Everything becomes easier as technology increases, we can do almost anything with the click of a button. However, this hasn’t translated to the B2B payments world yet. Businesses are still accepting a majority of their payments via check, which is actually more costly, slows up the payment process and creates more work.
There is an alternative to these traditional payment methods with online bill pay. In this whitepaper, we walk you through how online bill pay works and all the benefits from saving money to increased payment security.
UNDERSTANDING THE CREDIT CARD PAYMENT PROCESS
One of the first steps to understanding Electronic Invoicing Presentment and Payment (EIPP) is to understand how a payment is initiated, accepted and funded.
The credit card payment process can be very complex and confusing. It all starts when a cardholder pays for something. The vendor communicates through their Gateway or hardware solution onto their Payment Processor to request an authorization from the cardholder’s bank. The Processor communicates through a tightly integrated network to exchange information with the customer’s card issuing bank (bank or financial institution that issued the card being used and providing the funds for the credit card purchase that is being made) for an authorization for funds. The first pass through the process the customer’s issuing bank will verify that the cardholder’s account is in good standing and that the amount requested is within the available credit for the cardholder. The issuing bank then holds the requested amount of funds on the credit card holder’s account.
The card issuing bank then sends a reply back to the processor with an authorization code and result for AVS, CVV and fraud various filters. This data is forwarded onto the gateway for the merchant to decide if they want to accept the transaction or not. If all the indicators meet the merchant’s requirements, the transaction is considered approved and ready for end of day batching.
The communication process is never a single direct connection between the organizations. Instead, the process involves a series of processors gateways and a few thousand card issuing banks along the way.
At this point in the process, funds have not changed hands from the customer to the vendor. The transfer of funds from the issuing bank to the customer’s bank occurs after the transactions have been successfully settled during a batch process. Once a transaction has been properly executed and batched it is marked for the next funding transfer to be deposited to the merchant’s bank account.
Today’s payment environment seems to have an ever increasing number of land mines when it comes to the protection of card holder data. One of the tools available to processing organizations to secure card holder data involves the payment gateways that are used to transfer the transactional data for authorization purposes. This card holder data is protected by ever changing data encryption standards that are used to transmit the information to the credit card processor. The credit card processor then communicates this information through the authorization network and back to the gateway for approval. Once the transactions are settled, the card issuing bank then transfers
the funding to the processor and then onto the merchants bank account via ACH or Wire transfer.
As mentioned, gateways add a layer of protection into the process. These solutions originated from companies that provide fraud control and data services such as providing additional information that can assist merchants in qualifying for lower interchange transaction rates. Gateways also provide tools to allow for more comprehensive reporting to help the merchant to make sense of the transactions which they need in order to account for them correctly in their accounting or business software.
Gateways also provide a streamlined and secure connection as direct certification to a processor can be a very long and tedious process. Instead, the processors use dedicated and more secure connections for transactions which are not practical for most vendors or merchants to establish due to high costs of setting up and paying for leased lines or access to the dedicated processor’s systems.
As such gateways utilize the Internet to establish a link connecting their solution to a large number of processors while simplifying the communication and integration with the processors and providing other value-added services.
The surprising truth about credit card processing is that it’s never as simple as it seems and companies – especially banks – make it seem like they’re in complete control all the while they are simply cloaking what happens in the background as the vast majority of all credit card transactions go through traditional credit card processors like First Data and WorldPay – both of which have very strong gateways.
A few larger banks like Chase are traditional credit card issuing banks that also offer gateway and processing services themselves through wholly-owned subsidiary divisions like Chase Paymentech. Card associations such as Visa and MasterCard have also become credit card issuers. Further, many point of sale and ecommerce providers also act as their own niche gateway providers.
There is another layer to the process which includes ISO and MSP providers. ISO stands for Independent Sales Organization and it is a term used by Visa. MSP stands for Merchant Service Provider and it is a term used by MasterCard. ISO and MSP mean exactly the same thing – a company sponsored by a member bank to service credit/debit card processing services. Becoming an ISO/MSP requires a business to go through a registration, certification and underwriting process. One can easily verify an ISO/MSP by checking a company’s website or any of their marketing material for a disclosure “company is a registered ISO/MSP of bank, town, state, and FDIC insured status or designation.”
Some of the more popular gateways are provided by First Data, Paypal’s PayFlow Pro, Authorize.Net, CyberSource, Stripe, Sage Payments, and Chase Paymentech. These companies most often work with the ISO or MSP merchant processor and there are literally hundreds of them throughout the country. The ISO or MSP is typically the company that interacts the most with the merchant and serves as the processing point of contact to ensure that they’re getting the best value, lowest rate qualification, and the information they need. Merchant processors typically also work with and resell credit card and point of sale systems and offer integration for online ecommerce storefronts and virtual terminals for remote entry of credit card orders where a physical machine is not available.
It’s important to understand that all parties involved in processing a credit card payment make something from the transaction which is only fair since accepting credit card payments is a convenience and the parties involved are for-profit businesses. However, the amount charged will vary significantly depending on the banks involved, the merchant processors involved, and other factors discussed later in this document. Some of the fees involved in each transaction include interchange fees charged by the cardholder’s issuing bank and discount rates which are fees charged by the merchant processor/business’ bank accepting the payment. Both types of fees are expressed as percentages of the transaction while there could be small fixed amounts or minimum charges associated with each individual transaction.
Interchange fees are based on a fee structure as defined by the major credit card associations such as Visa, MasterCard, Discover and American Express.
Most professionals in the accounts receivable department can feel like they’re drowning in work. Invoices continually go unpaid and the work to try and get those delinquent customers to pay continues to add up. Since a business never stops selling, this cycle of work for the accounts receivable department will continue to pile up, unless tactics change. Online bill pay is one way to greatly reduce the workload being faced by accounts receivable professionals through customer self-service and dispute management.
CUSTOMER SELF SERVICE
Online bill pay systems allow the customers to do the payment work completely on their own. Where you were previously having to process and deposit their payments, your accounts receivable team can now spend that time making phone calls to severely delinquent customers.
When allowing customers to pay via online bill pay, the collections specialist sends an email with the invoice attached. The customer is then able to open the email and click a special hyperlink that takes them directly to their online account. This makes it very easier for customers to access information without a user name or password. Once in their online account, the customer can pay invoices and review their information online, including past invoices and payments. You can also control how long the hyperlink is effective by setting a limit to the number of times it can be clicked before the link becomes inactive or a number of days from the link creation date that it is active (or a combination of both).
One of the most common reasons that a customer doesn’t pay on time is because there is an invoice dispute. Whether it happens because something was miscalculated or because important information is missing, dealing with the dispute quickly and with the least amount of effort is key.
With online bill pay, you can setup workflow so every customer receives an email if they have any invoice that is due in the next three or five business days where the invoice has a balance due. The customer will automatically receive the email which includes PDF copies of the invoices that meet this criteria. The process may be further automated to synchronize supporting invoice documents such as timesheets, proof of delivery, bills of lading, customer purchase orders, and other documents or files required by your customers before they will remit payment. These documents and files could also be manually uploaded and associated with the
related invoice. If a customer says that they are missing an invoice or important supporting documents, you can simply resend them through the customer payment portal. Disputes are dealt with in seconds and payment is received even faster.
It’s estimated by the Association for Financial Professionals that more than half of businesses expenses are still paid with a paper check despite the advent of the digital economy and the advancement of payment technologies. According to Bank of America, the cost to process a paper check can be as low as $4 or as much as $20 based on the price of the check, postal fees, and labor involved to write, mail, collect, and reconcile the checking account. A recent study by Aberdeen Group validates this putting a value of $7.78 on every manual check that a business creates to pay their bills. This is the cost for your customers to pay their bills via check. The costs you assume will be about the same as you need to enter the check into the system, apply the payment to customer accounts, and process the check with your bank. Why are we paying that much to simply get paid?
Although checks used to be the number one source of payments, they are riddled with issues. To begin, you have to wait for the check to arrive in the mail which can set you back in getting paid. Then, you have to process the check. According to the Federal Reserve payment survey, the cost to process checks costs U.S. businesses $100 billion in annual spending. When using online bill pay, customers have the option to use ACH or credit cards payments, which decreases the total cost of processing.
Once checks and paper processes are eliminated with online bill pay, less costs are spent paying employees to do manual tasks. Less time will be spent copying down customer card numbers for payment or manually entering payments into your business, and more time can be spent calling the customers that still need to pay.
GETTING PAID FASTER
Traditional methods of payment, such as checks and cash, inherently take longer to process than using online bill pay. It is simply the nature of the payment. A customer needs to write the check, send the check via snail mail and then you are left waiting for it to clear the bank. This is a long, drawn out process just to get paid. In addition, there is always the possibility that the check doesn’t clear. At this point, you will have to contact the customer and the waiting process begins again. With online bill pay, what usually could take a week or more can take only 24 hours. Customers can simply receive an email and click a link, then pay via ACH or credit card. Online payments are typically processed nightly with funds transferred to your bank account daily for credit card payments. Some ACH transactions may take longer to process with most funds transferred to your bank in no more than 1 to 2 business days depending on the backend gateway used for the transaction.
Another obstacle that often presents itself when waiting to get paid is “lost or missing” invoices. When you’re sending invoices through the mail, they can either truly get lost on their way to the customer or the customer then misplaces it. You’re then left playing the waiting game again as you send them another invoice. Lost and missing invoices are much less of a hassle when using online bill pay. As soon as the invoice is reported to you as missing, you can send another one
via email, keep the customer on the phone and wait for them to report that they have received the replacement invoice and the customer can pay immediately.
The main reason people choose not to use online bill pay usually has to do with security reasons. According to a Federal Reserve Consumer report, of those who are not using online bill pay, 59 percent cited security concerns for why they choose not to. However, as technology advances, so does heightened security measures in online bill pay. By finding a reputable online bill pay provider, you can ensure that the most up-to-date security standards are in place.
PCI ensures the security of credit card information as set forth by the Payment Card Industry Data Security Standard (PCI DSS) which sets security requirements that all companies must adhere to when processing credit card payments.
In 2006, the Payment Card Industry Security Standards Council (PCI SSC) were launched to manage the ongoing evolution of the Payment Card Industry (PCI) security standards administered by PCI SSC (www.pcisecuritystandards.org), an independent entity created by the major credit card association members including Visa, MasterCard, American Express, Discover, and others.
PCI requirement standards vary depending on a number of factors but primarily the volume or number of credit card transactions processed annually. PCI pertains to how credit card information is stored and how this information is shared among banks, processors, and gateways to ensure the security of the cardholder and the acquiring merchant’s bank. Failure to comply with requirements can result in significant fines which could range from $5,000 to $100,000 per month.
Merchant service providers are an essential part of the process and can help your business ensure that you’re adhering to PCI regulations by providing data encryption and storing credit card information in secured data vaults so you can minimize your risk for non-compliance fees.
CARD NUMBER TOKENIZATION
Many customers enjoy being able to simply click and pay. It takes out the hassle of having to type out their 16-digit card number, expiration date, name and CVV code every single time they go to make a payment on your site. However, saving that highly sensitive information in your database also runs the risk of a customer having their credit card number stolen.
Credit card tokenization allows customers to simply click and pay without the increased security issues. Customer’s credit card information is stored in a unique alphanumeric code that cannot be deciphered by someone with harmful intentions. Essentially, the numbers are saved through encryption. Through credit card tokenization, customers are able to receive the convenience of an online bill pay system without the worry.