- +++ S P E C I A L R E P O R T +++
"Businesses Adopt Online Payments to Improve Cash
Flow and Save Time"
Jules Kaplan, President, EZPaymentservices.com
21 September 2003
A substantial number of businesses are adopting
online payment systems in order to improve cash flow and save time by
reducing paperwork. The process typically begins when customers complete a
check authorization form online or fax a paper version of the form to the
company. One of the two different types of online payment systems available
then generates a paper check that can be taken to the bank for deposit. The
other type of system transmits the information to the Federal Reserve’s
network for processing. In either case, this approach avoids problems with
late payments and collection as well as the paperwork associated with
billing and accounts receivable. In the second case, the funds go directly
into the company’s account, also avoiding the time and expense associated
with making bank deposits. “We are receiving well over 50% of our payments
from customers through electronic checks,” said Jose Lopez, Credit Director
at Kinray, the largest independent wholesaler of pharmaceutical and health
and beauty products. . “The advantage is that we get our money much faster,
which improves our cash flow, and we eliminate all of the paperwork
associated with billing.”
Conventional paper billing and collection methods are a major headache for
most businesses. Gartner, a top research organization, estimates that it
costs $2 to $5 to send a paper bill and $10 to process a paper check. Based
on a labor rate of $30 per hour, estimated costs of a single conventional
paper invoice include invoice include $2.10 for preparation of the invoice
data, $2.00 for printing and stuffing the envelope, $1.00 for mailing the
envelope, $0.37 for postage, $5.00 for a reminder call, $1.75 to record the
incoming check, $2.05 to deposit the check, and $0.10 for the deposit fee,
for a total of $14.37. Another problem is the delays and uncertainty
associated with conventional paper billing. Even when the check really is in
the mail, it can easily take 10 to 15 days for it to be delivered,
deposited, and for the funds to be collect and available for use. And, of
course, there’s always the occasional customer that delays paying their
bills, which makes it necessary to spend additional time and effort in the
collection process and, in the most extreme cases, even makes it necessary
to write debts off as uncollectible.
Online payments will reduce your expenses and increase your bottom line.
The emerging technology of online payment systems has the potential to
overcome all of these problems. It takes advantage of systems that have been
in place for many years and are currently used by most banks and Fortune 500
companies to transfer funds between each other. The first step is always to
get the information from the customer needed to process the payment. All
that is required is typically the customer’s name, bank information, account
number, check number and check amount. You have two basic ways to process
this information. One is to purchase software that accepts the customer’s
check information, which can be entered either by your employee or by the
customer himself in an online form, then prints the customer’s check on
blank stock so you can deposit it in your bank. The other approach saves
even more time by using a service that moves the payment through the Federal
Reserve Automated Clearing House (ACH) electronic funds transfer (EFT)
system, eliminating the need for depositing the funds in the bank. Instead,
the funds move directly from your customer’s bank into your account.
How does this approach compare to the alternative of accepting credit cards
from customers? The major advantage is that the fees are much smaller. The
discount rate charged to the company that accepts credit card payments is
typically 2% up to 4% for certain credit card transaction, which amounts to
a major hit. Another disadvantage of credit card payments is that businesses
and consumers are used to paying by check. The fees involved in online
payments are much smaller. Software that generates checks for bank deposit
is sold for a one-time price that is typically under $500 and the only
additional cost is the per-transaction cost of fifteen cents average for the
blank check stock and special toner cartridge needed to print magnetic codes
on the checks required by banks for processing. The second more automated
approach, where the payment is processed through the Federal Reserve,
requires only a minimal registration fee of several hundred dollars and a
small fixed per-transaction fee, that is generally only 34 cents instead of
a percent of the sale like a credit card transaction. Thus online payment
provides a huge cost savings over credit card payments. But it should be
noted that if you have customers that prefer credit card payments, they
could easily be integrated with online payments, providing the customer with
a choice of which method to use. In this situation, it often makes sense to
charge the customer an extra fee to defray the credit card discount rate.
Automating the entire accounts receivable process. Another advantage
of online payment systems is the potential they provide for offering further
operating efficiencies by automating the entire billing and collection
process. This approach applies mainly to companies that bill a significant
number of customers each month. These companies typically incur substantial
expenses for printing and mailing invoices, collection calls, providing
replacement invoices, and depositing and recording checks, that can be
eliminated or substantially reduced with an end-to-end online payment
system. In this scenario, companies upload their monthly billing to the
online payment system. The customers are immediately notified via email and
view the invoices online. The customers can then pay online using true
128-bit SSL encryption in seconds via electronic funds transfer for
processing through the United States Federal Reserve Bank. Besides saving
the cost of sending a paper bill and processing a manual check, the time
from when the customer makes the payment until the funds are available for
use is reduced by one to two weeks.
Companies that use this approach can send messages by email to a single
customer, all customers that meet certain criteria, or all of their
customers. This makes it easy to, for example, automatically send gentle
reminder messages to customers whose balances exceed 30 days and to send a
sterner notice to those over 60 days. Also you would have the ability to
send important notices to all your customers, example up coming sales or
special events. Companies can also review their customer transaction history
and payables balances at any time. Companies have the option to charge their
customers a small service fee for the convenience of making online payments.
By the same token, they can provide their customers with the opportunity to
save money by automating their own payment process. Customers can automate
the process of paying regular invoices. This approach provides the
opportunity to reduce their costs of billing and collection by more than 90%
by eliminating the time-consuming and costly process of sending paper
invoices to customers, sending reminder letters and replacements for lost
invoices, and recording and depositing checks.
How two companies use online payments. Kinray's revenues last year
were above $2.5 billion and revenues are expected to top $3 billion this
year. “The problem with paper checks is that it takes a lot of time and
money to handle them,” Lopez said. “So we began encouraging our customers to
use electronic checks a few years back and found that they responded very
well to the idea. They simply send us a photocopy of their check or a fax or
an email to confirm their intention to make the payment. We bring up the
online checking software, enter the customer’s account number and most other
information is automatically filled in such as their bank routing number and
account number. We enter the check number and amount and print a natural
check that we can deposit in our bank immediately. The customers like it
because they still can take advantage of the float and, unlike EFT
transactions, they don’t have to go into their account. We have the security
of having the check in our hand at the time of the transaction and can
deposit it immediately rather than waiting for it to arrive in the mail. We
have deposited $3 billion in 6 years using this method and it really works.”
Tom Palermo is Program Administrator for Allen, Lewis & Associates,
Jacksonville, Florida, and the nation’s largest collection agency
specializing in serving music stores that sell on the installment plan.
“When we call the customer who owes money for a music purchase and they say
they are ready to pay, we take their check information right over the phone.
In the past, we used to print out a check and deposit it in the bank but now
we have moved to an online system that moves the money right into our
account. This saves us the man-hours of printing the check, setting up a
deposit and taking it to the bank. We also save the special toner and check
paper. Best of all, the charge for a bad check is reduced from $5 to $1.25
by going through the Federal Reserve System. Since we get an average of
4,000 checks a month with about 500 of them returned for NSF, which amounts
to a major savings. These savings offset the cost of the EFT Service and
increase bottom line. Online check writing has streamlined our entire cash
receipts system and saved us a lot of money.” All in all, it’s clear that
online payment systems have the potential to improve competitiveness by
dramatically reducing the cost of billing and collections.
For more information, visit
www.ezpaymentservices.com
