By Jules Kaplan
A substantial number of businesses are adopting online payment systems in order to improve cash flow and save time by reducing paperwork. The process typically begins when customers complete a check authorization form online or fax a paper version of the form to the company. One of the two different types of online payment systems available then generates a paper check that can be taken to the bank for deposit. The other type of system transmits the information to the Federal Reserve’s network for processing. In either case, this approach avoids problems with late payments and collection as well as the paperwork associated with billing and accounts receivable. In the second case, the funds go directly into the company’s account, also avoiding the time and expense associated with making bank deposits. “We are receiving well over 50% of our payments from customers through electronic checks,” said Joseph Lopez, Credit Director at Kinray, the largest independent wholesaler of pharmaceutical and health and beauty products. . “The advantage is that we get our money much faster, which improves our cash flow, and we eliminate all of the paperwork associated with waiting for the check to come in the mail.”
Conventional paper billing and collection methods are a major headache for most businesses. Gartner, a top research organization, estimates that it costs $2 to $5 to send a paper bill and $10 to process a paper check. Based on a labor rate of $30 per hour, estimated costs of a single conventional paper invoice include invoice include $2.10 for preparation of the invoice data, $2.00 for printing and stuffing the envelope, $1.00 for mailing the envelope, $0.37 for postage, $5.00 for a reminder call, $1.75 to record the incoming check, $2.05 to deposit the check, and $0.10 for the deposit fee, for a total of $14.37. Another problem is the delays and uncertainty associated with conventional paper billing. Even when the check really is in the mail, it can easily take 10 to 15 days for it to be delivered, deposited, and for the funds to be collect and available for use. And, of course, there’s always the occasional customer that delays paying their bills, which makes it necessary to spend additional time and effort in the collection process and, in the most extreme cases, even makes it necessary to write debts off as uncollectible.
Online payments will reduce your expenses and increase your bottom line
The emerging technology of online payment systems has the potential to overcome all of these problems. It takes advantage of systems that have been in place for many years and are currently used by most banks and Fortune 500 companies to transfer funds between each other. The first step is always to get the information from the customer needed to process the payment. All that is required is typically the customer’s name, bank information, account number, check number and check amount. You have two basic ways to process this information. One is to purchase software that accepts the customer’s check information, which can be entered either by your employee or by the customer himself in an online form, then prints the customer’s check on blank stock so you can deposit it in your bank. The other approach saves even more time by using a service that moves the payment through the Federal Reserve Automated Clearing House (ACH) electronic funds transfer (EFT) system, eliminating the need for depositing the funds in the bank. Instead, the funds move directly from your customer’s bank into your account.
How does this approach compare to the alternative of accepting credit cards from customers? The major advantage is that the fees are much smaller. The discount rate charged to the company that accepts credit card payments is typically 2% up to 4% for certain credit card transaction, which amounts to a major hit. Another disadvantage of credit card payments is that businesses and consumers are used to paying by check. The fees involved in online payments are much smaller. Software that generates checks for bank deposit is sold for a one-time price that is typically under $500 and the only additional cost is the per-transaction cost of fifteen cents average for the blank check stock and special toner cartridge needed to print magnetic codes on the checks required by banks for processing. The second more automated approach, where the payment is processed through the Federal Reserve, requires only a minimal registration fee of several hundred dollars and a small fixed per-transaction fee, that is generally only 34 cents instead of a percent of the sale like a credit card transaction. Thus online payment provides a huge cost savings over credit card payments. But it should be noted that if you have customers that prefer credit card payments, they could easily be integrated with online payments, providing the customer with a choice of which method to use. In this situation, it often makes sense to charge the customer an extra fee to defray the credit card discount rate.
Automating the entire accounts receivable process
Another advantage of online payment systems is the potential they provide for offering further operating efficiencies by automating the entire billing and collection process. This approach applies mainly to companies that bill a significant number of customers each month. These companies typically incur substantial expenses for printing and mailing invoices, collection calls, providing replacement invoices, and depositing and recording checks, that can be eliminated or substantially reduced with an end-to-end online payment system. In this scenario, companies upload their monthly billing to the online payment system. The customers are immediately notified via email or by fax and view the invoices online. The customers can then pay online using true 128-bit SSL encryption in seconds either by credit card or via electronic funds transfer for processing through the United States Federal Reserve Bank. Besides saving the cost of sending a paper bill and processing a manual check, the time from when the customer makes the payment until the funds are available for use is reduced by one to two weeks.
Companies that use this approach can send messages by email or fax to a single customer, all customers that meet certain criteria, or all of their customers. This makes it easy to, for example, automatically send gentle reminder messages to customers whose balances exceed 30 days and to send a sterner notice to those over 60 days. Also you would have the ability to send important notices to all your customers, example up coming sales or special events. Companies can also review their customer transaction history and payables balances at any time. Companies have the option to charge their customers a small service fee for the convenience of making online payments. By the same token, they can provide their customers with the opportunity to save money by automating their own payment process. Customers can automate the process of paying regular invoices. This approach provides the opportunity to reduce their costs of billing and collection by more than 90% by eliminating the time-consuming and costly process of sending paper invoices to customers, sending reminder letters and replacements for lost invoices, and recording and depositing checks.
How two companies use online payments
Andrew Bloch, CFO and Alan Cusson, IT Manager of The Hamilton Company, Boston, Massachusetts, a large property management company, stated “that we have been looking for a solution where we could send a statement to our many tenants either by email or fax and to allow our tenant to be able to make payment over the Internet. Our company processes a significant number of transactions each month and it is very costly to send out statements. The problem with paper checks is that it takes a lot of time and money to handle them,” Block and Cusson stated. “So we began encouraging our tenants to use Ez Payment Services to pay either by Electronic Check or by Credit Card. They simply login to a secure site, using their unique user id and password and select the item to be paid and select the type of payment and financial information to process the payment, upon confirming the transaction, the tenant and The Hamilton Company receive a confirmation of the transaction either by email or by fax. The tenant like it because they will be able to make their rent payment on time, where ever they are located. It is also an asset to our many student tenants who parents pay their rent directly to our company on behalf of their children. They don’t have to go to the post office or send the rent payment by express service to make sure the rent is paid on time. We have the security of having the payment in our hand at the time of the transaction and it is deposited automatically rather than waiting for it to arrive in the mail. We also do not need too prepare a bank deposit and run it down to the bank. We expect to do approximately 6000 plus transaction per month using this method and it really is a well thought out process.”
Tom Palermo is Program Administrator for Allen, Lewis & Associates, Jacksonville, Florida, and the nation’s largest collection agency specializing in serving music stores that sell on the installment plan. “When we call the customer who owes money for a music purchase and they say they are ready to pay, we take their check information right over the phone. In the past, we used to print out a check and deposit it in the bank but now we have moved to an online system that moves the money right into our account. This saves us the man-hours of printing the check, setting up a deposit and taking it to the bank. We also save the special toner and check paper. Best of all, the charge for a bad check is reduced from $5 to $1.25 by going through the Federal Reserve System. Since we get an average of 4,000 checks a month with about 500 of them returned for NSF, which amounts to a major savings. These savings offset the cost of the EFT Service and increase bottom line. Online check writing has streamlined our entire cash receipts system and saved us a lot of money.” All in all, it’s clear that online payment systems have the potential to improve competitiveness by dramatically reducing the cost of billing and collections.