how it is quickly evolving to affect the physical world from the virtual world. It was set just a few short years in the future.

And here we are, a few short years into the future, and authorities are investigating the theft of real value currency stolen from a virtual environment.

The amount of coins hacked and stolen from Mt. Gox amounts to about 6 percent of the entire Bitcoin market in circulation. And law enforcement is now tasked with trying to find the identity of the perpetrators — which may seem like an obvious and standard step in the investigative process. But it’s Bitcoin, which is famous for its anonymity and unregulated status. So authorities are filing subpoenas to Mt. Gox to gather information about how the virtual currency is transferred and converted into dollars. While stuck investigating even the basics of how the model works, authorities haven’t even gotten to the stickier situation of how Bitcoins are designed to be untraceable and finding the phantom thieves who stole the strings of encrypted numbers may not happen.

Leaving a half billion dollar hole in an industry that’s already proving to be volatile and susceptible to hacking.

PayPal President Hacked [2023 Update]

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Twitter, the modern equivalent of Mad Libs and the yellow journalism of the late 19th century, has revealed to us a gem of irony that makes the whole Target getting hacked story seem that much more poignant.

No one is safe in this bold new era of credit card hackers and identity thieves. Not even the president of a major payment processing company.

PayPal President David Marcus has been the victim of credit card fraud, he said on Monday. The leader of the online payments company revealed via Twitter that his credit card information had been stolen on a trip to the United Kingdom and he’d racked up a “ton” of fraudulent transactions on his account.

Smart Chip Didn’t Help

Marcus speculated that thieves probably skimmed the info from the magnetic stripe on his card, even though his card had an EMV chip, a technology that makes cards in Europe more secure than the ones commonly used in the U.S.

EMV® chip technology– or EMV — is a worldwide standard for credit and debit card payments based around the use of chip card technology. The acronym stands for Europay, MasterCard, and Visa, who collaborated to create the technology. The goal of this project was to create a card that worked based off of a microprocessor chip that is read by the payment terminal. Because the U.S. has yet to widely deploy embedded chip technology, the nation has increasingly become the focus of hackers seeking to steal such information. The stolen data can easily be turned into phony credit cards that are sold on black markets around the world.

Is it Just a Marketing Ploy?

Marcus adroitly used the incident as an opportunity to plug his own company, suggesting that the fraud wouldn’t have happened if the merchant had accepted PayPal. His company is currently trying to expand its presence as a payment option in physical stores, putting it in direct competition with platforms like Square and Google Wallet.

It also comes right when data breaches are major news in the payment processing industry. On December 19 2013, Target confirmed a sophisticated data breachoccured. In their press release they stated: “Approximately 40 million credit and debit card accounts may have been impacted between Nov. 27 and Dec. 15, 2013. Target alerted authorities and financial institutions immediately after it was made aware of the unauthorized access, and is putting all appropriate resources behind these efforts.  Among other actions, Target is partnering with a leading third-party forensics firm to conduct a thorough investigation of the incident.”

So Marcus’ misfortune happens right at the time identity theft, credit card fraud and hackers are on everyone’s mind. With EMV chip cards being touted as one of the best solutions to the hacking problem, Marcus’ mishap even taps into that buzz.