Credit Card Fees: A Growing and Largely Avoidable Burden For Business-to-Business Companies
Companies Can Dramatically Reduce the Burden of Credit Card Fees By Evaluating and Changing Payment Policies
MIAMI & LONDON, November 6, 2014 – Credit card processing fees present a growing burden for many U.S. business-to-business (B2B) companies, according to new research from REL Consulting, a division of The Hackett Group, Inc. (NASDAQ: HCKT), and companies can significantly improve their profit margin by changing acceptance policies for credit cards.
REL's research estimates that B2B companies in the U.S. now incur an average of $2.2 million in credit card processing fees per billion of revenue. Credit cards usage for B2B payments has increased dramatically over the past few years, and are expected to represent 10 percent of all payments in 2014. REL estimates that approximately 60 to 85 percent of credit card fees can be avoided by making changes to credit card acceptance policies keyed to the organizations business model, customer base, customer risk, and competitive landscape.
"It’s not hard to understand why B2B customers have doubled their use of credit cards over the past few years, even for five and six figure payments," said REL Customer-to-Cash Practice Leader Veronica Wills. "It’s an easy way to extend time to payment, and transaction processing cost to the purchaser is low. In addition, companies can often accrue rebates and rewards.
"But for B2B sellers, the cost of accepting credit cards far outweighs the benefits," Ms. Wills explained. "Visa, MasterCard and other credit card companies have tripled their U.S. swipe fees in the past decade, and they are now the highest in the world. As a result, the spiraling cost of allowing credit card payments can easily cut into bottom-line profitability. Any company that is not actively reviewing how and when it accepts credit cards is willingly squandering away margin."
Many B2B companies have been slow to respond to the problem for a variety of reasons. "Companies are afraid of losing customers, and don’t want to give their competitors an edge" said Ms. Wills. "Accounts receivable staff can also be indifferent, because to them, a payment is a payment…and sales staff are often unsupportive, because their compensation is generally tied to simple revenue."
REL encourages U.S. companies to carefully evaluate what forms of payment they accept from clients, and consider both incentives and disincentives to encourage customers to use other electronic payment methods that benefit both the payer and the payee. A comprehensive analysis should evaluate the impact of payment methods on cash flow, cost, risk, and service.
REL recommends that companies consider multiple strategies to reduce the use of credit cards by their customers. Through a strategic analysis of the customer base, companies can develop a stratified payment method acceptance plan that takes into account payment terms optimization, migration to other forms of payment, and trade-offs, modeling to evaluate concessions such as discounts in lieu of payment by credit card.
Cost is the first thing companies that should be considered. Electronic payment methods are significantly less expensive, labor-intensive, and error-prone than checks, which remain the most popular form of payment for B2B companies. But some forms of electronic payment – in particular electronic funds transfer and automated clearinghouse, or direct debit – are clearly preferable to the seller, as they offer lower processing costs than credit card acceptance, faster turnaround times than traditional checks, and are less labor intensive to process.
Other alternative options to consider include renegotiating credit card fees, considering alternative payment processors, surcharging credit card transactions, establishing convenience charges, and implementing multi-tier pricing. And lastly, the simplest solution may be to no longer permit settlement of receivables by credit card where credit terms are offered. This ensures total mitigation of credit card fees and other processing costs.
"Companies are understandably cautious when making changes like they ones we’re proposing. They need help understanding how and when they can apply new regulations to their credit card policies, because there’s a lot of room for interpretation, and not a lot of guidance out there for B2B companies. There’s also concern that policy changes may spark customer discontent. But we are not aware of any B2B company in our database ever reporting a loss of business due to a strict credit card acceptance policy," said REL Associate Rob Crowder. "Still, communication is a critical element of success here. Internal staff need to understand policy changes and why they’re being made, and how to answer questions. Customers need to be told what’s happening, and how they can potentially benefit by changing their payment procedures. There’s potential for a win/win. But it takes careful analysis, thoughtful planning, and real cooperation."
A complimentary version of this Research Insight, "Credit Card Payments a Growing Burden on Business-to-Business Organizations," is available with registration at this link.
REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a world-leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL’s tailored working capital management solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL’s expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programs. In-depth process expertise, analytical rigor and collaborative client relationships enable REL to deliver an exceptional return on investment in a short timeframe. REL has delivered work in over 60 countries for Fortune 500 and global Fortune 500 companies.