Can Merchants really turn off paper bills with digital billing?

Within the billing world, going paperless has been almost like a “Holy Grail” for many merchants, and especially those who are sending out thousands, hundreds of thousands or even millions of bills a month in some cases. And who can blame them? Merchants who send out more than just a few hundred invoices each month are typically spending a great deal of money on printing, putting invoices into envelopes, sending out reminders and/or statements, franking the envelope, having to engage in making sure bills are filed or stored properly and fielding calls from customers who don’t receive a the bill in the mail at all (so it has to be resent) to name but a few things.

By adopting a paperless invoice or digital bill only solution, a merchant can technically avoid all of the above and “switch off paper” immediately. However, despite the apparent significant  advantages to the merchant, this may not be the best way to go (and it should also not be the driver of the change to digital billing).

Most customers have been getting bills in the mail, or at least ones they can print if they are sent by email, for many years and many want to stick with a process that they well understand. Hence, any merchant that removes the option of receiving a paper bill risks losing a customer’s business altogether. Far better therefore to retain the option to receive a physical bill and either deliver it by cost-effective e-mail or allow a customer to retrieve it and print it for themselves from a central website.

With a cloud-based system such as PaySwyft, not only can any merchant post a digital bill but allow customers to print the bill whenever they like. Even better a merchant can email the bill if they so wish, including follow-up or chase bills. And once customers are using such a fully digital portal they can also use a whole range of convenient technology to manage their bill in more flexible ways. This includes:

Receiving a monthly e-mail notification when a new invoice is available to view.

• Decreasing the possibility of mail fraud and identity theft.
• Automatically calendarising or secheduling payments at a time or date to suit them
• Set email and/or SMS alerts as they like
• Store and retrieve all invoice and payment records whenever they like, forever
• Make payment 24 hours a day, 365 days a year
• Pay in a multitude of ways at the same portal and get a receipt there and then
• See all of their invoices and payments when they want
• Analyse invoice trends and patterns as they wish

This does not mean that they will necessarily “turn off” the paper bill, or stop printing it, but over time the resistance to doing so will clearly lessen. And in the meantime, not only is the customer getting a convenient service for free, that they can use at work or home on their computer (and save themselves time if they were previously paying by cash or cheque in particular), but a merchant is saving money on many fronts, including fielding less phone calls, accelerating cash-flow with earlier online payments and reconciling payments in a much more straightforward way than ever before. Given all of this, getting to a paperless world, if and when it happens, is only a minor bonus.

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

Or why does 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.

 

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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).

 

 

 

Can Merchants really turn off paper bills with digital billing?

Within the billing world, going paperless has been almost like a “Holy Grail” for many merchants, and especially those who are sending out thousands, hundreds of thousands or even millions of bills a month in some cases. And who can blame them? Merchants who send out more than just a few hundred invoices each month are typically spending a great deal of money on printing, putting invoices into envelopes, sending out reminders and/or statements, franking the envelope, having to engage in making sure bills are filed or stored properly and fielding calls from customers who don’t receive a the bill in the mail at all (so it has to be resent) to name but a few things.
 
By adopting a paperless invoice or digital bill only solution, a merchant can technically avoid all of the above and “switch off paper” immediately. However, despite the apparent significant advantages to the merchant, this may not be the best way to go (and it should also not be the driver of the change to digital billing).

Most customers have been getting bills in the mail, or at least ones they can print if they are sent by email, for many years and many want to stick with a process that they well understand. Hence, any merchant that removes the option of receiving a paper bill risks losing a customer’s business altogether. Far better therefore to retain the option to receive a physical bill and either deliver it by cost-effective e-mail or allow a customer to retrieve it and print it for themselves from a central website.

With a cloud-based system such as PaySwyft, not only can any merchant post a digital bill but allow customers to print the bill whenever they like. Even better a merchant can email the bill if they so wish, including follow-up or chase bills. And once customers are using such a fully digital portal they can also use a whole range of convenient technology to manage their bill in more flexible ways. This includes:

 

• Receiving a monthly e-mail notification when a new invoice is available to view.
• Decreasing the possibility of mail fraud and identity theft.
• Automatically calendarising or secheduling payments at a time or date to suit them
• Set email and/or SMS alerts as they like
• Store and retrieve all invoice and payment records whenever they like, forever
• Make payment 24 hours a day, 365 days a year
• Pay in a multitude of ways at the same portal and get a receipt there and then
• See all of their invoices and payments when they want
• Analyse invoice trends and patterns as they wish

This does not mean that they will necessarily “turn off” the paper bill, or stop printing it, but over time the resistance to doing so will clearly lessen. And in the meantime, not only is the customer getting a convenient service for free, that they can use at work or home on their computer (and save themselves time if they were previously paying by cash or cheque in particular), but a merchant is saving money on many fronts, including fielding less phone calls, accelerating cash-flow with earlier online payments and reconciling payments in a much more straightforward way than ever before. Given all of this, getting to a paperless world, if and when it happens, is only a minor bonus.

Is online Direct Debit a “Win-Win” for Everyone?

Direct Debit or Direct deposit as it is called in some countries has been around for decades now and making steady inroads as a payment method offered these days by many large merchants, often with incentives (such as vouchers or money off a bill) to customers to sign a direct debit mandate. Merchants who are part of the Direct Debit scheme (called Originators) claim that the service not only saves time and hassle for customers in general, but also that it facilitates easier scheduling, easier storage, is more secure, involves less cheques and reduces errors. Of course, both the merchants and the banks also gain these same benefits, not to mention the capacity to reach into a customer’s bank account directly to collect payment for a bill (something that a customer is not always completely happy about).

Despite its steady progress, Direct Debit’s growth has slowed until very recently, when on-line billing and/or payment portals have come into being and offered to speed up quite an old-fashioned process, in which a paper-based form still had to be sent in and signed before service could commence (and the whole process repeated when a direct debit amount changed). These new portals (such as the one at www.Payswyft.com as an example) not only offer traditional benefits to consumers (shown in the table below to the right-the top 4) but adds new customer benefits that are only possible online (shown in the 5 blue italics items in the right column below). The online portal therefore gives consumers even more reason to either use direct debit some of the time or use it as their primary payment channel.

Banks and Originators win too
It’s always critical for a customer to gain substantive advantage with a payment service of any kind but it is even better if the service provider can win at the same time. In the two columns to the left above are therefore the advantages gained by both the banks and the originators/merchants by pushing direct debit as a payment option. For the banks the primary advantage is that online direct debit payments reduce data entry time and staff, but not far behind is the new revenue possibility of opening up new markets (e.g. smaller merchants being introduced to the scheme). For the originators the primary advantage is that it helps to retain customers, who typically like all their payment history to be available at the portal. Just as important though is the cash-flow benefit. Direct debit payers almost always pay on time (and many pay early). No more cheques in the mail on the last possible day.

Summary
Direct debit is not a new service but online billing and/or payment portals such as PaySwyft offer even more reasons for everyone to gain the benefit of using this payment channel.

Can Merchants really turn off paper bills with digital billing?

Within the billing world, going paperless has been almost like a “Holy Grail” for many merchants, and especially those who are sending out thousands, hundreds of thousands or even millions of bills a month in some cases. And who can blame them? Merchants who send out more than just a few hundred invoices each month are typically spending a great deal of money on printing, putting invoices into envelopes, sending out reminders and/or statements, franking the envelope, having to engage in making sure bills are filed or stored properly and fielding calls from customers who don’t receive a the bill in the mail at all (so it has to be resent) to name but a few things.

By adopting a paperless invoice or digital bill only solution, a merchant can technically avoid all of the above and “switch off paper” immediately. However, despite the apparent significant  advantages to the merchant, this may not be the best way to go (and it should also not be the driver of the change to digital billing).

Most customers have been getting bills in the mail, or at least ones they can print if they are sent by email, for many years and many want to stick with a process that they well understand. Hence, any merchant that removes the option of receiving a paper bill risks losing a customer’s business altogether. Far better therefore to retain the option to receive a physical bill and either deliver it by cost-effective e-mail or allow a customer to retrieve it and print it for themselves from a central website.

With a cloud-based system such as PaySwyft, not only can any merchant post a digital bill but allow customers to print the bill whenever they like. Even better a merchant can email the bill if they so wish, including follow-up or chase bills. And once customers are using such a fully digital portal they can also use a whole range of convenient technology to manage their bill in more flexible ways. This includes:

• Receiving a monthly e-mail notification when a new invoice is available to view.
• Decreasing the possibility of mail fraud and identity theft.
• Automatically calendarising or secheduling payments at a time or date to suit them
• Set email and/or SMS alerts as they like
• Store and retrieve all invoice and payment records whenever they like, forever
• Make payment 24 hours a day, 365 days a year
• Pay in a multitude of ways at the same portal and get a receipt there and then
• See all of their invoices and payments when they want
• Analyse invoice trends and patterns as they wish

This does not mean that they will necessarily “turn off” the paper bill, or stop printing it, but over time the resistance to doing so will clearly lessen. And in the meantime, not only is the customer getting a convenient service for free, that they can use at work or home on their computer (and save themselves time if they were previously paying by cash or cheque in particular), but a merchant is saving money on many fronts, including fielding less phone calls, accelerating cash-flow with earlier online payments and reconciling payments in a much more straightforward way than ever before. Given all of this, getting to a paperless world, if and when it happens, is only a minor bonus.

Will an “iTunes” Type of Web site for ebilling Ever Come into Being?

Last month an interesting article was published on a blog which made a very useful reference to on line music, and iTunes in particular, in relation to ebilling. In his article the author suggested that if we thought about bills in music terms:
• CDs (and the artists that produce them) are like paper bills;
• Listening to music online is like logging in to a portal to view and pay your bill; and
• Downloading a song (file) to your chosen device from iTunes is like receiving your bill as a file (attachment) to your PC, tablet, iPhone, Android, Blackberry etc.

This article rather strangely goes on to conclude that all music and bills should be delivered by email attachment so that customers can open it/them on all their different listening or reading devices.

Despite that fact that this article seems to get a little lost quite quickly, it does draw a useful general analogy and it is therefore worth looking at the core question that it hints at but never answers-will an iTunes type of web site for ebilling ever come into being (and how of course)?

First and foremost let’s get the comparisons right here:
• Songs (or “albums” of songs) should be compared to bills in general
• Artists should be compared to merchants (and some of both are very large and some are tiny)
• Record companies should be compared to banks
• Music listeners should be compared to customers or bill payers
• CD’s (or Vinyl) should be compared to paper-delivered bills
• Online Audio type files (MP3’s, WAVs etc) should be compared to online emails with attachments
• An online store (like iTunes) should be compared to an online bill-payment portal

You’ll notice that we do not yet talk about a delivery device like a smart phone or tablet in the above table-we’ll cover this later.

The Music Scene
If we look back at recent history, up until as little as 10 years ago, the music industry had been operating in similar fashion for decades. Artists produced songs and approached record companies to back them. If they were successful, the record company would help getting the song(s) to market on vinyl as a single or a long play record, getting the songs played on radio and elsewhere so that people would buy what they liked in main street record stores. Innovation in the music industry was very slow to come. Vinyl eventually became CD’s and radio went slowly from analogue to digital. However, the biggest changes were in listening devices, which became increasingly portable. This was led by Sony’s “Walkman” in 1979-the first step towards MP3 players which led to the huge industry paradigm shift-the iPod-introduced in late 2001 (and the new iTunes music store two years later in 2003).

When Apple arrived on the music scene the portable MP3 scene was ripe for change to something simpler and more appealing to customers. In this sense, the iPod, iTouch and finally the iphone and iPad all became the simplest and most user-friendly way to listen to music (both on a live streaming basis and recorded). As a result, the music industry has been almost completely transformed commercially and listeners (or at least those with a 3G/4G connection and/or access to the Internet) have more choice and convenience than they ever had before.

The Billing Scene
So how does this compare to the billing sector? Like music, billing has operating in similar ways for decades. Bills (the song comparison) have been and still are delivered mostly in very traditional ways, especially by small and medium sized merchants (the artist comparison). This is by paper in the mail as the simplest format (a bit like the vinyl single) or by mail with a plain PDF attachment (the CD comparison). In some cases, the email with attachment may be a little more dynamic and sophisticated and can collect signatures for example (used in the B2B billing world). This is more comparable to the MP3 or wav files in the music world.

Although a dominant player like Apple and a site like iTunes has yet to “explode” in the billing world, we are getting very close to it happening now. For some years, online bill payment has been available at a merchant’s web site, although this does make for some inconvenience for customers when they need to pay a lot of bills (or listen to a lot of songs from different artists at different record companies). Online bill payment has also been available at bank sites for many years now and has become quite well-used by the same people who took quickly to Internet banking. Unfortunately, full digital presentment is not normally available via this channel, so both of these valuable innovations are comparable to the “Walkman”-they have taken us some of the way but there is room for improvement.

The private “cloud-based” bill presentment and payment portal is a much newer innovation in the last 2-3 years, and is much closer to being the billing “paradigm shift” we talked about earlier. In this system, customers can see bills from a given merchant (an artist in music terms) and subscribe to get all the bills they send (or songs they release). Because this is non-merchant owned or bank owned (the equivalent of sometimes cutting out the record companies), customers can see many merchants (or artists), and thus have the capacity to ultimately start to see all of their bills in one place. Naturally, paying bills is never a fun activity like listening to music but the quicker and more easily you can deal with them the better (and you can get back to what you like doing much more speedily). Having all your bills in one online place (with free back and storage and easy retrieval whenever you need access) is the equivalent of getting all of their songs in one playbook-just as iTunes allows now. Customers can then keep these bills (or songs) permanently stored in one place and revisit them whenever they like. These bills are all fully digital and do not have multiple file formats that have to be tackled (much as Apple made MP3, WAV and other music file formats an irrelevance to the listener).

Perhaps most importantly, customers can access their bills at the portal from any device that is connected to the Internet by some means-a computer, a smart phone, a tablet etc. And because this is all digital, customers can use all of the currently available and evolving technology that is available such as bookmarking, flexible sorting (like assembling playlists) and using SMS alerts for example (to prompt the customer when there is a bill to pay or a credit card to update, just as you would when a new song or album by an artist has been released). Of course this is not to exclude other ways of getting a bill in any other format that may be wanted-you can still send an email or a PDF or even print them if you like.

Summary
We are not suggesting that bills are anywhere near as much fun to ‘access’ as music and you will of course listen to the same song a lot more than you will use the same bill. However, we think the broad analogy here is a useful one. Our general conclusion is that the online bill presentment and payment portal is already here and like iTunes will transform the bill payment sector over the next few years just as Apple did. There are a few innovative companies that are competing to be the “big gorilla” at the moment but it is inevitable that one of these will emerge soon as the dominant player in this space. A few early adopters (the merchants or artists as they would be in the music scene) already understand this and are quickly getting on board. For these merchants this is a relatively painless transition, with no capital outlay and they can be in the online bill presentment and payment space almost immediately to reap the benefits.

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.

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.