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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 Joseph 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 waiting for the check to come in the mail.?
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 or by fax and view the
invoices online. The customers can then pay online using true 128-bit SSL
encryption in seconds either by credit card or 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 or fax 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 60% 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
Andrew Bloch, CFO and Alan Cusson, IT Manager of The Hamilton Company, Boston,
Massachusetts, a large property management company, stated "that we have been
looking for a solution where we could send a statement to our many tenants
either by email or fax and to allow our tenant to be able to make payment over
the Internet. Our company processes a significant number of transactions each
month and it is very costly to send out statements. The problem with paper
checks is that it takes a lot of time and money to handle them,? Block and
Cusson stated. ?So we began encouraging our tenants to use Inovium Solutions to
pay either by Electronic Check or by Credit Card. They simply login to a secure
site, using their unique user id and password and select the item to be paid and
select the type of payment and financial information to process the payment,
upon confirming the transaction, the tenant and The Hamilton Company receive a
confirmation of the transaction either by email or by fax. The tenant like it
because they will be able to make their rent payment on time, where ever they
are located. It is also an asset to our many student tenants who parents pay
their rent directly to our company on behalf of their children. They don't have
to go to the post office or send the rent payment by express service to make
sure the rent is paid on time. We have the security of having the payment in our
hand at the time of the transaction and it is deposited automatically rather
than waiting for it to arrive in the mail. We also do not need too prepare a
bank deposit and run it down to the bank. We expect to do approximately 6000
plus transaction per month using this method and it really is a well thought out
process.?
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.inovium.com
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