Other side of the coin: Rethinking rising payment costs

Blog | April 18, 2023

Reading time: 8 min

For the first time in two years, Visa and Mastercard raised their credit card interchange fees for merchants. That was a big story in 2022. Along with inflation and supply constraints – it caused a lot of stress for businesses.

Many businesses will try to reduce how they’re paying in credit card fees. And there are lots of ways to do that. We’ll go over all of them at the back of this article.

But trying to reduce your credit card costs is obvious. Recognizing and reducing your total payment acceptance cost is revolutionary. And that’s the big idea we’re going to focus on.

We’re going to turn around the proverbial coin and look at the often unseen side. Let’s explore the hidden costs of payment acceptance and learn what you can do about them.

Card is not a four letter word: but term is

Card is not a four letter word
Watch Billtrust VP of channel sales & business development go in depth on this topic.
Watch Billtrust VP of channel sales & business development go in depth on this topic.

Suppliers tend to see credit card acceptance and the fees that come with it as a necessary evil. We often see suppliers comparing cards to other payment modalities like check and ACH which they perceive as “free.”

That’s only true in a very limited sense. Fees are one aspect of the cost of payment acceptance. They’re the most obvious because they are the ones spelled out on the statement. We call them hard costs because they are fixed.

But labor costs are a significant factor, too. So is the cost of DSO, or not having access to your money for a particular term. Term is expensive. Term comes with opportunity cost, inflationary reduction in buying power, and interest payments if capital must be borrowed. We refer to these more fluid inputs as soft costs.

So, no payment acceptance modality is “free.” If suppliers are going to compare credit cards to ACH and checks, they must compare them while recognizing all of their costs, which is hard to do.

Everyone’s numbers will vary, but the chart below should provide a guide of both the hard and soft inputs you need to account for.

The hard and soft costs of payment acceptance

Hard costs Soft costs
Paper check
  • Bank lockbox fees
  • Value-added keying fees
  • Outsourced Cash Application (if applicable)
  • Manual, in-house cash application (employee hours + overhead)
  • Time to cash application x costs of tied-up working capital
  • Risks to working capital posed by bounced checks
  • ACH transaction fees
  • Outsourced Cash Application (if applicable)
  • Manual, in-house cash application (employee man hours + overhead)
  • Time to cash application x costs of tied-up working capital
  • Risks to working capital posed by claw-backs or insufficient funds
Credit card
  • Interchange fees
  • Costs of PCI-compliant hosting provider
  • Outsourced cash application (if applicable)
  • Manual, in-house cash application (employee man hours + overhead)
  • Time to cash application x costs of tied-up working capital [credit card is generally the best performer on this metric]
  • Contacts from financial institutions attempting to gain card acceptance (employee man hours + overhead)

Focus on reducing term before fees

Your customers love paying you with credit cards – and that can be a point of leverage. Because card payments promise so many benefits for the AP side of the transaction (float and rebates), Billtrust customers have found enormous success in negotiating shorter terms with their buyers in exchange for accepting card payments.

This has proven true across business sizes. Card just gets paid faster. And it’s not only from buyers agreeing to tighter payment terms. The actual speed is different, with cards processing up to 4 days sooner than ACH. And they beat check payments even more handily because they spend no time in the mail.

So, instead of solely focusing on lowering your credit card fees, we recommend that you first embrace cards and focus on lowering your DSO. Commit your customers to tighter terms and get from payment execution to receipt faster.

But there’s more that you can do to reduce DSO through credit card acceptance.

Breaking down the cost of term

The math is going to be a little different for everyone, but we’ve prepared a chart using example data that can be useful in comparing the cost of virtual card fees with the cost of term.

There are three aspects of term that we’re considering in this chart:

  1. The opportunity cost of not investing capital that is tied up in term
  2. The cost of collecting payments
  3. The cost of inflation that occurs during term
Card acceptance, a cost-effective alternative infographic

The economics and ergonomics of card

Just like an adjustable desk is better fit for a human worker, credit card payments are a better fit for digitized AR processes.

Checks are inefficient vehicles for payment in a modern organization. But ACH payments, even though they are digital, come with quirks that often generate manual work.

With ACH, the money hits your account, but the remittance information is separate, often coming in an email. Many companies employ AR specialists who spend their entire workday opening remittance emails, typing the payment data into ERPs and matching payments with invoices in the cash application process.

It is ergonomically unfortunate. But credit card payments are only a little bit better. They generally come in an email with a virtual credit card number specifically created for the payment and remittance information attached. But a human being still needs to open those emails and type in data to process and post the payment.

But here comes Billtrust with the ergonomic solution. You're probably familiar with bank lockboxes that receive paper checks, process them and then type up and transmit the remittance data to you. We have a digital lockbox that does the same for credit card and ACH payments, but it is completely automated.

The digital lockbox completes the promise of electronic payments

At the center of the digital lockbox is an email inbox where all of your electronic payments are sent or rerouted. Billtrust will automatically open and read payment emails, processing credit card payments and capturing remittance. Billtrust Cash Application can do the same for ACH payments.

Your team is probably spending a lot of their time in Outlook and Gmail, opening and processing emailed payments. All of that employee time comes with a cost. And smart tools like the Billtrust digital lockbox can enable you to reassign those employee hours to more beneficial tasks or eliminate the need to add contractors to handle payment volume.

Labor saving is cost saving

And it’s possible to reduce the costs of your labor and term enough to completely cancel out the costs of credit card acceptance fees.

That’s the big idea we want you to come away with from this paper: Credit card payments come with costs, but they enable even more savings if you deploy automated solutions that take advantage of the digital nature of credit card payments. 

The face of the coin: lowering fees

Ok, let’s get down to it. Now that we’ve made our larger point about term and labor costs, we’re going to show you exactly how every business can lower their credit card acceptance fees.

It starts with understanding the fees, which break down into three parts:

  1. Payment processor fees: This is what you pay the company that accepts the card payment and sends it to the payment network. And this fee is actually negotiable. Depending on the deal you work out with your processor, you could be paying interchange plus, flat rate, subscription or tiered fee structures. Compare processors and see what they’re offering.
  2. Interchange fees: This goes directly to the card issuer / bank. These fees aren’t negotiable, but they can vary based on the amount of the transaction and the industry the business is in.
  3. Assessment fees: These are paid directly to the credit card network like Visa or Mastercard. This fee is based on your monthly sales and is not a per-transaction fee. Merchants refer to the combined interchange fee and assessment fee as the swipe fee.

Leveling up your data to lower your interchange rate

The most effective way to influence your interchange rate is with payment data. In every payment there are multiple fields that can be populated with data. These fields are things like “business address” “tax ID” “product code” “destination zip code” etc. They’re basically more information about the payment.

The card networks categorize these fields into Level 1, Level 2 and Level 3 data. Level 1 data is required for a transaction to take place. But providing Level 2 and Level 3 data unlocks lower interchange rates because the card networks feel that having this data proves the payment is less likely to be fraudulent.

The bad news is that Visa and Mastercard define what constitutes Level 2 and Level 3 data differently. And it’s difficult to accurately capture and input Level 2 and Level 3 data on every transaction.

That’s why we recommend using a third-party payments specialist like Billtrust, who can leverage automation and big data to process your payments with Level 2 and Level 3 data more consistently.

Put them all together and lower your costs

Rates may have gone up last year, but if you leverage all of the cost saving strategies we’ve outlined in this paper, your holistic costs for payment acceptance may significantly go down.

Billtrust founder, Flint Lane, is fond of promoting digitization in addition to automation.

Automation is what we sell here at Billtrust. Our solutions automate processes across the order-to-cash cycle.

But what are we automating? We can automate the cash application of your paper check payments. Our matching software can accurately and instantly match your check payments to open invoices. But we can’t automate the mail. If your paper check is in the mail for 5 days – there is no automating that away.

That’s why we are champions of digital payments like credit cards and ACH. It’s only when you put digital data together with automation that you unlock the full benefits of modern AR solutions.

We’d like to help you get there. Please reach out to us.

An expert in cost-lowering, cash flow quickening, AR solutions will be in touch with you shortly.