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Tuesday 22 February 2011

Can taking payments online help to get businesses out of tough times?

For some time now, almost all businesses have had to work a lot harder to keep sales revenues from falling and stop costs rising too quickly (and therefore making profitability very difficult, if not impossible). Although some companies are clearly doing better than others, at the most simple level, they only have two broad “weapons” available to them to do better. One is to sell more and/or at a higher price. The other is to reduce their cost of selling as much as they can without adversely affecting sales or customer service. Let’s look at both of these “weapons” in a little more detail.

Selling more at a higher price
In a high demand market, or where there is product/service scarcity, this is much easier to do. However, in the current economic climate, customers often want to buy or “do” with less and purchase at lower rather than higher costs. As a result, many companies have tried to create discounts for a higher levels of purchases (trading price for volume) or have offered smaller and more flexible purchase “packages” at a higher cost (trading volume for price) but rarely both. Of course, even these individual approaches do not always work and several organisations try many other tactics to win new business or to keep a customer buying (including free product/service giveaways, discounts, costless trial use periods etc). Even more challenging is that every company is now adopting similar steps and the buying customer often benefits by simply watching and waiting for the best deal.

Reduce the cost of selling
At face value, this is a relatively straightforward approach in which we simply stop spending as much as we can or cut budgets/expenses by a fixed amount perhaps. However, all businesses have fixed costs and variable costs. Fixed costs take longer to change (like paying rent in a contract that might run for 2 to 3 years for instance). We therefore often have to wait for the right opportunity to change things in the fixed cost realm. Variable costs can be changed quickly but often mean removing or reducing those very costs which are being invested to generate sales. An obvious example here would be marketing or promotional expenses which are clearly spent to stimulate future purchases. When cutting costs, many companies consequently restrict their efforts to finding “unnecessary expense” or “cost wastage”. This may have worked when there were a few qualifying expenses around to find, but after 2-3 years of economic “squeezing”, there’s often little left to cut.

Technological Innovation comes to the rescue
So, if revenue raising and cost cutting are difficult, what else can companies do? One often overlooked area is to use technology or innovation to render the improvements you are looking for (and this does not have to mean a large-scale investment on the IT side either).

In recent years, technological innovation, as it relates to organisations both small and large, has moved extremely rapidly and has provided whole new ways to do business both more efficiently and effectively. The use of the Internet is an excellent example of this change with even the smallest enterprise now being afforded the opportunity to sell to a worldwide customer base if they so wish via a well-designed web site. And even individual customers are keeping up with the Internet revolution it seems. In 2011 it is estimated that a little under 24 million people in the UK will regularly use the Internet for business transactions. And for a high proportion of these, it is their preferred way of transacting with organisations they buy from.

With the above in mind, there is one area that every enterprise can quickly change to achieve positive benefits on both the revenue raising and cost reduction efforts side of the equation. This is using the Internet to present the organisations’ bills or invoices and to allow them to be paid by customers electronically.

In the past, the change to online billing and payment would have meant quite a large investment in both hardware and software and having to tie up valuable employee resources for months potentially (IT and other). However, if the right solution is selected this no longer needs to be the case. Full service Digital billing providers (such as PaySwyft) have already invested in the technology and are continuing to do so continually. What this means is that this technology is therefore now offered on a “pay-as-you-go” basis to organisations, which can thereby gain the benefits immediately and only pay as a small proportion of transactional income, as the online processes are used. Although this sounds like an on-cost (even if it is “pay-as-you-go”) this is not the case. By getting customers to review invoices online and paying them by electronic means, a company saves lots of individual costs, including issuing invoices (paper, ink, envelopes, stamps etc) and collecting payment (phone call handling, credit control, reminders, statements, reconciliation efforts etc). In addition, because the whole process is much faster for both the merchant and the customer, payments are often made much more quickly, thereby accelerating much needed cash flow. It is not unusual in these circumstances to see savings of 3-5% of costs saved by adopting online bill presentment and payment as well as 0.5-1.5% in revenue side benefits. Clearly this makes a big difference to the bottom line and is well worth investigating as a strategic performance improvement exercise.

Friday 11 February 2011

Getting paid by the customer-the first not the last consideration

Any entrepreneur looking to start and build a new business would typically have a long list of priorities to consider. This might include what legal structure to adopt, how much operational money to raise (and from where), the specific market upon which to focus, how to advertise the business to customers and how to render efficient and effective service, etc. How to get paid, however, rarely makes it to the list, and even if it does, as a very low priority. Even large-scale and mature businesses commonly fall into this trap, leaving the whole subject of getting paid by the customer as an afterthought at best. So, why is this the case and why does it matter?

First and foremost, whether it is a start-up or mature business, cash-flow is the lifeblood of any organisation. Initial cash-flow may come from shareholders or from borrowings, but pretty quickly, almost all the cash that most companies get comes from its customers. Ideally then, customers who are satisfied with the products or services that are provided are happy to pay the bills that are sent to them. However, they will only remain satisfied if the process for sending them appropriate bills and for settling these bills has been well thought-through.

To illustrate how different this can be from one company to another, let’s look at two example organisations of similar size (each issuing about 3000 bills a month on 30 day payment terms) to see the impact of a well-designed and executed billing and payment system, versus one which is poorly designed and executed.

In company A, management have decided to issue bills/invoices to customers electronically as much as possible. They therefore ask for email address contact details when they acquire new customers and even request a mobile phone number so as to use both email and text messaging when appropriate. Furthermore, they automatically upload their bills into a full digital billing and payment site where bills can be seen and settled 24/7 (such as www.payswyft.com). This allows all bills to be quickly uploaded and viewed almost instantaneously as they are issued. The bill is displayed online in icon format (with full bill detail if required) and can be settled on the same web site immediately. Settlement options include all major credit and debit cards, calendarised dynamic debit payments and even cash settlement choices at the site. In summary the customer gets his or her bill immediately as it is issued (within seconds), can pay it within a few clicks online and gets a record of the transaction stored in the system forever. Because there is really no need to print anything to paper (unless people want to), this is an entirely “green” system for all parties.

In company B, management have decided to stick with a traditional billing system and, as such, send physical bills to customer home addresses. It takes 2-3 days to prepare the “bill-run” typically and takes up to 2 -3 days for the bill to reach the customer (with a second class stamp). Once they have received the bill customers can pay by cheque and direct debit, but only by credit or debit card if they call the company’s call-centre between the hours of 9am and 5.30pm each Monday to Friday. Some bills are lost by customers (and need to be found and resent) and in all cases a follow up chase bill is sent out again after 21 days to encourage settlement within the 30 day terms. Customers call in to get copy bills frequently and also regularly call to ask questions about past bills.

In company A, 90% of customers are not only happy to pay online but 95% of these do so on terms or better. Of the other 10%, cheques and cash payments are rendered, but the system of email and SMS alerts keeps days outstanding to within 3 days late over terms on average. The business therefore needs no special late payment reserve and has no call-centre staff to pay. It also has very few people involved in account reconciliation as most of the electronic payments are automatically matched and reconciled online. Customers are generally happy with the flexibility and choice offered in the payment options, and often comment on it as “a big plus” in the annual customer survey. The bottom line-the cost to issue a single bill and get paid costs about £5 total in company A. This is therefore £15,000 per month or £180,000 a year.

In company B, 30% of customers pay by direct debit on terms. The rest either send cheques or phone in to the call-centre to make a card payment. While 60% of these are paid on terms, 40% are paid late and days outstanding run at 10 days over terms on average. The business therefore runs a reasonably large cash reserve (as an overdraft from the bank), has quite a few staff in customer service (to handle the call volume) and in accounts (to deal with reconciliation issues). Complaints about payment problems are frequent and billing is generally a big minus on the annual customer survey. The bottom line-the cost to issue a single bill and get paid costs about £10 total in company B. This is therefore £30,000 per month or £360,000 a year.

It may seem that these two companies of similar size are deliberately and conveniently described as being poles apart in their approach (with naturally large scale differences in their costs). However, these are real example of two companies that put getting paid first versus last. The key (and hopefully obvious) question is which one would you rather be in your organisation?

Friday 4 February 2011

Does offering lots of ways to pay bills on-line make a difference?

Despite the rapid rise of the Internet in recent years as a way to both issue a bill/invoice to customers and get it paid on-line, many organisations are not giving their customers much convenience or choice in terms of ways to pay (and not always on-line ones).

In terms of limited convenience, some businesses will send out a bill via email but then expect customers to call in on the phone to make a payment (and then have to staff up to take that call). Even worse, they may encourage customers to send a cheque (and then have to staff up to receive the paper, reconcile it and deposit the cheques at the bank). Having used an on-line channel in the first instance, this simply serves to take customers back to very traditional methods to pay (and also limits the options by which payment of a bill can be made).

And when it comes to choice, consumers like to have many options as possible when paying bills. Hence, writing a cheque might be a valid option but involves writing it out accurately, stamping and then posting it and waiting for the money to be deducted from a bank account. Paying bills at the post office may also be a viable choice but is far less attractive if the customer knows that they may have to queue for quite a while to do it. By making other payment choices available, many customers will therefore elect to pay online by a debit or credit card or by using Internet banking and save themselves time and hassle in doing so.

In terms of available technology, as we are now able to issue a bill electronically (and save the manual time and effort of typing up invoices, stuffing envelopes, stamping them and sending them out) then we should ideally look to give the customer simple ways to stay online to make a payment-this can deliver both greater convenience and choice. So how can this best be done? There are essentially 3 options:

First, an organisation can seek a merchant account with their bank or building society and, once approved, use their facilities to offer several online payment options. Banks/Building societies like merchants to use internet banking, so these days will offer relatively easy ways to make BACS transfers and direct debits for example. They will also issue credit cards for merchants to use and a PDQ machine for some to accept payments (as long as the merchant can staff the machine so that credit and debit cards can be processed). Although this solution undoubtedly diversifies the payments options to customers, none of this is necessarily with some merchant cost of course. Most banks will expect quite a lot of up front security, minimum monthly fees and what might be quite high per-transaction rates unless they get a lot of customer business from a given merchant. They also will not usually offer much more than some very basic payment records.

Secondly, and the first choice of many online websites with a shopping cart for example, is for a merchant to sign up with a Payment Service Provider or PSP. A PSP (such as Worldpay, Global Collect or PayPal for instance) will usually make a wide variety of payment options available via debit or credit and may have the added benefit of allowing customers the opportunity to pay in several different currencies. This can therefore be an attractive option for those merchants who just want to effectively “outsource” the online payment process to a third party. Once again however, although PSPs offer diversified payments options to customers, it can be expensive (with transaction fees of 4% or more in many cases). In addition, a PSP will often also have minimum fees (either monthly or even per transaction) and not offer an on-line billing functionality or capability.

As a third choice, an organisation can work with an online billing and payment aggregation company (such as Payswyft). The main benefit of this option is that the customers of an individual merchant can see an electronic or digital version of the bill at a single web site and then click on the bill to then select from a range of ways to pay or settle it. On a well-designed site these ways will include not only debit side and credit card options but also the ability to pay by dynamic debit and even cash. Furthermore, because the whole site is dedicated to bill presentment and payment, there will be a number of additional services that are useful to the merchant. This is likely to include customisable alerts and reminders (for both merchants and customers), searchable and date-range-able analytics and reports on all transactions and effective bill-matching capability. In this option there are no minimum fees and merchants will make for each transaction according to what the customer chooses to do.

Whatever a merchant elects to do, convenience and choice will greatly improve the customer experience when paying an pnline bill and is likely to decrease internal costs of handling by more traditional payment methods, as well as accelerate cash flow. However, merchants should be careful about how they go about increasing convenience and payment choice as there can be significant up-front costs to be considered-which with care and the right options, can be kept to an absolute minimum.