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Wednesday 21 December 2011

Is it "Safe" to View and Pay Bills online?

As Internet technology now allows bills or invoices to be presented electronically and then paid at the presenting web site (whether this is a bank’s site, merchant site or third-party site) in this brief article we investigate whether this carries any significant risk from a payee/consumer or merchant perspective.

Perhaps the very first test of potential “riskiness” when using any electronic presentment and payment (or EBPP for short) web site is whether it is secure. The vast majority of web page addresses, also known as URLs, typically begin with "http." However, to pay bills online, the web page should always start with "https," which signifies a secure socket layer or SSL connection (or one in which data is fully encrypted). This typically means that you can see a padlock icon, usually in the top or bottom corner of the browser window (or in some cases it may even turn the URL address background green or light blue). Clicking the padlock icon will often reveal the site's security certificate (and allow you to read about the particular protection that this affords).

Now that a consumer knows that he or she is on a secure site, the next step is to ensure that the login process is secure. A good site will usually give a consumer two options-to pay instantly or as a guest, and to register on the site to use it again and save time on the next occasion the consumer uses it. As a guest, a web site will typically only ask for an email address and then ask a consumer how he or she would like to pay from the options they make available. This may mean entering debit or credit card details for example, which should then give a consumer the option to confirm the transaction (and then as a further security step run the transaction through 3D secure-a process used by major credit card companies as an added XML layer for online credit and debit card transactions. Visa call this process “Verified by Visa”, MasterCard call it “MasterCard SecureCode”, JCB International call it “J/Secure” and American Express call this “SafeKey”. Overall then, a well-constructed site will offer a safe payment system for consumers (and there are card and bank protections on fraud and low limitations on consumer liability in any case). Even so, consumers should also look for extra safety in specific statements on any given EBPP site about PCI compliance (or payment card industry standard adherence) and/or that credit/debit card data or numbers will not be stored or saved in any way (and if they are, that they will be fully encrypted and tokenised as a further protection against theft or fraud).

When registering (either before or after a bill had been viewed and paid) a well-designed and safe web sites will ask a consumer to set up a user name and password that he or she can remember and that identifies the consumer every time he or she uses the site in the future. The site may also ask for additional data such as email address, physical address, date of birth, driving license number or even passport number. In some cases, they may go yet further and ask security questions to help validate a consumer’s identity in the case of a future forgotten login ID or password. Although these may seem personal and even intrusive, these steps are all designed to protect consumer security and ensure that only one person is able to see the bills posted and to effect payment of any kind. In other words, this process allows the web site operator (financial institution or merchant) to know the customer (a process they call KYC) and protect everyone’s security to the best of their ability.

In general, research suggests that consumers worry most about using credit and debit cards on online sites of any kind. However, in the world of bill payment (as opposed to online shopping for example) these risks are not as great. Even a person with a stolen credit card number is highly unlikely to pay a bill for another person (assuming he or she had the bill details to enter) and even if they did, the risk would be with the merchant and not the consumer. So what about merchant side risk?

For a merchant, the greatest risk is charge-backs. This is where the credit or debit card holder disputes the transaction anywhere up to 6 months after the transaction date. Charge backs can either be because the card holder disputes that they made the transaction at all (i.e. it was a stolen or fraudulent), or because they did receive anything in return for the payment that was made. The second reason for chargebacks in the bill pay space is very rare, but the first reason-theft or fraud is obviously quite common (with total estimated costs of just under £1 billion in the UK in 2010). This is why online billpay web sites need to take so much care to ensure that card holders (who are not present as they are in a retail transaction) are who they say they are.

Summary
In the final analysis, for those EBPP sites that have a clear secure socket payment layer (SSL), have clear statements about security of information and sound compliance and a well-structured registration process, consumers face very low levels of risk (with a very low liability even when a rare problem may arise in any case). The merchant however, faces potentially much more risk arising from both debit and credit card fraud (and therefore possible charge-backs), but risk this can be mitigated with good consumer checking processes that are made easy for every customer to the site to use.

Monday 12 December 2011

Should public sector organisations care about introducing e-billing?

Electronic billing (or E-billing for short) has now been around for several years and has been introduced in businesses like large utilities, telcos and many smaller commercial organisations (such as accounting and legal firms). However, it seems the switch to some form of e-billing has occurred mainly in the private sector and only in a limited way (if at all) in the public sector. In this blog article, we will explore why this is the case and whether this is because the barriers to adopting this approach are different in the public sector or perhaps that some of the benefits may not apply.

The “public sector” is obviously a catch-all term and one which envelopes large national government departments such as defence (including all the armed forces), education (including state run schools and colleges), employment, social security or tax) and smaller local government entities such as urban and rural councils. In addition, it also includes more directly community-focused organisations such as hospitals (of all sizes and kinds), the fire service and the police, etc. Clearly, this represents a wide range of very diverse types of organisation whose needs are likely to vary greatly when it comes to the flow of money in an out. Of course, not all of these organisations send out a bill or invoice or even provide a receipt. However, they all buy products and services of one kind or another and will often have some kind of internal charging method for services rendered (however infrequent this may be). This means that the vast majority of public sector organisations receive or issue bills (especially where they deal with consumers directly) and the volume can be very high. This is true of large council organisations, medical clinics and tax departments for instance and in some single organisations can run into millions of bills each year. For example, both the British Broadcasting Corporation (BBC) and the Driver Vehicle Licensing Centre (DVLC) in the UK issue over 20 million bills a year to consumers alone. We will therefore assume that for the purposes of this article that we are referring to the whole public sector, which includes Government to Government (G2G), Government to Business (G2B) and Government to Consumer (G2C) billing.

Based on the volumes of invoices generated (estimated to be over 2 billion bills/ invoices a year across the entire UK public sector), the automation of billing and payment collection processes (to create greater efficiency) should be a primary concern of most governmental entities. However, the evidence suggests that the generally slow take up of new approaches and online technology in particular has arisen from both many perceived barriers and a lack of perceived benefits versus commercial companies. Let’s therefore look at each of these factors in turn.

The Perceived Barriers
Although there are others, there are five main perceptions that public sector organisations often have about e-billing and payment. These are listed below:


The Perceived Benefits
A manager in the public sector can review the commonly perceived benefits of e-billing as easily as a private sector manager can do so. However, he or she may feel that these benefits may not apply as much or even at all in some cases. In the chart below, we have listed six of the major perceived benefits of modern internet based e-billing and payment portals (again such as Payswyft for example) and commented on the likely applicability of each to both private and public sector organisations.


In addition to the above benefits in each of these six categories, online presentment and payment portals provide for many other valuable features. This includes, easy upload of accounting data files (by many means), file transfer compatibly, to and from all major accounting systems, convenient and useful transactional analytics and cheaper bill-storage and retrieval. In fact, public sector organisations are often required to be able to store and retrieve many years of bills and transactional records, which can now all be done in the third party online bill presentment and payment portal. This means that bills can be easily found, referred to, appended with notes or even resent and a very low cost to the organisation in question.

Every one of the above ultimately can potentially create a much more user-friendly process to send a bill and get it paid for both the organisation and its payees (whether these are other public sector organisations, businesses or consumers). Furthermore, many of the legitimate barriers to entry of the past seemed to have disappeared and the benefits of making the change are now clearer. For this reason, e-billing should now be a key strategy for every public sector organisation.


This article was written by Dr Jon Warner of Payswyft (at www.PaySwyft.com). Jon has extensive senior executive experience and has led organizations in a variety of industries through significant transitions to achieve bottom-line results. He is an expert in developing and implementing strategies in operations, marketing, sales, and corporate turnarounds. Jon is currently CEO of PaySwyft in the UK (an innovative on-line billing and payment business) and Chairman of WCOD (a management consulting and publishing business). He can be reached at jon.warner@payswyft.com.

Monday 14 November 2011

What will happen to bank fees in the future?

In my last blog article I stated that Merchant Banks are now making a large proportion of their profits by charging fees to both end consumers or account holders (although they worry about overdoing this to prevent customer “churn”) and to merchants who want to offer payment services to their customers. In the latter, I also suggested, there are many direct and indirect fees in the mix that need to be closely scrutinised. In this follow-on article I want to look take a more philosophical perspective and gaze into the crystal ball a little. I am therefore going to look at what the future might hold for merchant bank fees of all kinds.

The future of Direct Customer fees
Banks tend to charge transactional fees only when a customer has gone beyond what is deemed to be the core commercial relationship. Hence, fees are typically charged to customers when they have overdrawn an account, written a cheque in circumstances where they are insufficient funds to cover it, written a banker’s draft, made a wire transfer or carried out a foreign exchange transaction etc.

Although different banks are likely to try different approaches, most of them will want to move to a more transparent business model with customers. This will involve no fees whatsoever for customers that maintain a minimum positive balance and are willing to tie inward payments to their checking account (such as regular salary payments for example). It may also be that the bank will require some other accounts to be maintained to keep fees at zero (such as having a separate savings account or buying insurance through the bank etc). However, the model here will typically be not to charge fees for normal everyday transactions, and this will include items such as electronic bill pay, peer-to-peer payments online or via a smart phone app and even account balance enquiries online or at an ATM.

Of course, while this free service approach may work well for customers who can maintain a minimum float in a checking account (and also meet the other standards that may be required), many customers will not be able to do this and may actually pay more than they are charged today. As this encompasses many customers who are potentially still very valuable to a bank in the long term, another strategy here (and one that has been adopted already in several banks) is to charge a single standard account management fee (such as £20 or £30 per month perhaps-often also involving some rewards or loyalty benefits being offered too). This would either render all transactional fees at zero (or at least all but the ones that involve a customer going into debt).

Merchant fees
There has been much controversy about merchant bank fees in recent years. This controversy arises mainly from two factors: The first is the scale of these fees (both fixed and variable). And the second is the number of different fees that are levied (leading to much complexity and frustration on the part of a given merchant, much of the time). As we saw in the last article, there are often many separate charges rendered by merchant banks including: Cash processing fees, Cheque processing fees, Discount Fee Rates, Inter-change Transaction Fees, Address Verification Service (AVS) fees, Batch Fees, Monthly Statement or Customer Service Fees, Monthly Minimum Fees, Gateway Fees, Annual Fees, Chargeback/Retrieval Fees, and even Cancellation/ Termination Fees (not to mention other administrative fees relating to copy statements or reminder letters etc). The shear volumes of these different and often layered fees make not only for extra hidden costs but often considerable internal merchant time and effort to check that they are accurately applied.

While it is highly unlikely that merchant side fees will disappear completely, we are already seeing a shift to fees that fall into two categories. Those fees that are seen by a merchant as relatively arbitrary and unrelated to any real cost or contribution (let’s call them bank overhead recovery fees) and fees that are seen by a merchant to relate directly to a particular service or tangibly valuable outcome (let’s call them convenience fees). The future of these two fee categories will be very different.

Overhead Recovery Fees
Overhead recovery fees (rightly or wrongly in reality) are seen to be things like Discount fee rates, Bank Interchange rates, Gateway Fees, Batch Fees, Monthly minimum fees, Annual fees, Cancellation/Termination fees and any fees related to administration (such as charging for an email being sent) etc. What these fees have in common is that most merchants see these costs as having no direct benefit to their business or add little value as far as they are concerned. In fact, most merchants take the view that many of these tasks and processes have been automated or made very simple and cheap in the advent of modern software and/or Internet based technology, and yet fees have remained broadly the same or in some cases gone up. Debit cards in the US, provide a particular example where fees which often average 75 cents or higher were known to be costing a bank 70-80% less than this.

All Merchant banks will continue to compete aggressively with one another to win new customers or to retain existing ones, and price will be their primary tool. This is likely to drive these perceived to be low valued-added overhead recovery fees down strikingly in the next few years. Furthermore, as more and more mainly internet-based payment providers come to the market (with far less overhead to have to recover of course) there is every chance that all of these fees will evaporate completely-very good news for merchants of all sizes and types.

Convenience fees
Convenience fees (again rightly or wrongly in reality) are seen to be things like Cash and Cheque processing fees, Monthly Statement fees, Chargeback/ Retrieval fees etc. Not only do most merchants appreciate that these services have more easily seen effort and cost associated with rendering them but can more readily appreciate the value that they add to them. In other words, these activities would be as costly or even more expensive if they were to be performed by the merchants themselves or some other third-party organisation. In addition, these activities are perceived to add value in many cases by providing efficiency, or even a direct customer service benefit (which either increases satisfaction or can justify a particular pricing position on goods and services). You’ll notice that Address verification fees or Customer Service fees are not automatically listed here as convenience fees. These qualify to be included but merchant banks need to work hard to explain why and how this is the case (whether it is describing the benefit of having a real live person available in a call-centre to help with an unusual transactional event or bring about better credit card security by using look-up database services etc).

For all of these fees, if well-presented and explained, there is every opportunity to continue to charge for the service offered. However, the real opportunity here (to both retain fee income and then to grow it) lies in really getting alongside merchants in helping them to reduce their costs or to increase their revenue (in tangible ways). In this respect the opportunity is to help the merchant get bills/invoices seen more quickly and in digital form, to set up calendarised and recurrent type payments when they want them, the offer aggregate bulk payments (especially in the B2B space), to offering currency exchange service options, to offer greater payment type ubiquity and to offer better analysis and reporting on progressive transactional activity. In addition to this, merchant banks can offer modern internet-based technology to store invoice and payment data, offer alerts and reminders when wanted and even to provide links to better goods and services pricing and payment options in the future. Simply put, fee income in this convenience category can grow, and do so substantially, but only when there is a true partnership and the bank and merchant can both gain from the relationship in real and visible ways.

Summary
The merchant bank fee scene will change dramatically in the next few years. Overhead recovery type fees will reduce dramatically and ultimately disappear altogether in the competitive landscape ahead. However, convenience type fees, or those that can be seen by a merchant to add-value will continue to exist and can grow. This growth however, will be heavily dependent upon each bank’s ability to work in partnership with their merchants and offer technology and services that tangibly lead to lower costs or higher revenues. This will therefore be the big challenge for merchant banks in the next few years.

Sunday 6 November 2011

A guide to bank transactional fees (direct and indirect)

For many years now, banks and other financial intuitions (including credit unions and community banks) have been generating revenue from transactional fees of one kind or another. In fact, these fees can make up a large proportion of overall revenues and corresponding profits (in some cases constituting up to 50% of all profits in some banks).

In general, transactional fees fall into two categories-those that are charged to the end customer or the consumer and those that are charged to an organisation or merchant, when it wants to allow payment services to its customers.

Direct Customer fees
Transactional fees typically apply only to the direct customers or account holders of a given bank (as the bank has no direct relationship with other consumers) and even then, only when a customer has gone beyond what is deemed to be the core commercial relationship that the bank is prepared to offer at no direct cost. Hence, fees are typically charged to customers when they have overdrawn an account, written a cheque in circumstances where they are insufficient funds to cover it, or perhaps used an automated teller machine or ATM in another banks’s network. However, even here, a bank will allow many transactions without fees, if a customer maintains a positive balance (sometimes with a minimum threshold) or commits to regular income being paid in or saved every month. This is because banks worry a lot about customer “churn” and know that fees can often be a “switching factor” if they become too much of an irritant to an account holder (especially now that opening another account with a different bank can be done online very easily in many cases). The simple logic here is that it is more cost effective and profitable to keep good customers who transact regularly with a bank (and do so for the most part in the black) for what might be many years, than to risk losing them completely over a fair but nonetheless irritating fee that “pushes them over the edge”. But even though this results in what might be seen as a better deal for the end consumer, banks still have to find ways to recover their internal transactional costs and overhead in some way. For some transactions, such as bank cheques, wire transfers and transactions involving foreign exchange a customer will be relatively happy to pay (as these are often “one-off” or special instances). However, these fees will not always cover the costs involved completely and it therefore often falls to the other major category to provide the fees that can cover costs and the bank’s overhead-the merchant.

Merchant fees
Although every individual commercial merchant relationship will be different, depending on a given organisation’s size, type of business, types of services offered etc, banks will typically charge a very wide variety of transactional fees to most merchants to provide a payment service.

The most obvious fees charged to merchants (because they have been around for a long time) are for cash and cheque handling. In both cases, these payment transactions are expensive for any financial institution because they involve human intervention (a teller in a branch perhaps or a reconciliation and settlement clerk in a head office) and in both cases, considerable human data entry (sometimes carried out multiple times) is required. As with an end consumer, a merchant may be able to bring about lower fees by maintaining a positive balance or “float”. However, it is rare for any merchant these days to be able to operate without an overdraft, at least some of the time, so fees in this area need to be monitored carefully by every merchant.

Outside cash and cheque payments, the majority of transactional fees that are charged by a merchant bank are credit and debit card use fees. Cards are typically issued to a consumer without charge, and with no transaction fees when they are paid off regularly each month. However, a merchant will be charged for every transaction that a customer makes with a credit and/or debit card and this may be a very complex affair. In some cases, the fee charged will be a single “aggregate rate” for say credit card use, such as 2.5% of the transaction size. Hence for a £100 consumer purchase, a charge of £2.50 will be made to a merchant. However, this rate may vary from one transaction to another and this is because the aggregate rate is made up of many sub fees that every merchant needs to know about. Here are just some of the fee types that are typically charged:

The Discount Fee Rate
Credit and debit card companies (Visa and MasterCard being by far the largest of these) have what is called “interchange” rates. These can range in price- so in order to make it easier, the merchant banks often have sub-categories. These include rates such as the Qualified Discount Rate – a pre-set or agreed percentage is paid for each pound charged or the Non-Qualified Rate – a fee added to the qualified discount rate in certain transactions. For example, this may occur if a merchant does not use an address verification service (AVS) when they manually enter or take a transaction.

Transaction Fees
This is a specific, flat rate (such as 5 or 10 pence) that is paid on every sale processed through the specific credit card processor. Sometimes the transaction fee is called the interchange fee, authorization fee, or per inquiry fee.

Address Verification Service (AVS) fees
Merchant banks charge a small fee for the validation service to ensure that the billing address provided in say an online checkout process matches the issuing bank’s records. Not using this service can sometimes result in hefty charges on the processing of the card for that sale.

Batch Fees
Merchant banks often require that customer organisations complete or “close out” their transactions a minimum of one time each day. The batch fee pays for expenses for the “gateway” or software that accesses the credit card processing network. If a merchant doesn’t have transactions to process, there is no batch fee to pay of course.

Monthly Statement or Customer Service Fee
Most merchant banks charge a monthly fee in order to cover their deemed monthly costs of operation for a given merchant (paying their customer service team for example).

Monthly Minimum Fee
Many merchant banks require a given organisation to process a minimum amount of sales per month, or they pay a monthly minimum. Monthly minimums tend to range between £15 and £50 per month.

Gateway Fees
There are fees for internet and mail order merchants to use an internet gateway service, although some merchant banks will cover this fee on their customer’s behalf as part of the package deal.

Annual Fees
These are often charged by Merchant banks when free terminal equipment to take payment is offered.

Cancellation/Termination Fees
Most merchant accounts require a contract agreement of one or two years and if a merchant cancels early, they are likely to be charged a termination fee.

Chargeback/Retrieval Fees
When a customer requests a refund (or the customer’s credit card issuer requests a refund), merchant banks typically charge a “chargeback” fee. This can typically range from £10 to £30. This can mount up quickly when possibly chargebacks are not managed carefully.

Summary
Banks are now making a large proportion of their profits by charging fees to both end consumers or account holders (although they worry about overdoing this to prevent customer “churn”) and to merchants who want to offer payment services to their customers. In the latter, there are many direct and indirect fees in the mix that need to be closely scrutinised, as they can make the cost of providing a product or rendering a service a lot more expensive than may organisations think (up to 5% o revenue as we suggested in an earlier blog article). However, with the rise of the Internet and much more choice now being available to the merchant, the fee landscape for the merchant in particular is changing quickly and it may be possible for a merchant to gain greater value for their fee spending (especially as they come to better understand what different transactional fees may be charged). In the next article we will therefore look at whether merchant fees on payment transactions are likely to change over the next few years (and we predict that they will certainly change considerably).

This article was written by Dr Jon Warner of Payswyft (at www.PaySwyft.com). Jon has extensive senior executive experience and has led organizations in a variety of industries through significant transitions to achieve impressive bottom-line results. He is an expert in developing and implementing effective strategies in marketing, sales, operations, (even in corporate turnaround situations). Jon is currently CEO of PaySwyft in the UK (an innovative on-line billing and payment business. He can be reached at jon.warner@payswyft.com.

Wednesday 19 October 2011

Can a Third-Party Digital Billing Company Put Big Savings on the Bottom Line?

In a recent article, we broadly confirmed that a general claim of the international billing and payment research companies was true for two companies (one small and one large) and that it is therefore likely to apply more widely. This claim is that on average every organisation spends around 5% of its revenue on issuing invoices and collecting payment for them. Now that we believe this claim to broadly accurate, in this article I want to test the claim of some third-party electronic billing and payments companies that they can make cost savings of up to 50% if their clients adopt a fully digital billing and payment service. At the full 50%, this would mean that up to 2.5% of a given company’s revenue would be saved. And as the large company in our previous article had an annual turnover of £90 million, this would amount to a whopping £2.25 million (and that’s certainly worth having as recurrent additional income).

To properly analyse this situation, we first need a few facts. In the information below therefore are some statistics about the company which we called Beta in the earlier article:

What this chart tells us immediately is that Beta spends slightly more than 5% of its revenue on issuing invoices and getting them paid, with 43% of this £4.62 million cost being on the staffing side and 57% being on the transactional cost side. So, now that we know this, where is the particular scope for savings, taking each of these two headings separately?

A) The Staff side savings potential
By moving to a fully digital billing solution, there is an expectation that many more people will be happy to both get/view their bills or invoices on line and pay them by the same means. However, this is not going to be the case for all customers and even for those who do make the transition, it takes time. For our purposes here we will therefore estimate potential take up after a three year period, at which point, 50% of Beta’s customer base is happy to view their bills online and half of these (or 25%) are happy to pay online. For simplicity we could say that this is a switch of 35% of the customer base to online billing and payment (the other 65% staying with previous practices and methods).

The implications of the above is that Beta cannot cut or redeploy its staff too aggressively, as the majority of customers still need to be serviced in the old way. However, we can nevertheless estimate that staff man-hours necessary to tackle the new workload (and therefore numbers needed) are reduced as follows:

Accounting: The 50% of customers now viewing their bills on line and the 25% paying by online means, allow much easier settlement and reconciliation, with electronic records at every step, less errors and much easier analysis of data (because the digital billing system can be used for the entire customer billing process and not just part of it). As a result, the people handling invoicing and payments could be reduced to a manager plus four accountants at Beta (a reduction in staff of 38%).

Clerical staff: Quite high numbers of clerical staff are needed at Beta to handle the 25% cheque and cash mix, general data entry (with records often being keyed two, three and even four times on occasions) banking and the chasing of invoices when overdue. Because there is also likely to be faster payment in the electronically paying customer base, this reduces the amount of time chasing late payments. In summary, data administration is simplified considerably across the whole system. As a result, the people handling invoicing and payments could be reduced to a manager plus fifteen clerks at Beta (a reduction in staff of 39%).

Call-centre staff: 50% of all Beta’s payments are taken on the phone, where service agents have to find the customer data and invoice, take the payment manually and payment data to a system of some kind. With a fully digital solution being used by 50% of the customer population, and half of these paying on line, the burden on the call-centre is reduced by 25% (as there is no need to contact the call-centre anymore for these customers). In addition, call-centre staff may be able to convert more and more customers to online payment by showing them the digital invoicing and payment system and pointing out that this is available 24/7, 365 days of the year-and not just 9am-5pm call centre hours. As a result, the people handling invoicing and payments could be reduced to a manager plus forty agents at Beta (a reduction in staff of 30%).

All of the above adds up to staff savings (even with a lower overhead recovery now of 40% as there are less offices, desks, computers etc needed) of £730,056.

B) The Transactional cost side savings potential
We have assumed no change in Beta’s business in terms of revenues and overall transactional volumes (and therefore average cost of each transaction). There are, however, two major changes that a digital system is likely to bring:
1. A change in bill presentment costs
2. A change in the mix of payment types being used

Bill presentment costs: Now that 50% of the customers are viewing their bills on line, it is reasonable to assume that they are happy to see paper “turned off”. As Beta were emailing invoices previously this was a preparation cost mainly (on the staff side) but it does allow the opportunity to send statements electronically as well as give customers copy invoices in the new digital system forever as a free service. This means that paper and envelope costs would reduce, as well as the need to store physical paper copies within the Beta organisation or externally (so costs of storage space are reduced also). Perhaps more significantly, the marketing material send in the post by Beta can now be put online for half of the customers (where it is presented without the cost of having to send it out). All up, savings in all of these presentment areas for Beta are estimated to be £481,035 per annum.

Payment costs: In the new world, a fully digital presentment and payment solution is likely to half Beta’s volume of cheques and eliminate the use of cash completely (even though the option to pay by cash may still be available to customers in some solutions –such as the one offered by PaySwyft). On line bill payment however goes up to become 15% of the total mix (with the other 10% coming from credit and debit card payments that used to go through the Beta call-centre). This adds a transactional cost of £0.50 per invoice to Beta, or £116,379 per annum, but it is more than offset by savings elsewhere. The greatest of these is in the float costs of the business. Because online payments are known to get to customers quicker and lead to faster payment, cash flow is accelerated and days outstanding are reduced (in Beta’s case from 45 days to 38 days (a drop of 22%). This contributes a total of £123,288 in annual savings to Beta. In addition, the often linked costs of having to handle bounced cheques, chasing debt and writing off unpaid invoices, diminishes considerably, adding another annual saving of £387,931.

If we add all the transactional side potential savings up, the total is £924,908

Summary
So, on the staff side we have estimated total savings of £730,056 and on the transactional cost side estimated total savings of £924,908. This makes a grand total of £1.652 million in savings per annum (recurrently) or 1.84% of revenue. Hence, the claim that a good digital billing system can save a company 50% of its costs (or in this case 2.5% of revenues) is not quite met here. However, with the potential to add more savings over future years as more and more customers switch to the new online system it would get very close to the 50% target and make the switch to digital billing still seem like a very good idea.

To make the above figures easier to see at a glance, a summary of all of the above is presented in the table below:

Wednesday 5 October 2011

Sending Bills and collecting payment from customers costs every organisation 5% of Revenue on average!-can this really be correct?

According to several leading research companies who look at international billing and payment issues on an ongoing basis, (including perhaps the leader in the field of billing research -Billentis) they say, that on average, the overall cost of sending out a bill or invoice and then collecting payment from the customer, is anywhere from £4 to £17 per invoice. Unfortunately, apart from the fact that this is a pretty big range, it tends to create an unnecessary defensiveness in organisations (and often in the finance department in particular) who understandably become very keen to point out that they spend nowhere near that kind of money on such a mundane and clerical activity (although they will often fail to include many of the indirect and hidden costs of the process). Another recently published general statistic, however, could be much more useful and may make a few divisional heads and even CEO’s sit up and think about the efficiency and effectiveness of their billing and payments practices for the first time. This is the statement that on average, an organisation spends 5% of its revenue on issuing its invoices and in collecting payments from customers. In this article, we will explore this claim and see if it reflects reality for both small and large organisations. To do this we will look at the figures based on two real UK businesses.

First and foremost let’s deal with the “on average” part of the 5% of revenue claim. What is being done here is to look at many organisations of many sizes and types and simply working out the median or middle value in a range of numbers. In this case the median cost of billing and collecting payment in proportion to total revenues is 5%. Of course, this means that they are some companies that may be higher or lower than this but statistically, we can say that around two-thirds of all companies would fall into this average of 4%.

The Small Company
The first company (let’s call them Alpha) employs 26 people, has a turnover of £5 million in total revenues per annum. This is earned by selling goods and services at an average of £500 on average each time. Hence their total bills in a year are 12,000 or 1,000 per month. There are two broad cost categories that we now need to look at –staff and transaction costs.

On the staff side, Alpha have one accountant (on a salary of £45,000 per annum, three clerical admin people (at a salary of £21,000 each) and two people answering the phones (at a salary of £17,500 each). Hence, the all up payroll for this group of people is £143,000. The three clerical admin people devote all of their time to billing and payments but the accountant and customer service people devote only 50% of their time to this activity. Hence, we can say the cost of the people’s time which is devoted to billing and payments is £103,000. However, the company has staff overhead costs of 40% (cost of offices, equipment, training etc) which brings this cost up to a total of £144,200.

On the transaction cost side, 40% of the 12,000 bills are paid by cheque, 10% by BACS, 30% by phone (half by debit card and half by credit card), and 20% by cash. For cheques the bank charge fees of £1,200 (£0.25 pence times 4,800 cheques). For BACS, a charge is made of 15 pence per transaction (so £0.15*12000*0.1 or £180). For cash handling the bank charges a flat annual fee of £500 for all cash deposits of this size. For cost of transactions by phone, on the debit side the company pays £0.35 pence per transaction or £630 and on the credit side 2.5% of each transaction value (£500*0.025*1800 transactions or £22,500). Finally, we have to worry about how long it takes to get paid (and the cost of borrowing money to operate and allow for possibly late payments). Given that this small company has average invoice days outstanding of forty, they have to cover this £500 for 40 days or just under 11% of the year. As Alpha is paying interest at 5%, this means the cost to fund the necessary float is £26,027.

There are also a few direct invoicing costs for Alpha to bear including printing invoices, paper, envelopes, stamps and even marketing material (to also design and print). This adds up to a total of £0.90 per invoice (the stamp alone being half of this). We therefore have a total annual cost of £10,800. This makes the grand total on the transactional side of things £61,837. If we total all of the above, we now have a grand total billing and collection cost of £206,037. As a % of the £5 million in revenues this is 4.12% (or what would be £17.17 per invoice).

The Large Company
The second company (lets call them Beta), employs 525 people, has a turnover of £90 million in total revenues per annum. This is earned by selling goods and services at an average of £58 each time. Hence, their total bills in a year are 1,551,725 or 129,310 per month on average. Once again, there are two broad cost categories that we now need to look at –staff and transaction costs.

On the staff side, Beta have a team of eight accountants (on an average salary of £48,000 per annum each, thirty-two clerical admin people doing bookkeeping, settlement and reconciliation (at a salary of £23,500 each) and a call-centre with sixty people answering the phones (at a salary of £18,500 each on average). Hence, the all up payroll for this group of people is £2,214,000. The Beta company does not keep detailed records but estimates that billing and collecting payments occupies about 60% of the time of this whole team. Hence, the cost of the people’s time, which is devoted to billing and payments is £1,347,600. However, the company has staff overhead costs of 45% (cost of offices, equipment, training etc) which brings this cost up to a total of £ £1,954,020.

On the transaction cost side, 20% of the 1,323,530 bills are paid by cheque, 20% by BACS, 50% by phone (half by debit card and half by credit card), 5% by cash and 5% via Beta’s Internet bank site portal. For cheques the bank charges fees of £52,941 (£0.20 pence times 264,706 cheques). For BACS, a charge is made of 12 pence per transaction (so £0.12*264,706 or £31,765). For cash handling the bank charges a flat annual fee of £15,000 for all cash deposits of this size. For cost of transactions by phone, on the debit side the company pays £0.30 pence per transaction or £99,265 and on the credit side 1.8% of each transaction value (£58*0.018*330,883). transactions or £405,000). Finally, we have to worry about how long it takes to get paid (and the cost of borrowing money to operate and allow for possibly late payments. This company has average invoice days outstanding of 45, they have to cover this £68 for each transaction for 45 days or 12.3% of the year. As the Beta company is paying interest at 5%, this means the cost to fund the necessary float is £553,500.

There are also a few direct invoicing costs for Beta to bear including sending invoices (which Beta does via email not paper unless it is requested by a customer), monthly mailed statements and accompanying marketing material (to also print and design). This is a total of £0.40 per invoice. We therefore have a total annual cost of £620,690. This makes the grand total on the transactional side of things £1,860,054.

If we total all of the above (all staff plus all transaction costs), we now have a grand total billing and collection cost of £ £3,814,074. As a % of the £90 million in revenues this is 4.24%. (or £2.46 per invoice).

Summary
Although the data from these two very different sized companies cannot in any way constitute a statistically significant result, it is nonetheless quite remarkable that both costs of invoicing and collection are so close. At 4.12% and 4.24% respectively they are also only a little less than the 5% average claim made by the research companies. In fact, it is a reasonable assumption that a few more “hidden costs” still need to be added to both sides here (which may completely close the gap). For example, the small company Alpha added no costs for the senior managers (GM and CFO) who both spend some of their time in payment matters, nor for the extra bank charges for bounced cheques, debt collection and writing off-unpaid invoices (issues also not included for Beta). And, in the large company, there were some system and invoice storage costs that were excluded. This may well have made both % numbers even closer to the 5% figure and possibly slightly higher.

In the final analysis, this is just the data from two individual companies. However, they seem to provide a useful general justification to the claim and serve as a basis for calculating the actual figures for almost any business. This may be especially useful ahead of talking with online digital bill presentment and payment companies that often claim that they can reduce these costs by up to 50%-if this is true, what a great way to lift revenues by up to 2.5%!

Tuesday 27 September 2011

Are emailed invoices just as good as digital ones?

Most people now believe that electronic invoicing offers significant advantages over paper-based processes (saving direct costs like printing an invoice, stamping an envelope and sending it in the mail etc and saving indirect costs such as lost invoices, late and missing cheques in the mail and often much more difficult reconciliation). However, there is not always agreement on what the term “electronic invoicing” actually means and in this brief article we will look at two very different kinds of e-invoicing-emailed invoices and digital invoices. These are often perceived to be similar and/or equivalent methods but, as we will see, they are actually quite different.

Emailed invoices
Sending an invoice via email is usually done these days by attaching the invoice as an Adobe PDF document. This allows the invoice to be sent cheaply and quickly to the recipient who can use a free product (Adobe Acrobat Reader) to open and view it. The simple idea here is that once the customer has reviewed the document (and even saved it to his or her hard drive) he or she can then pay it. In theory (especially in Business to Consumer or B2C markets) the invoice is not only sent out quickly (and at much lower costs than traditional invoicing methods) but means that the customer can send back a cheque or phone in a credit card payment within hours or just a few days (and well ahead of the latest date he or should could technically pay) thereby helping to accelerate merchant cash-flow. Unfortunately, although this works in some situations, the process is rarely this smooth and a number of problems can occur.

Firstly, the merchant needs to have a customer’s email address to be able to send a PDF. Secondly, the PDF is still a flat document which most customers will not only have to open, but will often print and put in a pile to deal with later, when they are ready (just like receiving the paper-based invoice in the mail). This means that the customer may wait as long as they did before to pay the invoice (assuming they do not lose their printed piece of paper in the meantime having deleted their original email). In addition to all of this, an emailed PDF does not encourage the customer to pay by electronic means any more than an invoice arriving in the mail does. Research suggests that customers actually often like to have the option to pay online by debit or credit card for example and can often only do so by calling the merchant (and having to spend time and effort, and within the hours of business operated by the call-centre). Finally, in Business to Business (or B2B) invoicing, the emailed PDF presents a whole new layer of challenges as these often require a digital signature. PDF technology is now much better at allowing digital signatures to be securely added to invoices when they are sent in the mail. However, the process is by no means simple and presents many logistical issues, particularly when multiple approval signatures are required.

Digital invoices
A digital invoice is available at a web site. Sometimes this is embedded in part of a merchant’s web site or it is “hosted” on a third-party web site (to which customers can go directly or can be redirected from a link on a merchant’s web site). In most cases, the digital invoice rendering process is even quicker than emailed invoices, as there is no need to generate a PDF and attach it to an email address. In addition, although a customer may be notified that a new invoice is available via email, it is not necessary to have an email address (as the customer can be notified about the web address by normal physical mail and then subscribe to the web site service to be later notified by either email or even their mobile phone –via SMS). In practice this means that digital invoices will often collect or “scrape” new email addresses from customers progressively.

Perhaps most importantly, a digital invoice is viewed in a truly online way (and does not require printing (as it can be easily stored and retrieved permanently or resent by a merchant at almost no extra cost). This means that not only can the customer view the invoice (in as much detail as they wish) but they can use many online features to both deal with the invoice (save it, schedule it for later payment or send it on for viewing or approval to another person) or even just pay it immediately of course. And if they do choose to pay it immediately, they typically get to do so via their debit card if they want to use their current bank account or by a variety of credit card options (and in some cases even by cash by printing out a voucher and taking it to a local newsagent or local store that takes cash payments). This is therefore much more likely to accelerate merchant cash-flow than in the emailed invoice situation and means that the payment is much easier to reconcile (as less difficult to reconcile cheques or phone-based payments are being made). Finally, the invoice recipient (whether it is a B2C one or B2B one) can elect to pay a bill 24/7 as the bill presentment and payment web site is truly “open-all-hours”.

Conclusion
Emailed invoices are superior to traditional invoices sent in the mail. However, they fall far short of full digital invoices, which offer many additional benefits (which translate into much greater time and cost saving for the merchant). These two approaches are therefore far from equivalent and a merchant can realise considerable advantages by upgrading from an emailed invoice to a full digital one.

Wednesday 14 September 2011

The factors that help shape choice in the online payment world

There are now many payments types or channels available to both merchants and customers (cash, cheque, credit card, debit card, pre-paid card, direct debit, Internet direct bank transfer, e-wallet transfer etc). However, they all present different advantages and disadvantages, and these may be quite different for a consumer versus a merchant. However, by drawing together a range of international literature about payment systems and how they are used by people and organizations of all kinds, six attributes of payment products appear to be most relevant to the choices that are made of both merchants and their customers alike*. These six factors are:
• capability
• cost
• convenience
• coverage
• confidence and
• confidentiality

Let’s look at each of these in a little more detail.

Capability
Capability refers to the functional ability to actually use a particular payment type or channel. For example, capability in cash transactions (the oldest and most ubiquitous of payment types) relates to a person or an organization being in a position to hand over a payment (having cash in an acceptable denomination/currency) and then receive the payment (also in an acceptable denomination/currency of course). This becomes a threshold issue in non-cash payments, which often involve technical issues such as the establishment of a means of communicating over distance, ability to verify the parties in a payment transaction, and many other factors.

Cost
All payment systems involve some costs (including cash). Both consumers and merchants are likely to seek to use lower cost payments if they can. This is especially the case if they can readily know what the use of each payment will cost them (sometimes this is transparent and sometimes it is not of course). The cost of a payment is not always spread evenly between the parties. Vendors of payment products will often seek to make some approaches appear to be no-cost or low-cost to the customer-but this may or may not be true. The cost structures of payment methods also differ; some have a fixed transaction charge while others are proportional to the size of the transaction.

Convenience
Convenience refers to the ease of use or “user-friendliness” of a payment method. A need for registration before using the payment method, or the speed of payment (for example, the time taken to approve a payment) can be factors affecting convenience. Consumers generally view cash as convenient to carry for small purchases at the point-of-sale. This means that to be competitive with cash, electronic payments systems have to offer a high level of convenience (hence all the current interest in mobile phone usage for payments). Businesses however typically have a very different perspective on convenience to that of consumers. They are likely to seek payment products and services that fit reasonably well into their broader processes and systems.

Coverage
Coverage refers to how widely a payment method or system is accepted by merchants and other recipients of payments, such as businesses receiving payments from suppliers. An important objective for all payment types and channels is therefore clearly to be widely accessible to merchants, traders, consumers and other users without high-entry or ongoing costs. Similarly, consumers should encounter as few barriers as possible in undertaking transactions using the chosen system.

Confidence
This refers to a customer’s belief that a payment will be successfully executed and completed, and that the value of a payment method will be respected. Confidence rises where arrangements are secure and value does not ‘leak’. The confidence that consumers have in a payment method also depends on the associated payment channel. For example, online payments with credit cards differ from offline payments, in that the card is not physically provided by the customer and the merchant does not obtain a signed confirmation from the customer. Some card schemes provide a system of cardholder authentication, usually through provision of name, credit card number and expiration date. To prevent illegitimate interception, this information is typically encrypted so as to increase levels of confidence in the payment system.

Confidentiality
As a payment type only cash maintains payer and/or payee confidentiality. Non-cash payments often involve the collection of information that becomes valuable. Users of payment systems are often concerned about the collection and use of this often personal information, and its potential release to other parties, if not properly secured. For example, in general, credit card payments are made via an identifiable account, resulting in the loss of anonymity. This means that some individuals are uncomfortable or unhappy about using payment types or channels which cannot reasonably protect their personal information (and may increase the risk of theft or fraud).

Summary
Payment type or channel choices are complex for both a given consumer or merchant. However, in this article we have described six factors which seem to be most influential in the decision-making process. Although these factors all stand alone, they are not necessarily independent of one another of course. In other words, the boundaries between factors are often blurred of “fuzzy”.

In addition, it is also worth noting that any one of these factors can be primary, depending on a given individual or organizational perspective. For some consumers and/or merchants therefore, cost and convenience may be first and second (with other factors making little difference). However, for other consumers and/or merchants, capability, coverage and confidentiality may all have equal significance, for instance.

In the next article, we will explore this subject further from the merchant’s perspective.

*The report by the Australian Government called “Exploration of future Electronic Payments” was extremely useful in assembling and describing the factors in more detail.

Tuesday 30 August 2011

Paperless billing-a cost effective and sustainable solution?

“Eco friendly” and “budget friendly” don’t always go hand in hand. But paperless billing is one of those rare measures that checks both boxes – all while keeping customers happy. This is simply because getting a bill to a consumer in a traditional way takes lots of time, effort and money that can be avoided. However, by using modern internet technology, the bill issue time can be reduced, the effort to get the bill out can be lessened and costs can be squeezed or in some cases eliminated.

Lets look a look at some of the specific wins:

Any business of any size or type wins on cost. On the direct or visible cost side, there’s less paper, less envelopes, less ink, less postage. Even though these are often significant in and of themselves there are also big potential cost reductions on the indirect or more hidden side of things...less customer support (handling queries or phone-in payments) and much less time spent on reconciliation. In addition, online bill presentment and payment has been shown to lead to much quicker settlement by the customer-which substantially aids cash-flow for a merchant. All these savings add up.

The customer wins – This includes eliminating or simplifying the tasks of organising bills, querying them and being able to make payments (all being possible safely and securely at a single web site typically with a few clicks). Paper free means more free time for the bill payer, and less to worry about when dealing with paper (including having to put the bill or invoice somewhere safe, finding it when needed and even losing it occasionally).

The environment wins. Paperless billing is a simple but significant step that every business can take with a little focus, effort and determination. Less paper means less use of trees and less transportation (and petrol), reducing a merchant’s carbon footprint. Not all customers will be happy to turn off paper immediately but some will and they will slowly encourage the others to do the same.

So Paperless billing is a worthy goal for all merchants
Whether you’re a large merchant billing tens or hundreds of thousands of customers, or a small business raising a handful of invoices, on-line billing at an aggregation site (such as PaySwyft) is a pain free way to trial the paperless option.

Merchants can raise some or all of their bills online...or test dual billing with late payers and measure the impact on cashflow...or if they prefer, give customers a straight choice: paper or paper free.

Paperless Billing: at a glance:

Merchants are saving money on...
• Printing paper bills
• Fulfilment, postage and franking
• Undeliverable mail
• Chasing late payments
• Handling manual payments
• Archiving paper bills
• Reconciliation/bill matching

Customers are saving time on...
• Checking and paying bills
• Hunting for previous bills
• Checking funds and means to pay
• Writing and posting cheques
• Waiting for a merchant to be open for business
• Talking to customer services
• Worrying over lost cheques and late delivery

Wednesday 10 August 2011

Who Will Win the Online Billing and Payment War?

In the last 2-3 years, large research companies who focus on Internet trends in billing and/or payments, such as Ascent, Aite Group, Billentis, Forrester, Javelin Research, and several others, have suggested that a “war” has broken out to try to win the race to control most of the online billing and payment transactions (at least it seems to have done so in much of the developed world). This war is apparently between 3 parties –The “consolidators”, the large billing merchants themselves (usually called “biller-direct”) and the “aggregators”. In this brief article we will look more closely at this on-line billing and payment “war” and try to assess who seems to be leading or lagging in their efforts to emerge triumphant.

Introduction
The capacity to send an invoice via online means, and to facilitate payment of it electronically, is a relatively recent phenomenon. In reality, this has only been possible for around 10 years or so, and has only become broadly available as fast Internet access has become widespread and Internet banking has been taken up in far greater numbers. However, we need to separate online bill presentment from online payment. Research suggests that true online bill presentment (a digital bill/invoice capable of showing full detail as needed) is used by less than 5% of the adult population in the US for example (and may be as little as 3% in the UK). And as the chart below on preferred payment channels suggests, only 13.2% of the US population (at least in 2008) actually pays bills online (around two-thirds of which is via a bank and the customer’s linked checking account). This may have increased a little in the last couple of years but not by very much.

©Ascent Group: 2008

So, despite the fact that over 80% of the adult population now has Internet access in the US and the UK, there is still huge potential to switch people from sending cheques in the mail, bank drafts, in-person payments and even phone-in payments in the future (a total of around ¾ of all payments). For this reason, there are a wide variety of companies trying to win control of this potentially large and lucrative sector but the strategies for doing so are quite different. Let’s look at each one of what we see to be four different categories with a unique approach.

1. Consolidators
As the overall chart on the next page illustrates, consolidators are those organizations that seek to show a number of usually large merchant bills, as line items on an Internet web site. As most consolidators are banks, or at least large financial services firms, this is usually an extension of the bank’s internet payment web-site, and allows customers to immediately debit funds from a current/checking account to pay a bill (such as an electricity or telephone bill). It is actually rare for a consolidator to offer other alternative payment options, and it is even rarer for a customer to be able to see a full bill. This means that they can usually only remit a payment for a bill that he or she has received in the mail or by email (so that they can enter the payment information needed).

In recent years, the larger consolidators have penetrated the market well for this relatively basic service. However, they only have limited growth potential with a full presentment facility, which in any case is typically restricted to their own customer base or bank account holders.


2. Biller-Direct
Larger merchants (utilities, mobile phone operators and cable companies, for example) will often allow customers to both see their bill online in a part of the merchant’s web site and pay it (possibly by several means on the debit and credit side). However, to create this functionality for their customers, these merchants have to either build the handling software themselves, or buy it in as a package from a software vendor. This entails up-front capital, time to design and integrate the solution, as well as the effort to train internal staff to use the new system, once built.

From a customer perspective, this approach does afford the benefit of non-standard business hours access and some extra payment flexibility in some cases. However, there are also several drawbacks. These include some very unfriendly sites (buried/hard-to-find information, pop ups, missing detail, etc) and general customer irritation at having to remember each merchant’s site login and password process each time. For this reason, most large merchant biller-direct sites have relatively low levels of customer conversion (5% or less). In addition, the high cost of set-up makes this an unattractive approach for small to medium sized merchants to consider.

3. Consumer Aggregators
Aggregators are typically specialist organizations that have been set up to both present a bill and allow it to be paid online on behalf of a group of usually large merchants. If well-run and focused, consumer aggregators typically have considerable scope for future growth because they can theoretically provide a service for all consumers in the market. However, when consumers are asked to come to a web-site to find all or even most of their bills, only to find that one or two at most are available to them, they may not return. This makes consumer penetration a very long-term affair and assumes that the consumer aggregator finds it possible and even economic to approach all merchants in the market, however small and/or local they may be. In addition to this problem, although there are several consumer aggregator companies, they offer a slightly different range of features and in many cases may not even offer a full or detailed presentment option. This may act to simply confuse the consumer who may not then be prepared to use any of these sites, especially without their merchant encouraging them to use this as the primary channel.

4. Merchant Aggregators
Like consumer aggregators, merchant aggregators are also typically specialist online companies, but they have a different business model. The goal is to provide a service to one particular merchant at a time, and then work with that merchant to encourage consumers to view and pay their bill electronically (and particularly switch away from cash and cheques). To date, this service has been mainly aimed at small to medium sized merchants (rather than the “super-billers”). This means that both the penetration and growth rate has been slow so far. However, there is much scope for considerably greater growth and therefore higher market penetration in the future.

From a consumer perspective, the expectation here is limited to being able to see one given merchant’s full bill online and to be able to pay it by multiple methods. However, over time, more merchants are progressively added, meaning that consumers get to see several bills, from several merchants (some of which may be quite small and/or local) at the same site (with a familiar login and password).

The main challenge for merchant aggregators is acquiring merchants in the first place (which requires marketing and sales effort). Although merchant aggregators can do this in particular market verticals to manage these costs, one strong possibility is that consolidators (who already have many merchants already for payment purposes) may find it worthwhile to partner with the merchant aggregators, who get transactional volume in return for making available a full online presentment option.

Conclusion
As our chart on the previous page indicates, the biller-direct model has already proved to be a slow and expensive path for many large merchants and looks to be the worst current position to be in, if they were to try to win the online billing wars. Consolidators often have a large bill payments consumer population but do not have a cross-market platform to get their beyond their own customer base. Consumer aggregators have the potential to offer a multi-merchant solution, across the entire market, but having recruited many of the “super-billers” are finding it expensive to add the smaller merchants that consumers would want to see on their site in order to return again. Finally, merchant aggregators, although small in market penetration to date, probably have the most potential to offer a truly cross-market solution, which benefits all merchant and their consumers.

In the final analysis, it is, of course, extremely difficult to predict who is likely to emerge victorious in such a competitive space, especially where the financial stakes of wining or losing are so high. However, if the merchant aggregators can gain enough momentum, perhaps by partnering with the consolidator banks, they seem to be in the best position to win the online billing war at this particular time-we will watch the next couple few years with interest.

Monday 1 August 2011

Are you ready to take electronic payments of all kinds?

One of the most talked about topics in the electronic payment space for companies of all sizes is, “how can we have our customers pay through the web?” As the payments industry continues to evolve and more and more individuals are comfortable using the web, as well as their smart phones to make a payment, all businesses have a tremendous opportunity to speed up their receivables process while lowering costs and improving efficiencies. The question however then becomes “what is the best way to go about this?”

There are several choices available to a merchant to start to accept payments via the web, including building an online shopping cart themselves (writing the software), buying a third-party piece of software to do this (such as Basware or Tieto), adding a third-party payment system (such as AcceptPay or PayPal for example) or using an aggregator service (such as PaySwyft for example).

Whatever option is finally selected, there are several issues for a merchant to think about:
•Branding/Marketing issues
•Website Availability
•Customer Service
•PCI-Compliance
•Costs/fees

Branding/Marketing Issues
Any business will need to decide how much marketing control they want to have over the look and feel of the payment page or pages. In some companies, this may not matter very much and a generic payment site may be fit for purpose. However, if a brand is important or even if a company wants to maintain a very similar look and feel (including use of logos etc) then an internally built or a purchased software solution is likely to give a merchant the most customization potential. However, third-party sites may have some customization potential and have the added advantage of fast set up and faster speed of processing.

Website Monitoring and Availability
A critical component to any company’s desire to add web payments is ensuring that the payment website is consistently monitored and available for use. A couple of typical metrics measured and monitored are response time and website availability or uptime. Clearly an internally built system or purchased piece of software will need to be well-built and well-supported to be available as needed. However, most third-party web site solution providers should be able to easily provide these availability metrics to any business that wants to offer web payments.

Customer Service
Many considerations need to be fleshed out when deciding on what type of customer service is needed for your customers. For example, is the system going to be user-friendly to all people who may be interested in using it? do you need 24/7, 365 days a year availability? Do you require international payments? or can your system quickly find a payment transaction when needed (and can it communicate easily with the customer –via online means, when necessary)?

PCI-Compliance issues
As with accepting credit or debit card payments in person (or via a phone call), any merchant accepting credit cards as a payment type must ensure that they are in compliance with the Payment Card Industry (PCI) Security Standards Council’s rules. The PCI Security Standards Council offers comprehensive standards and supporting materials to enhance payment card data security. The PCI Data Security Standard includes requirements for security management, policies, procedures, network architecture, software design and other critical protective measures. With an internal or purchased solution PCI compliance has to be handled directly.

External payment system providers clearly need to have a very good understanding of the requirements and be able to both help the merchant on best practices for securing credit card data, or in some cases handle this on the merchant’s behalf. This means that tasks such as tokenization and encryption etc are handled by the third-party helping the merchant to better manage the risk of charge-backs, identity theft and other abuses. Once again, providers will have very different approaches and it is worth discussing these in detail.

Costs/Fees
One other issue to think about when accepting credit or debit card payments through the web is costs or fees. Many businesses that operate on low margins could see those margins deteriorate even more as credit or debit card fees (direct and indirect) would add an additional (and perhaps unnecessary) layer of cost.

Although fees are payable to process payments with an internally developed or software based solution, third-party providers can also charge a courtesy or convenience fee. Merchants need to be aware that a convenience fee is not allowed as a method of just passing on credit or debit card processing charges. According to the Merchant Council, “Surcharging customers for paying with a credit card is considered discrimination based on payment type. A convenience fee is a charge for offering customers another payment option that is separate and in addition to standard payment methods.” All fees therefore need to be carefully scrutinized ahead of time so that there are no surprises when a monthly transactional statement is sent.

Conclusion
In the final analysis, as payment channels and options on the web expand, and more and more customers become comfortable with the whole process of paying electronically, offering payment capability via the Internet will become more standard for most businesses. However, there are several possible strategies available to achieve this and several important areas of consideration to take into account. In this article we have briefly explored five of these, namely: Branding/Marketing issues, Website Availability, Customer Service, PCI-Compliance issues and finally Costs/fees.

Thursday 21 July 2011

Why the massive rise in using debit cards matters to all organisations

According to figures released by the payments council at the beginning of 2011, debit card expenditures more or less matched cash expenditures for the first time ever in the UK (and are expected to outstrip it easily in 2011). According to the statistics, there were around 6 billion purchases made using debit cards in the UK during the previous 12 months, an annual rise of nearly 9% and these transactions were worth a combined £265 billion, at an average value of £44 (up 7.5% overall). Yet while there were the much greater 21.4 billion cash transactions made in that same period (which was nonetheless down by 5.2%), the total value of these payments fell by 0.4% to about the same £265 billion figure.

Now clearly, these figures do not mean that cash is disappearing any time soon, especially since these lower average expenditures of £12 or less are often most conveniently settled by cash. However, it does signal that a lot of non-retail spending in particular is shifting to debit card use (and even some retail too with the interest in payment using NFC technology and smart phones in the near future) and perhaps the greatest area in which this likely to be significant is in paying bills (especially those sent from Government or Business to consumers).

What is driving this trend is that cheque writing is falling steadily (and of course is planned to disappear by 2018 in the UK). In fact, over 100 million fewer cheques were written in the UK in 2010 by consumers and it is the debit card that seems to be the preferred alternative, rather than the credit card. In 2010, credit cards accounted for £125.4 billion worth of payments, an annual fall of 0.7%, with 2 billion separate purchases (making an average credit card transaction £63). Hence, debit card transactions outnumbered credit card payments by three to one and represented more than twice the overall spend.

So what does all of this change mean for organisations on how they currently do business? Well first and foremost, accepting payment by debit card becomes pretty critical. Many small businesses (and even a few medium to large ones) do not at the moment and may well lose customers to competitors in the future. Beyond this perhaps obvious issue is the fact in the modern world people are happy to save as much time as they can and a debit card can often meet this need for faster transaction time and greater convenience (especially when paying over the web).

The benefits of accepting, and even encouraging debit card payments are many for the organisation and include:
•Less trips to the bank (with cash and/or cheques)
•Greater security (with less cash and cheques to keep safe)
•Extended opening hours for payment (allowing customers to pay by telephone or over the Internet 24/7 and 365 days a year-an outcome that can be set up immediately with a relationship with a web billing and payment portal such as PaySwyft.
•A faster transfer of funds to the organisation’s bank account than most other methods
•Generally cheaper than handling cash or credit cards
•Typically much lower charge-back risks than with credit cards

Each of the above is probably compelling reason enough for any business to take debit card payments, but in combination and given this payment type’s rapidly increasing popularity amongst consumers, the decision becomes extremely compelling in today’s fast-moving commercial climate.

Sunday 10 July 2011

Can Better Billing Practices Improve Merchant Cash-flow, Cost Effectiveness and Customer Satisfaction?

This blog article explores whether more efficient and effective billing practices deliver greater Cash-flow, Cost effectiveness and Customer Satisfaction for the merchant and more Convenience, Clarity/Certainty and Choice for the consumer-the 6 C’s

Billing is never the most exciting of subjects for business owners or managers, coming as it does as the last and perhaps most administrative or clerical step in the sales to delivery cycle. However, being a last step should not relegate it to being the least important and there is actually plenty of evidence to suggest that efficient billing practices may be one of the most critical. In this article we will therefore briefly explore why better billing practices can have a significant impact on cash-flow, cost-effectiveness and customer satisfaction for the merchant (as well as several equally beneficial, and linked, outcomes for their customers).

Before we look at each of these 3 merchant benefits in turn, let’s define what we mean by “efficient billing practices”. Presenting a bill or invoice can clearly be done in person (albeit rarely), in the physical mail (with a stamp), via an email (typically with a PDF attachment) or by digital means (via an Internet web site). All four of these options can be relatively “efficient” if they reach the right person quickly and facilitate the earliest possible settlement. However, experience (and much research) tells us that these practices are likely to be progressively more effective in the order in which they are listed. In other words, a full digital presentment of the bill is likely to be a much better option that delivering a bill by email, which in turn is better than doing so by physical mail etc. In this article we will therefore assume that a merchant will have, or aspire to have, the most efficient and effective approach –a full digital e-bill and it will be our contention that getting this bill delivered allows all the benefits we will elaborate upon subsequently to follow. The diagram below illustrates this rather more visually.


© PaySwyft, 2011. All Rights Reserved





Greater Cash-flow
The vast majority of organisations that supply a product or render a service to another organisation, or an end consumer, usually do so on credit terms (a lucky few get paid ahead of time of course). To operate somewhat like a lending bank, an organisation must therefore use shareholder funds, cash in its bank account, supplier credit (if they have any) or other money that is borrowed in some way (with interest being payable). These credit terms, or what is sometimes easier to visualise as the time taken to receive payment from customers, can have a huge impact on the working capital needed by a business and thereby have a critical affect on cash-flow. From the point of the delivery, spending days preparing and sending an invoice along with offering normal credit terms for a given industry (say 30 day terms on average), might mean that a particular enterprise may have an average days outstanding in practice of 40-45 days to get paid. Even for a relatively small business turning over say £500,000 a year this would mean working capital of £30,000 needs to be maintained just to stay in business (or in this case 6% of turnover).

Given the above, if a merchant takes its billing practices seriously, it should present an invoice to the customer in the fastest way possible (ideally digitally, the day after delivery-or even the same day perhaps). In addition, with a full digital bill, an opportunity can be offered to check that the bill has all the information that the customer needs to see and in as much detail and as they need to see it. This creates clarity and certainty that they are paying appropriately for what they have received. On a digitally presented bill, “clickable” payment options can allow the customer to render payment immediately (at the same web site and in the same session) or perhaps schedule a payment there and then (especially if there are multiple payment choices available, which we will look at later). All of this combines to ensure that invoice days outstanding are reduced, in some cases by up to 30-40%. This clearly has a very positive impact on cash-flow and allows working capital to be reduced or freed up for other uses (in the above small business example it could lead to 2-3% of total revenue in savings).

Greater Cost Effectiveness
It is estimated that physical bills (paper-base ones) still account for around 80% of the total volume of bills in all major economies, where there is good data to measure it such as the UK, Australia, Canada, France, Holland, Germany, New Zealand, Singapore, Sweden, and the US (amongst others).

The direct costs of preparing an invoice and sending it in the mail alone are relatively high, especially in an age when we can send almost any document electronically. However, they are even higher when you factor in the indirect costs associated with the potential for keying errors, mis-delivery and loss and the extra time often needed for accounting and reconciliation (to name but a few problems). The email based bill (now accounting for around 15% of the total volume of bills according to most research) removes some of the direct costs above, but almost none of the indirect costs of keying errors and mis-delivery, and extra time needed for accounting and reconciliation. The full digital bill is the only option therefore which has the scope to make a large dent in both direct and indirect costs.

With a well-designed system, a fully digital billing approach allows the customer to see the full bill immediately it is delivered (24/7 and 365 days a year) to analyse it versus other bills from the same merchant potentially and to immediately effect payment (or plan for it to occur on the system). This therefore affords much greater customer convenience (especially when they can use the system for their own personal bill storage and not have to wait for a merchant call-centre to be open to take a payment, for instance). However, the major benefits to the merchant are in having a full electronic record of each transaction (individually or in aggregate), with as much detail as they wish to see. And by maintaining the whole billing process in electronic form, all the data can flow in digital form in all directions, including reconciliation in the accounting system-thereby saving many labour hours and costs.

Greater Customer Satisfaction
When customers are asked about their overall experiences of organisational billing (in general) they will tend to mention three factors more than any other.

The first is that it should offer “clarity and certainty”. By this they typically mean that it should be a clear and easy to follow invoice, be accurate, be securely delivered to them and reflect what they have purchased in a certain way.

Secondly, they will typically say that a bill should be “conveniently” presented. Mailing it may meet this need (physically or by email) but digitally allows it to be viewed at any time day and night and, if it is user-friendly enough, can allow for further detail to be scrutinised, when desired.

Thirdly, and perhaps most importantly, customers will nominate the need for “choice” to be available to them. On the presentment side this may be whether to pay the bill now or later or to set up a scheduled or recurrent payment (with associated electronic alerts and reminders to an email account of mobile phone, as needed). On the payment side, this may be to have lots of immediate and widespread payment types or options to be used on both the debit and credit side if possible. In a well-designed digital billing web site, all of this can be available with an even greater range of choices being available in terms of individual customer preferences, in many cases.

Summary
In conclusion then it should by now be clear that the apparently basic and administrative item of a simple bill to a customer can be presented in a way that can have a significant bearing on Cash-flow, Cost Control and Customer Satisfaction. A well-designed and fully electronic or digital billing process will typically give the best results and all organisations should therefore consider moving to such a system as quickly as possible, especially if they can add it as an additional channel to existing practices (minimising disruption) and on a pay-as-you-go basis (as offered by systems such as PaySwyft for example).

Wednesday 29 June 2011

What is the difference between “push” versus “pull” on-line billing?

The terms “push” and “pull” are now commonly mentioned when on-line billing is being described, but what do these terms actually mean in this context and what is the advantages of one over the other?

A “push” based on-line billing process essentially means that a consumer is prompted or alerted directly with a full invoice, statement or other document describing what has been purchased and what needs to be paid. This is therefore what is commonly called a “rich” document. For the most part, push-based on-line billing systems are carried out as e-mail notifications with attachment files (such as a PDF for example).

A “pull” based on-line billing process will still alert a consumer that an invoice is ready to be paid but instead of including the rich document, invites the consumer to go to a nominated web site where they can find the full bill to be viewed and subsequently be paid in digital form. Both e-mail and text messaging can be used to simply alert the customer, but merchants may elect to use off-line notifications (letters, paper-based invoices etc) as well.

Both push and pull models on online billing offer merchants the opportunity to reduce or eliminate paper invoices over time but each has advantages and disadvantages.

The advantages and disadvantages or Push-based on-line billing
Push based on-lined billing has the advantage of using a very common and familiar system that most businesses and consumers now use with relative ease -their email. Recipient addresses are unique and go straight into an inbox to be read either immediately or when the person opens their email system. In addition, emails are now readily received on mobile phones and other portable devices, allowing for very fast delivery, flexible viewing and (in some cases) access to online payment options.

Despite the above, there are a number of drawbacks with this push-based delivery model. They include:
* An email address may be incorrect or not reach the right recipient directly
* Many individuals and even organisations may have inbox restrictions the size of incoming emails. This will limit the opportunities for presenting invoices (especially when the attachment is large in size).
* Staff turnover in businesses and changes to email addresses by consumers means that it is often difficult to ensure the complete integrity of email addresses.
* Recipients can claim that they never received an email with an attached e-bill
* It is not always easy to differentiate copy invoices from original invoices with push on-line billing.
* An attachment (such as a PDF) is still only a piece of paper. A consumer may just print it and pay it offline and/or a merchant cannot easily reconcile the data (needing to key in the data again).

The advantages and disadvantages or Pull-based on-line billing
In Pull-based on-line billing, an email is more equivalent to a paper-based notification in the physical mail and simply serves to alert the customer that an invoice is available for viewing and processing at the nominated billing website (the biller’s own or a third-party aggregator’s one). As well as presenting the invoice a fully digital and therefore clickable format, web 2.0 internet technology also makes it possible to distinguish between the original and copy invoice. In addition, this fully digital format makes for very simple upload or transfer to an accounting system, thus eliminating any requirement to key in data manually and greatly aiding the reconciliation process. In addition, full digitisation allows the recipients to view their bill and render payments all on-line, at the same web site (which they may choose to do as soon as it is received).

Just as with Push based on-line billing, there are nonetheless a number of drawbacks with this pull-based delivery model. They include:
* Recipients may forget their logins and passwords to the billing web site to which they are being directed
* Recipients may not trust the web site to which they are being sent, or least feel nervous about the security offered (especially where payments are concerned)
* Consumers may be confused with what is likely to be a simplified bill or one which approximates to the one they receive in the mail-it is often similar but not the same.
* The billing web site may not be very user-friendly (leading to consumer abandonment)

So, in summary, we can say that both push and pull on-line billing have many advantages worth considering but also have a range of disadvantages that need to be considered one-by-one according to each merchant’s needs. In overall terms perhaps there are less onerous disadvantages on the “pull” side, and it is this approach consequently has the present advantage. However, as usual in the online world, choice and convenience are always key considerations, and it may well be that offering both a push and a pull-based solution offers the best outcome of all (and most quickly attains the paperless system than many merchants may crave).

Thursday 9 June 2011

Why do all businesses need a Merchant Account and what is the best way to go about getting one?

Traditionally, to be afforded the opportunity to accept credit and debit cards from their customers any organisation (typically called a “merchant” by the financial services industry) must be granted so-called “proper” status as a bank. This proper status is given to a merchant through the vehicle of a unique Merchant ID (or MID) from the bank and allows them to participate in the payments chain. Pretty much all large businesses have a merchant account like this. However, the smaller the organisation gets, the less likely that they will have one and may be missing out on the benefits.

The banks which provide a merchant account are not quite the same as the ones with which we are most familiar as personal current account holders. All major high street banks have what is known as an “acquiring” bank arm or division. For example, in the UK NatWest has 'Streamline', Lloyds-TSB has 'Cardnet', HSBC has 'HSBC Merchant Services' and so on. In addition, some organisations outside the high streets banks (like American Express and PayPal for instance) have a license and do their own acquiring. Subject to a range of pre-conditions, all these “acquiring banks” issue a Merchant ID and allow an organisation of any sort to start taking credit and debit cards. They will then approve or decline each customer transaction made, collect any payments on the merchant’s behalf and pay the money into a merchant’s nominated bank account.

There are clearly costs involved in setting up this merchant account - in most circumstances the acquiring bank will include setup charges, monthly or annual fees, monthly rental of a physical terminal (or PDQ machine) for the merchant to process card details, and they may require a merchant to pay for a dedicated telephone line for the terminal. A merchant will also be charged a percentage of each transaction which they process, may have a minimum monthly volume of business imposed, and in some cases, have to provide a substantial “bond” or deposit as additional security (to cover any potential card “charge-backs” that may occur).

Sadly perhaps, that's the relatively easy part of the process! - before a merchant can even start the process, they will have to convince the acquiring bank that they are worthy of their trust, and a merchant will usually have to provide two years audited accounts and demonstrate a sound business track record in order for the application to proceed (which is why some banks also require a cash bond and an full business plan if a merchant cannot satisfy all that, for whatever reason).

Even if a merchant meets these requirements, they will usually only be able to accept card payments in the “traditional” part of the business only. If a merchant wants to set up a web site to accept card payments they will find that the acquiring banks will not accept any information coming from the merchant directly via the Internet. The banks will only accept information from a web site which has been processed by an approved Payment Service Provider or PSP (who will do this on a bulk basis and in a safe and secure way –and according to PCI or Payment Card Industry compliance rules).

A Payment Service Provider’s function is to integrate a merchant’s e-commerce enabled web site with the major credit card networks so that orders generated by a merchant’s own or chosen 'shopping cart' software can be authorised and payment collected. This payment is then transferred to a merchant’s account for onward remittance to another receiving bank account as necessary.

As you might expect every merchant has to go through quite a formal application process in order to get an agreement in place with a PSP. Their terms and conditions and charges vary enormously from one PSP to another and it is very difficult to make exact comparisons. Merchants also need to be aware that whatever charges any PSP makes will always be added to those charges which are levied by the acquiring bank providing the Merchant Account. This means any merchant may well end up paying two lots of set-up charges, monthly/annual fees, and, worst of all, two lots of percentages (plus fixed fees in some cases) on every transaction.

So, you might be thinking, with all of these hurdles:
1. why would a small organisation in particular bother with all of this? and
2. are there better ways to go about the necessary merchant account sign up steps if the journey to doing so is deemed to be worthwhile?

The answer to the first question is relatively straightforward. For most businesses turning over say more than £100,000 a year, the ability to offer credit and debit cards payments will bring not only extra revenue but will also accelerate cash-flow (to some extent at least). This will usually easily recover the outlay made on setting up a merchant account and make incremental profit into the bargain. Fixed fee payback would be expected to be within the first 6-9 months and thereafter the benefits would typically be significant for most businesses.

The answer to the second question is also a positive one. As the Internet (and web 2.0 technology in particular) has evolved in recent years, there are now several businesses that a merchant can approach to be a “one-stop-shop” when it comes to taking payments (credit, debit and even other types). In other words, these businesses will handle all of your merchant needs, including setting up the necessary relationship with both the bank (the acquirer) and the processor (the PSP) and may offer other services also. At a simple level this is likely to be more flexible customer service (a single point of contact with a real person for example) but may include other services (such as e-wallet capability-such as PayPal offers for instance or electronic billing capability-such as PaySwyft offers for instance). In addition these “one-stop-shop” businesses can often lower overall costs and reduce administrative hassle as well as operate on a “pay-as-you-go” basis. This means that even small merchants can accept credit and debit cards quickly and cost effectively and start to reap the benefits that have mainly only been available to the larger organisations in the past.

Useful additional information on this subject can be found on many websites. One of these is www.web-merchant.com (see www.web-merchant.co.uk/howdoesitwork.asp ) from which some of the above material was drawn.