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.electronicfunds.com
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