SelfInformed

December 2011


Going Electronic

Friday, December 02, 2011

How To Squeeze Paper Out Of Your Payment System

By Don Sadler

Remember when grocery store baggers started asking whether you wanted paper or plastic bags?

Now many micro-business owners have to answer a similar question when it comes to their payment systems: Do you want to send and receive payments via paper or electronically?

About two decades ago, major U.S. financial institutions and the Federal Reserve began a concerted effort to replace the billions of paper checks written each year with electronic funds transfer, or EFT. While we’re still far from a paperless payment society, EFT is making serious inroads as the preferred payment vehicle in the U.S.

The 2010 Federal Reserve Payments Study found that 24.5 billion checks were written in the U.S. in 2009, which was down about 7 percent from three years earlier in 2006.

Meanwhile, the number of electronic payments made via the automated clearing house, or ACH, rose more than 9 percent, from 14.6 billion in 2006 to 19.1 billion in 2009.

“The increase in electronic payments and the decline of checks can be attributed to technological and financial innovations that influenced the payment instrument choices of consumers and businesses,” the Federal Reserve noted in the study.

In other words, there are more cost-efficient options available to business owners when it comes to making and receiving payments electronically than ever before.

David Allen, a treasury management officer with Regions Bank in Benton, Ark., says that the cost of ACH payments has gone down considerably in recent years.

“And ACH payments are a lot cheaper than processing checks or initiating a wire transfer,” Allen says.

Here’s what you need to know when deciding if electronic payments are right for your micro-business.


Types Of ACH Payments

There are three primary types of ACH payments.

  1. ACH debits and credits

    These can be either business-to-business or business-to-consumer payments.

    On the B2B side, you can pay your vendors and suppliers via ACH credits, or they can collect funds from you via ACH debits to your account.

    “Most businesses prefer initiating ACH credits, rather than having their accounts debited by vendors, because it gives them more control,” Allen notes.

    If your customers are primarily consumers, you could follow the B2C ACH payment model that’s become common among many utility companies and health clubs. These were among the first businesses to begin using the ACH to collect consumer payments electronically on a large-scale basis.

    “Small businesses can enjoy the same cost-saving and cash flow benefits,” says Allen.

  2. Direct deposit

    Today, about three-quarters of all employees are paid electronically via direct deposit instead of receiving a traditional paper paycheck, reports the National Automated Clearing House Association.

    However, small businesses aren’t as likely as larger companies are to offer their employees direct deposit, says George Throckmorton, the association’s managing director of advanced payment solutions.

    “Our research shows that small businesses aren’t as aware of the benefits of direct deposit and how it works as larger firms are,” says Throckmorton. “But even a business with just a few employees can benefit from direct deposit.”

  3. Federal, state and local taxes

    The ACH has become a common funds transfer mechanism for the payment of business taxes at all levels of government.

    “You don’t want to be late with your tax payments,” Throckmorton says. “Making them electronically provides assurance and confirmation that they’re posted on time.”


Cost Versus Benefit

Throckmorton says many micro-business owners are hesitant to venture into the world of electronic payments because they’re not convinced the benefits outweigh the costs.

“This is a hard segment to help get over the hump from paper to electronic, because every dollar counts for these types of businesses,” says Throckmorton. “But once they realize the benefits, most of them see electronic payments in a whole new light.”

What benefits might you expect for your business?

Greater efficiency
Electronic payments allow businesses to automate much of the payment process, which improves efficiency. For example, if you make regular monthly payments to a supplier, you can set it up with your bank so that payments are made automatically on the due date.

“The business doesn’t have to remember to write and mail checks or re-key the same information into its accounts payable system every month,” says Throckmorton.

Improved cash flow
Receiving payments from clients electronically via the ACH provides significant cash flow advantages. It means you’re assured that payments will be made automatically on the date they’re due, rather than waiting for checks that may or may not be in the mail.

Also, checks don’t sit on your desk or bookkeeper’s desk for days (or weeks) before they’re deposited, further boosting cash flow and improving cash flow forecasting.

Lower payment processing costs
While there are modest fees associated with ACH transactions, the increased efficiency of electronic funds transfer more than makes up for them.

For example, the National Automated Clearing House Association reports that businesses can save from $2.87 to $3.15 per payment by using direct deposit instead of paper checks.

Environmental friendliness
Electronic payments are a green alternative to writing, mailing and processing paper checks.

They also reduce the resources used in the creation and transportation of checks.

Security
Although some micro-business owners voice concern about the security of electronic payments, their worry is unfounded.

The National Automated Clearing House Association reports that since the inception of the ACH nearly 40 years ago, there has not been a single reported instance of an ACH payment being lost.


Getting Started

Allen, of Regions Bank, says that micro-business owners who want to make electronic payments should first talk to their banker.

“Most banks can offer comprehensive solutions and packages that make it easy for small businesses and self-employed individuals to make and receive electronic payments.”

A limited, but usually sufficient, number of ACH transactions is included in most banks’ online banking packages, he notes.

For example, small businesses can conduct up to 150 ACH transactions a month—regardless of whether they are debits or credits, payroll direct deposits or tax payments—as part of the Regions Bank Online package.

In addition to ACH transactions, most online banking packages provide access to previous-day and real-time account information. They also usually allow owners to make transfers between accounts and send wire transfers.

Finally, Allen points out that many of the small businesses he works with don’t have a choice of whether or not to receive payments electronically.

“Many large national and big-box retailers require their vendors to receive payments electronically. The good news is that it’s easier and cheaper today than ever for small businesses to comply with this requirement.”


Don Sadler is a self-employed freelance writer who now receives some of his payments electronically.


The NASE Can Help

First American Payment Systems
The NASE’s new partnership with First American Payment Systems gives you access to credit card processing with rates as low as .08 percent and 10 cents per transaction over cost.

With First American Payment Systems you get the products you need to help your business grow and a variety of service options such as:

  • Free online reporting and statement analysis
  • 24/7 in-house customer service and technical support
  • Experienced team to walk you through product installation
  • Easy-to-understand merchant statements


First American Payment Systems has the ability to enhance your micro-business with:

  • Credit, debit, gift card, check and EBT processing
  • ACH (recurring payment) processing
  • E-commerce processing
  • Equipment purchase and lease options
  • And much more!

Ask The Experts
Have questions about electronic payments and other micro-business issues? The NASE micro-business experts can help.

These professional consultants can answer your questions, offer advice and help you avoid costly mistakes. Plus, as an NASE Member you have online access to our team of consultants 24/7—at no cost to you.


Read this article in PDF form here.