Although it is always extremely difficult to make predictions about an industry which changes as fast as online payments (including online bill presentment) there are always a few “clues, trends and patterns” around to draw upon. As a result and as it’s close to the start of a new year, in this article we will seek to make a few predictions about what is likely to happen in the near future. To do this we will use a number of key headings that are often seen to be important in this industry.
The general changes that we can expect
In broad terms, the payments landscape (which is still very paper or physical form-based in so many ways) will continue to switch inexorably to an online environment at many levels with “barcode type” paper to replace physical monetary exchange products like cheques and cash in the next few years and possibly even Card (debit, credit and pre-paid) in the more distant future. The market will increasingly use smart phone and PC tablet as a channel, although the infrastructure required to support this will take as long as 20 years to make the full transition.
Online person-to-person or P2P payments will increase using mobile devices or social network sites as the initiation point. In the early days of this transition, bank account details will need to be known but accessing and using cleared funds (as the way customers want to interact will each) will see more new players emerging outside of the traditional banking community.
While banks are competing with each other for market share, new players entirely are likely to be able to capture payment market share away from their base, by better satisfying the needs of market. PayPal, Google & Apple are good examples of this or it may be entirely new companies that are yet to become well-known.
The cultural shift to perform everyday functions on-line is still in its infancy. While on-line shopping is growing exponentially, other behaviour will move more towards online. For example, full digital bill presentment and payment services.
So, if that’s the general scene, let’s look at what might happen under a few specific headings
TIMELINESS & CHOICE
Customers want to choose when they pay, day or night, 24/7, 365 days of the year and whether to pay ‘just in time’ or in real time. Customers want very wide payment type options and the ability to choose which option best suits each payment activity.
In many cases, recipients of funds prefer real-time or same-day settlement. Surety of settlement in real time will be critical in most cases.
ACCESSIBILITY
Customers want to access the same payment options regardless of the channel by which they pay. For example, this may be the same payment choice regardless of whether they are in a store, at an on-line store or paying a bill.
Merchants will increasingly prefer to receive funds from the same payment options, regardless of channel, to reduce vendor management and improve internal efficiencies.
EASE OF USE
Customer like payment types that are easy to use and one they understand and trust. Mobile, PC tablet & social network usage is making the introduction of new payment processes easier to manage and educate the market, but present other challenges for the payment industry as a whole.
EASE OF INTEGRATION WITH OTHER PROCESSES
Online payments will grow steadily and will ultimately dominate the payment landscape. However, capability and capacity to integrate with internal computer systems will be a barrier that will need to be overcome. Seamless integration with Point-of-Sale systems, on-line store, ERP, inventory systems and billing engines will be a critical factor.
Cloud-based technology will assist in keeping capital outlay lower and at manageable levels while providing high speed access to the payment instruments and associated internal systems.
RELIABILITY
The new payment instruments and channels that arise will need to be ever more reliable. Traditional payment providers can still play a huge role in ensuring that high quality standards and suitable interoperability is maintained ensure the instrument can be trusted.
Convenience can sometimes trump reliability, but both having both is likely to be a winning combination.
PRICING
New payment instruments will have to be cost effective is all cases and this will start to happen slowly.
What is blurring the price aspect is merchants will try to demand low transactional costs even when real demonstrable value is being added. For example, instant bank transfer provides significantly more benefits to both a consumer and a merchant and yet the expectation would be that this should be priced the same as, or even lower than, the transactional cost to write a paper-based cheque.
Another example is that presenting an electronic invoice with a wide range of payment options would be significantly more cost effective than a biller managing their own bill collection, even though individual transaction pricing by payment type may be more expensive in that particular silo.
SECURITY AND ROBUSTNESS
Similar to the reliability heading, secure and robust payment instruments will be increasingly essential, although convenience and ease-of-use are considerations that will often dilute how secure and robust the new instrument has to be in practice.
INTEROPERABILITY
All online digital Payment systems will have a much higher degree of interoperability with other systems than they do now. This will apply to the movement of money (where necessary) and more particularly to data transmission. The intelligent design of this data transition process (nationally and internationally) will be done by at least one large player outside current financial services sector or by a new market entrant.
RISK MANAGEMENT
Much richer risk management tools will be available and these will have sophisticated algorithms that track all payment patterns and provide risk attenuation or control options at every level. This is likely to be a new software-based market entrant.
Summary
No-one has a “crystal-ball” to predict the future, but the online payments space is changing rapidly around us. It will be interesting to see whether, we are still heading in the general direction that this article suggests in 12 months time and whether some of the forecasts are starting to come true or not.
Wednesday, 1 February 2012
Wednesday, 18 January 2012
Should an organization design its own online billing solution?
Although there is a lot of third-party online billing/invoicing solutions available in the market these days, none of these can be entirely tailored to any one organization’s needs. For this reason, it must be worth spending a little time looking at whether a billing solution can be developed or built with internal accounting staff and IT people. This would mean that an exact specification could be put forward and, if it was executed to plan, this could be integrated with other internal systems. Once the system was up and running, customers would “flock” to it and the cost of sending out paper bills in the mail would reduce considerably. This would all have the potential to save a lot of money-wouldn’t it? In this brief blog post, let’s look at the six major issues that need to be considered in choosing to go down this path.
Before we look at these six issues, let’s briefly consider an organization’s motivation to undertake a project such as this. The typical logic of most companies is “After an order, we interact with customers today by sending out a paper bill, but it is expensive. Putting that ‘piece of paper’ on our own web site will be cheaper and we can still directly interact with our customers via our web site”. Hence, the internal business case might be “We invoice 100,000 customers a year and our current cost to bill by paper is £15 each time or £1.5 million. As the cost of doing billing via our web site will be £10 (including new internal operating expenses), or a 35%/£0.5 million saving an internal capital build cost of £0.5 to £1 million would be justified.” Where this model is flawed is that research tells us that only 4-6% of customers pay at any Biller’s site (for a lot of reasons that we have covered in other blog posts). This means the real cost per invoice ends up being higher than issuing paper and no ROI is achieved. Under these circumstances, a project is on very shaky ground before it starts. However, despite these problems, let’s assume that an organization stills wants to go ahead. What are the issues to think about?
The first issue to consider is can the organization build an application of sufficient scope and quality? After all, few companies would try to build spreadsheet or word processing software from “scratch” these days. These are usually far cheaper and superior to anything that could be developed in house. In general, widely available software designed for mass market consumption is considerably superior to applications developed in house, primarily because of the economies of scale that can be achieved. An online billing solution would not be any different in this regard? In other words, any in-house solution would probably lack the security, features and reporting capabilities needed and would not be as robust, stable or as user-friendly as a professionally developed application built by specialists in that field.
The second big issue to consider is the overall interface design of your potential online billing system.On the surface, an in-house solution provides the greatest scope to design this interface to suit all corporate requirements. However, third-party apps have changed greatly in recent years and allow almost as much customization and any one organization is likely to need. In addition, a third-party app (if well chosen) is likely to have designed in easy payment reconciliation and settlement (to the organization’s accounting system and even their bank –by electronic bill-matching means). This is often missed by in-house system builds or just adds major development costs to the project, thereby making the return on investment much worse than planned.
The third issue to consider is the need to protect an organization’s customers when using the new online billing solution. At a basic level this means bearing the additional cost to purchase a Secure Socket Layer or SSL certificate and to develop a payment plug-in, which necessitates a proper software development cycle (including specification design, build, test and installation). This potential cost alone can finance years of service from an online invoicing application service provider. In addition, as soon as the organization is processing credit or debit cards online, they may need to be PCI compliant (and bear the cost of maintaining this and being audited to meet bank standards). Direct debit mandates (if they are to be made available) are a further cost in this area that need to be taken into account, as these have high admin costs associated with them.
The fourth issue to consider is the immediate and tangible additional costs that are likely to be incurred with an in-house developed solution. A typical online application development project would likely have at least some of the following tasks, if not more: Needs analysis assessment; Application interface design; Database design; Technology assessment, costing and procurement; Server and security setup; Application build and Testing; Trial Rollout; ALPHA and BETA Testing; Full Production Rollout; Ongoing Support and Maintenance etc. Whether these tasks are done internally or out-sourced, projects of this nature will take many months (and possible more than a year) to complete and result in costs of many tens of thousands depending on the complexity of the application and the security level required. For a large organization this may even run into hundreds of thousands or even millions. This is a large capital cost that may not get a real return on the investment for many years.
Quite apart form the direct costs there are also the indirect costs to consider, because many application development project costs are hidden. The use of internal resources to stop working on other projects or tasks or even give up their “normal” job for a while is one example of a hidden cost that often goes unaccounted for. Every hour a development team member spend developing a new billing system, they could be focusing on an organization’s core business activities. In addition, if project development team members are not experienced in online invoice application development, there will be a high learning cost added to the project, and increase the chance the project will be delayed or even fail completely.
The fifth issue to consider is system-side issues. In other words, an in-house billing system (which is likely to be available 24/7) will inevitably have system costs that can easily be overlooked when initial specifications are done by an organization. There is the cost of the space and setup required for a secure and sufficiently large and secured server. This hosting environment will need careful protection (in maintenance terms and against hacking) proper virus protection and firewalls. In addition, back-ups will typically need much more care than other applications that may be running in the organization.
Last but not least such a project must consider the overall risks that are involved. Recent research suggests that over 35% of all technology projects fail in large and sophisticated companies (who have well-trained IT departments). Although this means that almost 65% succeed, this is not to say that even they were not over time or over budget before they “succeeded” of course. If an organization is therefore not a “large and sophisticated company”, chances are a new online application development project is at even greater risk of failing and/or being late/going over budget.
Conclusion
It is clear that developing an in-house online billing and payment system is a highly time sensitive, high cost and high risk undertaking. Some organizations may be tempted to start the process but may lack the expertise to specify it properly, build it to plan, run it cost effectively and maintain it well (and with the necessary level of security, compliance and control).
With all of these issues to consider, as well as the fact that third-party systems are now so well-developed (and in many cases available on a pay-as-you-go basis) this looks to be an easy decision, especially when given serious thought. In answer therefore to the question we asked at the outset- Should an organization design its own online billing solution? We think the answer is simply No (or at least only if it thinks it can overcome all of the obstacles mentioned above).
Before we look at these six issues, let’s briefly consider an organization’s motivation to undertake a project such as this. The typical logic of most companies is “After an order, we interact with customers today by sending out a paper bill, but it is expensive. Putting that ‘piece of paper’ on our own web site will be cheaper and we can still directly interact with our customers via our web site”. Hence, the internal business case might be “We invoice 100,000 customers a year and our current cost to bill by paper is £15 each time or £1.5 million. As the cost of doing billing via our web site will be £10 (including new internal operating expenses), or a 35%/£0.5 million saving an internal capital build cost of £0.5 to £1 million would be justified.” Where this model is flawed is that research tells us that only 4-6% of customers pay at any Biller’s site (for a lot of reasons that we have covered in other blog posts). This means the real cost per invoice ends up being higher than issuing paper and no ROI is achieved. Under these circumstances, a project is on very shaky ground before it starts. However, despite these problems, let’s assume that an organization stills wants to go ahead. What are the issues to think about?
The first issue to consider is can the organization build an application of sufficient scope and quality? After all, few companies would try to build spreadsheet or word processing software from “scratch” these days. These are usually far cheaper and superior to anything that could be developed in house. In general, widely available software designed for mass market consumption is considerably superior to applications developed in house, primarily because of the economies of scale that can be achieved. An online billing solution would not be any different in this regard? In other words, any in-house solution would probably lack the security, features and reporting capabilities needed and would not be as robust, stable or as user-friendly as a professionally developed application built by specialists in that field.
The second big issue to consider is the overall interface design of your potential online billing system.On the surface, an in-house solution provides the greatest scope to design this interface to suit all corporate requirements. However, third-party apps have changed greatly in recent years and allow almost as much customization and any one organization is likely to need. In addition, a third-party app (if well chosen) is likely to have designed in easy payment reconciliation and settlement (to the organization’s accounting system and even their bank –by electronic bill-matching means). This is often missed by in-house system builds or just adds major development costs to the project, thereby making the return on investment much worse than planned.
The third issue to consider is the need to protect an organization’s customers when using the new online billing solution. At a basic level this means bearing the additional cost to purchase a Secure Socket Layer or SSL certificate and to develop a payment plug-in, which necessitates a proper software development cycle (including specification design, build, test and installation). This potential cost alone can finance years of service from an online invoicing application service provider. In addition, as soon as the organization is processing credit or debit cards online, they may need to be PCI compliant (and bear the cost of maintaining this and being audited to meet bank standards). Direct debit mandates (if they are to be made available) are a further cost in this area that need to be taken into account, as these have high admin costs associated with them.
The fourth issue to consider is the immediate and tangible additional costs that are likely to be incurred with an in-house developed solution. A typical online application development project would likely have at least some of the following tasks, if not more: Needs analysis assessment; Application interface design; Database design; Technology assessment, costing and procurement; Server and security setup; Application build and Testing; Trial Rollout; ALPHA and BETA Testing; Full Production Rollout; Ongoing Support and Maintenance etc. Whether these tasks are done internally or out-sourced, projects of this nature will take many months (and possible more than a year) to complete and result in costs of many tens of thousands depending on the complexity of the application and the security level required. For a large organization this may even run into hundreds of thousands or even millions. This is a large capital cost that may not get a real return on the investment for many years.
Quite apart form the direct costs there are also the indirect costs to consider, because many application development project costs are hidden. The use of internal resources to stop working on other projects or tasks or even give up their “normal” job for a while is one example of a hidden cost that often goes unaccounted for. Every hour a development team member spend developing a new billing system, they could be focusing on an organization’s core business activities. In addition, if project development team members are not experienced in online invoice application development, there will be a high learning cost added to the project, and increase the chance the project will be delayed or even fail completely.
The fifth issue to consider is system-side issues. In other words, an in-house billing system (which is likely to be available 24/7) will inevitably have system costs that can easily be overlooked when initial specifications are done by an organization. There is the cost of the space and setup required for a secure and sufficiently large and secured server. This hosting environment will need careful protection (in maintenance terms and against hacking) proper virus protection and firewalls. In addition, back-ups will typically need much more care than other applications that may be running in the organization.
Last but not least such a project must consider the overall risks that are involved. Recent research suggests that over 35% of all technology projects fail in large and sophisticated companies (who have well-trained IT departments). Although this means that almost 65% succeed, this is not to say that even they were not over time or over budget before they “succeeded” of course. If an organization is therefore not a “large and sophisticated company”, chances are a new online application development project is at even greater risk of failing and/or being late/going over budget.
Conclusion
It is clear that developing an in-house online billing and payment system is a highly time sensitive, high cost and high risk undertaking. Some organizations may be tempted to start the process but may lack the expertise to specify it properly, build it to plan, run it cost effectively and maintain it well (and with the necessary level of security, compliance and control).
With all of these issues to consider, as well as the fact that third-party systems are now so well-developed (and in many cases available on a pay-as-you-go basis) this looks to be an easy decision, especially when given serious thought. In answer therefore to the question we asked at the outset- Should an organization design its own online billing solution? We think the answer is simply No (or at least only if it thinks it can overcome all of the obstacles mentioned above).
Tuesday, 3 January 2012
How many bills or invoices are sent out each year and to whom are they sent?
Electronic billing has been around in one form or another for over a decade now but according to the Swiss billing research firm Billentis, the penetration of e-bills versus traditional bills remains relatively weak. They estimate the proportion of e-bills to be anywhere between 4% and 9% of the total invoices sent out, but even this range applies only in relatively large businesses (and is increasingly invisible in medium and small businesses), making the overall take up perhaps nearer half of these figures. Furthermore, the proportional take-up of e-billing varies greatly in the two major parts of the market-the Business to Consumer or B2C market, and the Business to Business or B2B market. In this brief article, the aim will therefore be to try to quantify the relative size of the billing market, or perhaps more simply to determine just how many individual bills or invoices are sent out each year and to whom they are sent.
The table below illustrates the typically billing flows, in percentage terms, in these two major market sectors (B2C and B2B) and according to whether a company is large, medium-sized or small.
Although bills can be sent from one consumer to another (C2C), this is a relatively small market (estimated to be less than 1% of all bills). The two large sectors are therefore between businesses and their consumers (B2C) and between businesses (B2B). The B2C and B2B market is close to 50/50 but the B2C market is slightly larger in transactions but quite a lot smaller in terms of transactional value. Let’s look at these two markets in a little more detail individually.
The B2C market
As the above chart shows, large businesses send out the greatest proportion of B2C bills (43.3% of all bills). Medium sized companies send out only 5% and small or micro companies only 1.7%. In the UK as an example, the estimated total volume of bills is around 5 billion per annum. This means that large companies with more than 250 employees send out 2.165 billion bills. Given that the UK adult working population is around 26 million, this means that each consumer gets 80 bills a year on average, from a large organisation of one form or another or around 7 bills a month. They get a further 1.5 bills from medium and small companies, making an average of 8.5 bills a month in total.
As a different example, in the US, the estimated total volume of bills is around 42 billion per annum. This means that large companies with more than 250 employees send out 18.18 billion bills. Given that the US adult working population is around 130 million, this means that each consumer gets 140 bills a year on average from a large organisation of one form or another or around 11.5 bills a month. They get a further 2.5 bills from medium and small companies, making an average of 13 bills a month in total. The higher average consumer bill volume versus the UK may be explainable by two major factors. Illegal workers in the US are not counted in the adult working population figures and the US has Federal and State based system businesses, making for less truly national “super-billers”. For example, in a large utility may bill a large % of the UK population for its gas and electricity needs (a task that may involve a hundred utilities in the US). This makes the average bill volume artificially higher than it may be in reality, perhaps by as much as 15%.
In terms of value, there are no accurate figures relating to the average bill size or amount. However, it is estimated that the average “ticket” in the B2C market is around £65 to £75 (or $75-$95 in the US).
The B2B market
As the above chart also shows, large businesses send out the largest proportion of B2B bills (11.6% of all bills) to other large companies but medium sized companies (employing 50 to 249 employees) send out almost as many at 10% and even small companies account for 7.5% of the total. However, the picture is complicated further by the additional B2B billing that is done between Large, medium and small companies. Hence, in aggregate, large companies send out 15.8% of all bills (11.6%+1.7%+2.5%).
Once again using the UK as an example, this equates to 790 million bills. In the US this would be 6.64 billion bills. Just to complete the picture, medium companies in aggregate send out 18.3% of all bills and small companies in aggregate send out 15.9%. Although this makes the B2B transactional volumes very similar, in aggregate the medium sized companies send out proportionally the most bills.
In terms of value, accurate figures relating to the average bill size or amount are even harder to come by, as companies have very high variations from very low amounts (such as £15 0r £25 for example) to very high amounts (running to thousands or hundreds of thousands in some cases). In addition, there are no formal records kept in terms of average B2B invoice amounts. However, it is broadly estimated that the average “ticket” in the B2B market is around £1500-£2,000 (or $1250-$2500 in the US).
The penetration of ebilling
Once again, definitive figures are difficult to find when it comes to the penetration of ebilling. However, in the B2C market, it is large companies that have made the most progress, led by utilities and telecommunication/mobile phone companies typically. Here, the estimates are that penetration has been in the range 7-9% in Europe, and a little less (6-8% in the US). In medium companies, these numbers are reported to be less than a third of these figures or only 2-3% penetration and in small companies, considerably less than 1%. This leaves a lot of upside potential to switch to ebilling of one form or another across all three organisational size levels.
In the B2B market, it is apparent that accounting software and separate specialist billing software has made some significant inroads into large companies. However, this has largely translated into accounting system driven invoices (or email based invoices with PDF attachments, which are but fully digital bills of course) and as often as not, this has therefore become an additional channel to paper-based invoices, with many organisations reluctant to eliminate physical invoices too quickly. There are also many additional complexities in the B2B market when it comes to billing. This includes integration with purchase order systems, dealing with credit noting, bill line-item dispute handling and multiple decision-maker issues for bill sign-off. This is not to mention the accurate and legal handling of taxation issues. All of this means that the decision to take up ebilling in the B2B space usually involves quite high up-front capital expenditure (on new or changed software), long integration times, changed internal processes and the need to cover monthly fees (e.g. software maintenance and per user etc). There are alternatives to this approach but as yet, interest and take up has been very low.
Summary
A lot of bills are sent out every year in any country with a reasonably well-developed economy. However, it is important to understand that the B2C and B2B markets are very different in terms of transactional volumes, average “ticket” sizes and needs. It is also important to recognise that volumes vary greatly in large, medium and small companies, and their relative interest in making their invoicing practices more efficient will often be very different. This means that the potential for electronic billing take-up is still very high (perhaps as much as 95% of all bills are still not fully digital) but the route to increase overall levels of ebilling take-up needs to be carefully planned for each market segment, in order to be successful.
The table below illustrates the typically billing flows, in percentage terms, in these two major market sectors (B2C and B2B) and according to whether a company is large, medium-sized or small.
Although bills can be sent from one consumer to another (C2C), this is a relatively small market (estimated to be less than 1% of all bills). The two large sectors are therefore between businesses and their consumers (B2C) and between businesses (B2B). The B2C and B2B market is close to 50/50 but the B2C market is slightly larger in transactions but quite a lot smaller in terms of transactional value. Let’s look at these two markets in a little more detail individually.
The B2C market
As the above chart shows, large businesses send out the greatest proportion of B2C bills (43.3% of all bills). Medium sized companies send out only 5% and small or micro companies only 1.7%. In the UK as an example, the estimated total volume of bills is around 5 billion per annum. This means that large companies with more than 250 employees send out 2.165 billion bills. Given that the UK adult working population is around 26 million, this means that each consumer gets 80 bills a year on average, from a large organisation of one form or another or around 7 bills a month. They get a further 1.5 bills from medium and small companies, making an average of 8.5 bills a month in total.
As a different example, in the US, the estimated total volume of bills is around 42 billion per annum. This means that large companies with more than 250 employees send out 18.18 billion bills. Given that the US adult working population is around 130 million, this means that each consumer gets 140 bills a year on average from a large organisation of one form or another or around 11.5 bills a month. They get a further 2.5 bills from medium and small companies, making an average of 13 bills a month in total. The higher average consumer bill volume versus the UK may be explainable by two major factors. Illegal workers in the US are not counted in the adult working population figures and the US has Federal and State based system businesses, making for less truly national “super-billers”. For example, in a large utility may bill a large % of the UK population for its gas and electricity needs (a task that may involve a hundred utilities in the US). This makes the average bill volume artificially higher than it may be in reality, perhaps by as much as 15%.
In terms of value, there are no accurate figures relating to the average bill size or amount. However, it is estimated that the average “ticket” in the B2C market is around £65 to £75 (or $75-$95 in the US).
The B2B market
As the above chart also shows, large businesses send out the largest proportion of B2B bills (11.6% of all bills) to other large companies but medium sized companies (employing 50 to 249 employees) send out almost as many at 10% and even small companies account for 7.5% of the total. However, the picture is complicated further by the additional B2B billing that is done between Large, medium and small companies. Hence, in aggregate, large companies send out 15.8% of all bills (11.6%+1.7%+2.5%).
Once again using the UK as an example, this equates to 790 million bills. In the US this would be 6.64 billion bills. Just to complete the picture, medium companies in aggregate send out 18.3% of all bills and small companies in aggregate send out 15.9%. Although this makes the B2B transactional volumes very similar, in aggregate the medium sized companies send out proportionally the most bills.
In terms of value, accurate figures relating to the average bill size or amount are even harder to come by, as companies have very high variations from very low amounts (such as £15 0r £25 for example) to very high amounts (running to thousands or hundreds of thousands in some cases). In addition, there are no formal records kept in terms of average B2B invoice amounts. However, it is broadly estimated that the average “ticket” in the B2B market is around £1500-£2,000 (or $1250-$2500 in the US).
The penetration of ebilling
Once again, definitive figures are difficult to find when it comes to the penetration of ebilling. However, in the B2C market, it is large companies that have made the most progress, led by utilities and telecommunication/mobile phone companies typically. Here, the estimates are that penetration has been in the range 7-9% in Europe, and a little less (6-8% in the US). In medium companies, these numbers are reported to be less than a third of these figures or only 2-3% penetration and in small companies, considerably less than 1%. This leaves a lot of upside potential to switch to ebilling of one form or another across all three organisational size levels.
In the B2B market, it is apparent that accounting software and separate specialist billing software has made some significant inroads into large companies. However, this has largely translated into accounting system driven invoices (or email based invoices with PDF attachments, which are but fully digital bills of course) and as often as not, this has therefore become an additional channel to paper-based invoices, with many organisations reluctant to eliminate physical invoices too quickly. There are also many additional complexities in the B2B market when it comes to billing. This includes integration with purchase order systems, dealing with credit noting, bill line-item dispute handling and multiple decision-maker issues for bill sign-off. This is not to mention the accurate and legal handling of taxation issues. All of this means that the decision to take up ebilling in the B2B space usually involves quite high up-front capital expenditure (on new or changed software), long integration times, changed internal processes and the need to cover monthly fees (e.g. software maintenance and per user etc). There are alternatives to this approach but as yet, interest and take up has been very low.
Summary
A lot of bills are sent out every year in any country with a reasonably well-developed economy. However, it is important to understand that the B2C and B2B markets are very different in terms of transactional volumes, average “ticket” sizes and needs. It is also important to recognise that volumes vary greatly in large, medium and small companies, and their relative interest in making their invoicing practices more efficient will often be very different. This means that the potential for electronic billing take-up is still very high (perhaps as much as 95% of all bills are still not fully digital) but the route to increase overall levels of ebilling take-up needs to be carefully planned for each market segment, in order to be successful.
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.
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.
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.
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.
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.
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