Credit Card Payments: All about Surcharges, Level III Processing, and Technology

Host:

Welcome, everybody. Welcome to my panelists. We’re so happy to have you here this morning. So I start off with a question, and I’m going to have each one of you if you would provide the answer. So, first off where do you feel the opportunities for accepting credit card payments in B2B lie, and then secondly, is it critical to accept these credit card payments for the B2B suppliers today? So we’ll start with Jason at the end, please.

Jason Herrington:

Good, OK. Thank you. Can anybody hear me? Yeah. OK. Well, there is an inevitability in the industry. We have partners here attending this conference who are on the merchant services side and it’s such a convenient way to pay. The security of a card payment has gotten better and better and even in some instances more secure than a check payment or ACH. There are also the incentives behind that. If you’re a buyer you know that’s driving a lot of this which is really an easy sell if you’re a merchant services provider. So we as sellers have to decide how we are going to manage this either logistically and from an expense management perspective.

Because again there is an inevitability in our society in this in our industries that we have to adopt it. It’s happening. It’s coming our way and we’re learning about it. We’re seeing substantial growth in buyers utilizing their card products and we certainly don’t want to turn away business because the client is choosing to use a card product. So we’re conforming and finding ways to manage the margins. And logistically manage the business process.

Tom Samata:

Yaskawa has a model easy to do business with. And I always feel from completely non-technical. The easier you can make customers buy things from you the better off you are. And I think about 20 percent of our business is service like repair and field service and a lot of those guys don’t have a good credit history. So if you could they can use a credit card to buy stuff that they’re going to get our product and get our services a little bit easier.

Liz Chamorro:

Can You hear me? Consider that credit cards are increasingly becoming the mode of payment. Not only in the United States but also worldwide. It is crucial that we accept credit cards so we don’t want to fall behind or lose customers or increase your customer base. We need to be on top of technology as today’s digital age checks and cash are becoming increasingly obsolete. And it’s also good to keep in mind that accepting credit cards you could be potentially missing a portion of the market. Somewhat the benefits that I think it is like Tom that works in the same company. One of our bottles is to his active business where it’s very easy. A lot of customers don’t have good credit. So it’s very beneficial that you accept credit cards. You can improve your cash flow because you get your money depending on the relationship you have with your bank. You can get your funds sooner. You can get it the next day and depend on that relationship it helps you reduce DSO and it helps you improve your collection effectiveness. Because you’re getting the cash immediately. We have integrated the credit card solution with our ERP system.

So as soon as the collection effectiveness comes in we are able to make the payment it takes it off the customer’s account and it goes to a credit card, where you take it settles at night in batches and it settles at night. So again the benefit of accepting credit cards is improving your cash flow, improving your collection effectiveness. Open to possibly fit your competitors are not accepting credit cards you can gain you know those customers can come to you. And I think one of the benefits for the customer is that they have this strategy to reduce their DPO so by us setting credit cards too would definitely help the customer so it’s sort of a win-win-win solution and accepting credit cards.

Host:

Thanks. Chris, thoughts?

Christopher Land:

I agree with everyone else. There are a couple of other things that I would put into this one. You are opening up to smaller businesses. So you’re going to see a potential increase in sales. Another thing is you can see fewer chargebacks that are coming in. Associated as always are you’re set up correctly. So and that’s on the whole so you know the realm of this not actually point of sale or anything but on the wholesale. You’re going to see fewer recharge bags by accepting that and you’re increasing your sales because you’re opening up to another market that is smaller businesses that it’s not a huge increase in sales but every dollar counts. It’s definitely crucial to be able to accept those.

Host:

OK. Thank you. So I have a question for Jason specifically since you’ve been on both sides, you’ve done AR and AP. Why do you think customers might prefer to make credit card payments?

Jason Herrington:

Well, that’s easy for them. I mean really from an AP perspective. We rolled out a virtual card product ourselves to pay our vendors. This particular product eliminates reconciling differences. Meaning when we transmit a virtual card payment a client or a vendor can only charge us exactly what we’ve sent them. They can’t charge more and they can’t charge less. And there’s a fixed expiration date for a unique card number. So again the security that’s associated with that transaction and eliminating reconciling differences. And of course, on top of that, we generate a rebate accrual and every time we make a payment we’re generating a return on that that comes back to us in the form of a cash rebate from our provider.

So pretty easy to rationalize why go do that. We were challenged with typical P-cards and just regular corporate cards trying to make those payments on the AP side where they were consistently reconciling differences on what we authorized to be charged and what actually hit the statement as charged. So we eliminated that. That’s the AP perspective in terms of why go do it on the AR perspective. We find that processing credit cards as sent by a HighRadius portal or some type of customer portal is the most labor-intensive form of payment given the number of manual touches.

And also the security requirements that are around that and how well or maybe how not well we’re doing that. But again we’ve had to take it to know we’ve had to confirm. It’s these merchant services providers and these program providers are campaigning their clients to adopt these programs because they do provide great value and great security. On the receiving end of that as on the AR side. You know we’re finding significant differences between processing a purchasing card versus a virtual card versus a buyer initiated payment in terms of just a logistical execution. Those continue to evolve and I believe that the virtual card and the buyer initiated payments are really trending more towards that for larger buyers that the small incremental companies will probably continue to use their physical plastic card and really leveraging that as a way to mitigate in-house credit risk. I mean it was mentioned here we are basically shifting the credit risk to the card provider and not yourselves. So that’s another reason to do that.

Host:

Thanks, Jason. So we’re hearing that there’s a lot of opportunities we’re looking at but could potentially be some additional benefits. But there was a recent survey that came out by CRF and NACHA that only three-point one percent of suppliers preferred making card payments, three-point one percent. It’s a relatively small number. So what do you think is the major inhibitor that prevents these customers from paying with a credit card or adopting credit cards for payments? Chris?

Christopher Land:

Yes. The first start is PCI compliance is a huge topic and issue that surrounds credit cards. So first is you being able to implement some PCI best practices and standards. So if you’re not accepting credit cards you’re taking yourself out of PCI compliance. And it can be very costly. Yes, it’s very costly to implement to become PCI compliant within your own networks. It’s important to work with providers potentially to assist with the PCI compliance and also the fees the world of credit card fees is very convoluted. There’s not a clear answer to the interchange fees and processing fees. So it takes resources, it takes time to implement some standards to take the analysis of all the data coming in. It’s important to do that. And, some companies don’t want to take the time. They’d rather just not take their credit card at all. But you know it can. It could benefit you definitely if you just take that time. Have someone that can dedicate herself to fees and PCI compliance to help with that. So it’s the number one thing that I see speaking with any person who is trying to implement credit cards into their industry.

Liz Chamorro:

Yeah, I think I have to agree with Chris. Compliance, the initial cause of accepting credit cards is pretty high due to the regulations in complying with the credit card industry. You need your required IT resources and sometimes are readily available for you and I can speak for our team. It’s a very small team, a very knowledgeable group of people, very small. But, it’s you who knows that they don’t have the resources. They always know to put out fires for the areas within the company that could be more important for the company, overall than trying to be compliant with the credit card industry. Again the cost is pretty high , the interchange fees come right from the bottom line.

There is a disconnect between credit and sales, finance and sales where we’re taking note of these initiatives. Our goal is to bring the cash in sooner and will we go in a separate type of payment card. A lot of times finance is not paying attention, not at the cost associated with accepting credit cards and then sales are happy that we are able to release orders right away, right. So the disconnect comes when. Finance doesn’t talk to sales and says listening to my fees is X percent for accepting the credit card. Can you do something in that as a pricing increase?

You know there’s going to be a push back on that because customers are fighting for cost reductions. Also price reduction and yet we’re going to go and say do this to the customer so that this connects technology if you don’t have the latest technology you will be missing on passing in level three data. One thing to keep in mind, maybe I’m out-dating myself when I was researching and I decided to go with a processor that we have today, not all vendors offer level three data. So you have to be very cautious when you search or you’re going through a selection of vendors there. They do have the capability to pass level three data because that will help you reduce your fees and the security guard side the credit card industry is highly regulated in Monday’s that you’ll have the highest level of security to prevent fraud. So those are the things that I think that’s. The reason why we push back as a supplier on accepting credit cards.

Host:

Tom, do you have anything to add?

Tom Samata:

Yeah I mean like Liz says we have a very small I.T. department only 13 people, our managers, our SAP landscape, our website, Help Desk everything I got to imagine there’s not a lot of companies out there that run with a bloated I.T. department that has the expertise to implement a nice credit card system with all the laws and compliance things. So we have to find you know like we found a nice partner and HighRadius and did that and It helps you during your order entry process too.

Before we used to have to go to a portal and put the credit card in there and get some you get authorization then they have to e-mail it to Liz to release that order. It’s a big pain in the ass and slows down your order entry. So getting a fully integrated system helped a lot and kept costs down and made things flow much better.

Host:

Thanks, Tom. Jason, you have some thoughts?

Jason Herrington:

So why are sellers resistant to accepting credit? Yeah. I have to say number 1 is the merchant services fees. I mean we record that as a cost of sales so our gross profit is immediately reduced for a client that pays by credit card. We translate that back to our individual branch management teams. So their calculations are impacted. So they have to make a decision on whether or not to accept because we’re passing that along to them. That would be at the top of the list.

You know the logistics of getting set up. You have to engage a Merchant Services program provider. You know you have to build to accept credit cards and then establish a point of sale transaction system. Or you go to a different route and engage a client-based portal where you can sort of self enable the clients to do with themselves. That has been mentioned earlier in the level 3 data exchange so you know all of us using our credit cards at any retail place. I mean those you’re generally going to get the highest level fees between 2.8 to 3.2 percent.

That’s Level 1. If you can get to Level 2 or Level 3 you’re basically reducing the risk of that transaction with the program provider and they discount the fee. And really that translates into less expense for your organization. So it is very critical to implement a system that allows you to reach that data exchange because, by definition, reduces your costs in a very material way.

Host:

Thank you, Jason. So we have had a lot of talk about these fees, surcharges and the convenience fees. Now, Liz, I know you take a lot of credit card payments. Could you elaborate a little bit about what the differences between these two are that we can understand?

Liz Chamorro:

Okay. I’m going to try to see if somebody doesn’t agree with what I’m going to say as the difference between a convenience fee and surcharge. Please feel free to say you’re wrong because I won’t tell you from what I understand. Convenience fees are the charges for the convenience of being able to pay using an alternative payment channel outside the merchants’ normal payment method right.

So I’ll give you an example. I usually pay my electric bill on the phone and I pay via debit card. What they tell me is for the convenience of accepting this type of payment we are going to charge you a convenience fee of two dollars and fifty cents. Also, the convenience fee is something that he has to be a fixed amount. It’s not regardless of the amount of a transaction you can do that percentage or anything it has to be a fixed amount. And the surcharge rate is the rate that you pass to the customers to help you reduce the cost of acceptance of a credit card. The general rule for a surcharge is that surcharges can only be applied to credit card transactions. The rate cannot be greater than your average discount rate.

And the max that you can pass to your customers for a person, the idea of the surcharge is enough for you to make money. That’s why one of the regulations is that you must sort an average every year of what you pay in and you pick the lowest average of what you’ve taken. American Express credit card and Visa. So whichever one is the lowest that’s the rate that you are available because the purpose of the surcharge is now for you to make money. It’s for you to help you reduce some of the costs associated with the acceptance of credit cards. OK.

Host:

Thank you. I wouldn’t have any dispute about Liz’s explanation. Okay.

Host:

Great. So, Chris, you were closely working with the Adidas team while they’re implementing credit card convenience fees. So what were some of the best practices that you put in place that you can recommend?

Christopher Land:

Number one, You speak with your legal teams. That’s the first thing you need to do after at least gathering some information. Usually, your merchant service provider can provide you a lot of the details in the background on the laws because there are some state law states that just don’t allow it or there’s a gray area with this implementation when we were in SAP back in. So it was having to work with HighRadius and then also our SAP team too, we accept credit card payments through a platform which is below direct and through that is where we pass this through to actually do when they’re collecting the invoice in the amount of detail. There’s also the convenience fee which is one point five percent. So it took a lot of effort. Really it seems very simple to implement. But you do need to do your research, you need to definitely speak with your legal department. How can you do this? Because it’s going to affect your customer base if you’re in all the states. What states can you do this with and what customer base can you do this with you know what? What we see is that we’re taking credit card payments from a lot of smaller accounts.

So you know they’re eager to just pay us. So 1.5 percent is not a huge deal. It’s we’re not making money off of that like Liz said that’s not a lot of money. Profit Center. It’s basically just we’re offsetting our costs. We run around 2.3 percent on average. And if you take convenience for your immediately affecting that at 1.5. But again you can’t do it with every single customer. You have to abide by the laws. And then just having that resources and the time to put in what you need to do on your ERP system, what do you need to implement to apply the convenience fee to the invoice, pass it through HighRadius that is a great job in implementing on their end for the payment processing side to take those. Those numbers coming from I say should be implemented to the invoicing and then pass it through to the credit card processing. So again I can’t stress enough legal. I always talk to them and get that approved. But it is a gray area. There’s a lot of buzz circling a convenience fee. Can you do it? Can you not? You can. Just really research the law and speak with your legal teams and get your service providers included in this conversation. They usually know the laws as well. And so they know what you can and can’t do.

Host:

Yeah. And I would think that it would get even more incrementally complex as you look at your international laws. And go beyond, even in the States and the laws here.

Christopher Land:

Yeah. This really only is for the US. Yes. In our global market acceptance of credit cards is very low, if any. There’s not a lot of credit card acceptance on the wholesale side of the business, that specifically wholesale. So yeah definitely. This is just something for the U.S. that we’ve implemented.

Host:

Thank you, Chris. The next question I have is for Jason. How do you create a business case to automate credit card processing? So could you mention some best practices for creating that business case?

Jason Herrington:

The first thing I did was just identify my client base. I mean we build 8-900 customers a week but only about 300 of them pay by credit card. So really build a demographic around your clients that are paying by credit card and establishing a historical transaction history that allows you to understand your year over a year whatever increase or decrease you are experiencing in card charges. And then the respective fees that you’re absorbing across that transactional activity. So through 2016 and 2017 there was about a 20 percent increase in charge volume. 2017 and 2018 was almost 30 percent increase. So it became a fairly simplistic case to say that we need to make a change here and do something a little different because of this. The evolution of card payments is very evident and it isn’t going away. And additionally, we had our full-time person. Managing the logistics of accepting card payments and running all forms that come to us to carry email accessing a Merchant Services terminal executing the card payments our PCI compliance was not well done. There was a security element there. So building out your demographic of clients and doing the math in terms of what your charge volume is, what your fees are, what you’re absorbing internally as labor expense to execute all those transactions. And then your risk element is associated with compliance. It’s difficult to monetize that but it certainly does exist.

Host:

Thank you, Jason. So the next question I have is for Tom and for Chris. It’s a little bit more on the technical side. So could you explain to us how you would integrate these credit card payments with your ERP systems?

Tom Samata:

Like I said we use SAP for ERP system and We take orders through the ECC side and we also have our CRM on-premise. So we have to. We had to incorporate the fees into the pricing condition based on the rules that list set up in the rules to take into account. First, are you using a credit card on your order? Does a customer have payment terms with us? I came over the third one. Oh, the credit card type debit card prepaid. Yeah. And so in our pricing formulas and we have several sudden first-rate sales orders for repairs and field service we have to incorporate a can let’s call the condition type. That when it meets all those conditions. It’ll add the 2 percent fee that we charge people that shows up on the. Order confirmation as a separate line item shows up on our billing document as a separate line item. A post to a separate GL so later they could. Write it off to the actual fees. And again get me to make it very easy for the order entry person and do it. It’s right during the order they create in the order if the credit card is stored at the customer level already they know just say no. Use that card and otherwise a customer will call in and say you know. Card number 4 1 2 5 blah blah blah. And those numbers again with our small IT staff and limited knowledge on. All the rules and requirements regarding credit cards. We only store a token on the SAP side. The rest is stored on HighRadius to keep it secure. That’s in a nutshell, that’s how we do it. I don’t know if it’s rocket science or being a technology expert to do it but it just works very well and it. Speed up the time and order entry too because they use apps to take the credit card, go to the portal, get authorization and can bring it back. Now it’s all done all in one shot if the card fails. They know that they get a little answer-back. Not always the greatest answer why it fails but it sometimes is yellow. Card stolen cards now are overdrawn or whatever. All the different error messages are. And then they either give us a new card. Or we go on.

Host:

OK thank you, Tom. Chris, your thoughts?

Christopher Land:

Yes. Just a simple way to put this and how the integration into our ERP was just working with partners that understand what you can implement into your systems. And it’s not that difficult to do that but it does take some time because of PCI compliance issues. It’s going to take some time because of your resources that are available. Also, the security you know making sure security is in place tokenization is an important thing that gets into the technical side of it. There’s a lot going on. There are a lot of things I really need to understand or know but it needs to happen for your security purposes. So tokenization is a big thing that’s happening in the back of this and implementing that and working with a partner, someone that understands it and others can do this on your systems. From an aspect of you know presenting the invoice to making that payment. Sending it through the processor and doing that securely taking the PCI compliance off of your plate as a business and pushing it to the processor is important. And it’s not a difficult thing to do. Like I said, it is fairly simple, you just need to have the resources and they need to go through the PCI.

Host:

Everything’s simple when you have the resources. Exactly. So just as we’re wrapping up here and I’ll ask this as a general and you can just jump in. But what do you see as the future for credit card payments in the B2B space? And do you think that there is an alternate format or payment method that could be placed on credit cards down the road?

Christopher Land:

I’ll go and sort it out. What I am seeing today is an increase in the one-time payment virtual cards. I am seeing that a lot and that’s happening more and more. That’s not a bad thing. It’s a hindrance to us to accept those but your fees are not of the same structure and are not the same. But I am finding that acceptance and so some of this is a little bit easier on the customer but for us, as a business, it’s a little bit more difficult to take that. I’m still researching today. I’m still working with processors. I’m still working with different teams to find an easy solution for these but that is increasing and that is something we’re not controlling completely.

We can’t control that as much. The banks are controlling, they’re controlling issuing of these types of things. So I’m seeing that increase. Is it one that I really want to see. Not necessarily but it’s something that is happening. The other thing and it’s a hot topic like blockchain and Bitcoin and cryptocurrencies and I think they’re coming, they’re definitely on the way. There is a difference between blockchain and your cryptocurrencies understanding that when you’re talking about transaction or a payment type you’re talking more on the crypto side, not just bitcoin but there’s so many out there many things going on it’s not settled in the industry yet to say, “Hey we’re taking it especially in the wholesale world but it is happening and as soon as that becomes stable I think we’ll see an increase in those types of payments and when there are more backing more securities within that you’re definitely going to see some cryptocurrencies at some point when that is.” It’s still yet to be determined.

Host:

Liz, Tom, Jason, thoughts on this future B2B?

Liz Chamorro:

What Jason mentioned on the AP side, I think we’re going to start seeing more and more virtual cards at the receiving end. It’s not the best type of credit card that we want to accept especially when you do have a surcharge fee. It’s very difficult because the customer is controlling the amount that they’re paying you is making it easier on the AP side to reconcile. But our end and it’s the push back because the customer didn’t pay within the allotted time for not being charged, this surcharge yet we can not charge more than what they authorized us to take. So it’s a battle between the customer and our shelves telling them, “OK I can save your virtual card but you have to increase it to this amount to include in.” That’s where we get the pushback a lot of going back and forth a lot of wasting time with the customer and the bitcoin. I’m not very familiar with that but listening to Chris and what I talked to Tom about yesterday, I don’t think this guy will ever go that route.

Tom Samata:

I don’t think we even know how to take a bit of course.

Host:

I think there’s a lot of people in the same boat. Yeah.

Jason Herrington:

That echoed the thoughts on the virtual card product if you know the challenges it creates because you have to know in advance that somebody’s going to pay with a virtual card in order to put the fee on their surcharge, convenience fee or whatever it is to make a part of the invoice total. So when they send it to you it’s already there. Otherwise, you’re in the battle of having to incrementally add it back later and get paid later which would be very difficult. But the next one is would the buyer initiate a payment which is an ACH directly into your merchant funding account and directly from your client’s payment provider. So it eliminates the point of sale transaction it does in the company and would have some fee structure but we’ve got organizations like American Express and so forth that campaign that I took a hard look at on the AP side. You know there’s definitely value there and it’s kind of very similar to it to a card product because it does allow from a buyer-side for them to engage a statement float which is similar to a card product where they increase their DPL. So they’ve sent you a buyer initiated payment but they haven’t settled up with AMEX for 30 days or whatever their statement cycle is. Some incentives are generated from that as well. From you know the seller side you eliminate them near the point of sale transaction. And if the funds just go right into your merchant services funding account which actually works out pretty good.

Host:

Okay. Do we have time for questions? Okay. What? Whoever gets their hand up first. Okay. Here I have a question I have here.

Audience:

Hi, I’m Stephanie Ford with Cox automotive. Do your companies have limits on credit card transactions? How much do you allow clients to pay?

Host:

Good question.

Jason Herrington:

Well generally at ten thousand and under there we won’t. We won’t go over ten thousand. No, we certainly limit. When it comes to limits this is more of the customer base. It’s not actually per transaction. We’re looking at our customer base and when we’re allowing that customer to pay by credit card. So but the transaction we allow those transactions to come through without it without a limit.

Liz Chamorro:

Would do the same thing as Chris says. We do allow any transactions to go through.

Host:

Any more questions. All right. Thank you so much for coming out. Thank you to my panelists. Jason, Tom, Liz and Chris. We really appreciate your coming here and sharing your thought leadership with us. So thank you so much.