FIS Modern Banking Platform
Advance your bank with a modern core platform.
February 26, 2019
Many challenges prevent collection teams from achieving a 100 percent current accounts receivable metric. The only sure-fire way to achieve this mark is to sell strictly with cash-in-advance rather than credit terms. Sounds appealing to a credit and collections manager, however, selling with credit terms creates an opportunity to increase revenue for a company, which sounds appealing to the CEO. The reality is, credit terms are here to stay. So, how can credit and collections teams accelerate cash flow? One option is to accept credit card payments.
Credit cards are designed to speed up the rate at which suppliers receive payment. Rather than the supplier waiting 30 days for the actual payment to arrive, the credit card companies take on that risk of non-payment by submitting the funds immediately (within a day or so) to the supplier and then wait for the cardholder to submit payment to them. Why do they take on that risk? Every credit card transaction has a fee associated with it, known as the interchange rate. This fee is generally somewhere in the 2-3 percent range of the overall transaction. This fee is split among the credit card company, the merchant processors (companies moving the transactions along the network), the network company (i.e., Visa, Mastercard, etc.), and some may be shared with other parties in the transaction as a rebate.
While a 2 percent fee does not sound like much, especially when it is split with all the groups listed above, when you extrapolate that over hundreds of thousands of transactions every day, the figures get overwhelming.
When companies accept credit card payments, they are agreeing to give up the interchange rate in favor of improving the speed in which they receive payments on average 15-20 days. On the surface, this is a no-brainer decision. When you factor in the cost of borrowing money (Weighted Average Cost of Capital – WACC), it is considerably higher than the interchange rate. So, another way to look at it is that it is a loan with much better interest rates.
To accept credit card payments, companies must have a merchant account. As mentioned above, these are the companies that move the transactions along the credit card network. When transactions are settled, they are placed into a merchant account (which is similar to a bank account). One of the challenges of beginning to accept credit card payments is connecting to the merchant providers. Over the years, this has been made easier for card-present transactions where you can swipe the card with a device attached to a mobile phone. Even the card-not-present transactions have been made easier with API technology and websites allowing customer to enter their own information.
The challenge, however, is on the backend in creating the secure connection to the merchant provider. Because of the sheer volume of merchant providers, a collection solution provider must build the integration to connect with whoever it is you do business with. This can take weeks, months or even longer if you do not choose the correct provider. If you ever decide to change merchant providers, perhaps because of a better interchange rate, the solution provider must create a new connection to that merchant provider.
The answer to this problem is very simple. With pre-integrated merchant providers, a collection solution can easily plug and play the correct one for you. Switching providers is made easy through simply updating the new provider credentials. This is made possible through gateway processors. These gateways are already connected to a wide network of merchant providers. By connecting to these gateways, a solution is pre-integrated with every merchant provider the gateway does business with. A collection solution can provide multiple channels for accepting credit card payments. Your collectors can accept payments while on the phone with customers. Additionally, offering a self-service portal or customer portal to your buyers provides them with the comfort that they can securely enter their credit card information themselves without handing it over to someone else.
So, what does this mean for you? If you already have a merchant account, the setup in a collection solution is simple and takes no time at all. If you do not already have a merchant account, it is easy to sign an agreement with one and then you are ready to accept credit card payments. Finding a merchant processor that offers a less expensive interchange rate is possible. In the past, the hassle involved in finding and implementing a new processor was so onerous, companies continued to give up much higher percentages than necessary. With these pre-built integrations in a credit and collections solution, the landscape becomes much more diverse and creates a competitive advantage for those that can leverage their credit and collections solution to accelerate payments.
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