What does accepting credit card payments really mean for your business?
To some companies, credit card payments translate to expansion into new markets. To others, credit card processing signals unaffordable transaction fees or more complex technical integrations. Fill in the blank with your own answer.
But the one thing credit cards definitely don’t mean: that the business has joined the digital era just by virtue of accepting them as a method of payment.
Myth: Credit card payments = digital transformation
We at PayStand hear this fallacy regularly in our conversations with companies across the globe. “We’ve already gone digital by offering credit card payments,” they say. “What else is there?”
Our answer is this: a lot more goes into digitizing billing processes than just offering credit card payments. Credit cards are just a switch you can turn on and off for customers. Don’t get us wrong: they’re a valuable switch, but they are not digital transformation alone.
Take one of our customers as a cautionary tale. Before moving to PayStand, this regional business insurer started offering credit card payments on their website as a way for customers to pay insurance premiums, deductibles, and other associated fees. Customers responded by converting to credit card payments at a high rate.
The company then incurred staggering fees, both per-transaction fixed fees and variable monthly fees. Consider the dollar values: if their customers pay an average of $1 million in premiums per month and 80% opt to pay with a credit card, that’s $24,000 in per-transaction fees per month at the standard 3% rate.
The regional business insurer’s transaction costs were significantly higher and more unpredictable based on the decision to offer credit card processing to customers. That’s not exactly the digital transformation they had hoped for.
What does “going digital” mean, if it isn’t credit card payments?
Going digital means transitioning the payments process from many disparate, manual steps to an optimized, automated workflow. It starts with examining what’s happening in the business today. Credit card payments make up one piece of the larger puzzle - not the whole thing.
Digital transformation means looking at the entire cash lifecycle of a business. What happens at each touchpoint? How could manual steps be automated to reduce effort, cost, and the potential for error? What systems could benefit from being connected to the cash process? These are just a few questions to start with.
A sample cash lifecycle might look like the following:
- The customer makes a purchase.
- The company sends the customer an invoice.
- The customer chooses a payment option.
- The customer submits payment to the company.
- The company receives the payment.
- The company processes, records, and reconciles the payment.
- Payment data flows from the company’s A/R system to other critical systems.
To go digital, businesses must evolve each step of the cash lifecycle.
Here’s a way to dig into the details:
- Describe the steps to purchase and the types of purchases customers can make.
- Explain the process for sending an invoice.
- List all payment options available and their associated costs.
- Demonstrate how the customer can make each payment method.
- Describe any processes related to managing exceptions - following up on unpaid invoices, managing expired credit cards, and the like.
- Enumerate all the payment channels the company manages.
- Walk through the steps for processing, recording, and reconciliation of payments.
- List all the internal systems that receive payment data today and how each system receives that data.
- Make a note of any additional systems that could benefit from payment data.
Let’s take the regional business insurer and expand upon their current state. Customers can purchase business insurance coverage using monthly recurring payments and make one-time payments for deductibles and other associated fees.
The company accepts paper check payments via snail mail and credit card payments over the phone and on their website. A/R staff manage customer subscriptions manually using a series of reminders. Each day, A/R clerks check customer accounts to determine which invoices to send and reconcile payments to invoices.
These details of the cash lifecycle offer tons of opportunities for digital transformation. Based on what they learn, the business may brainstorm faster payment methods that could reduce their costs. What if they added eCheck and ACH to their online payment options? Both formats offer online funds transfers with much lower fees than credit card processors provide.
If the company would like to continue offering credit cards as an option, they can decide to pass the transaction fee on to the customer. If they currently send mailed invoices, they may choose to convert to online invoicing to immediately speed up time-to-cash. Adding a “pay now” button to the online invoice could drive even faster payments. And, the business can automate policy activation, customer subscriptions, and payment reconciliation to reduce time spent and lost receivables.
Business leaders can understand more by studying the cash lifecycle.
If you believe your business has gone digital just by offering credit card payments, it’s time to reevaluate. Credit cards offer an additional payment option to customers, and they are a powerful (yet costly) tool. However, the most impactful exercise is to find out what’s really happening with payments from start to finish. Armed with all the details on what works and what needs improvement, executives can make informed decisions on the cash lifecycle.
Are you interested in digitizing billing processes but don’t know where to start? Download our comprehensive Guide to ACH and eCheck for several considerations in the move to go digital.