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 forprofit 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.
WORKING WITH ISO/MSP MERCHANT SERVICE PROVIDERS
To accept credit cards at your business, you need to establish an account with a credible merchant service provider. Not all merchant service providers are the same. It can be difficult, if not impossible to compare them side-by-side as each one has their own formulas for calculating rates and some provide more tailored services that may be more beneficial for your business. That’s why Lockstep Collect partners with Solupay.
Solupay is consistently among the most reputable payment processors on the market with an A rating on leading rating sites such as CardPaymentOptions.com and an A+ rating by the Better Business Bureau. Solupay works with nearly 40 different gateway providers and is one of the largest partners for First Data which accounts for approximately 70% of all credit card transactions in North America.
Further, Lockstep Collect customers are saving an average of more than $10,000 in credit card fees when switching to Solupay from their current merchant service provider. This represents an average reduction of about 0.52% in the effective rate for credit card transaction fees or about 27% lower than most competitor services.
Solupay also has a 97% customer retention rate which is unheard of in the merchant processor market. And unlike other providers, Solupay is one of the few companies that offers technology solutions to enhance the process so you can get the best rates possible with multiple options to get data that’s meaningful for your business.
Merchant processors manage the credit card transactions and which payment gateway they go through ensuring that the transactions are secure and qualify at the most cost-effective interchange rates for the merchant accepting payments. Depending on the nature of the transactions as well as the amount of information provided with the transactions can cause the effective rate of a transaction to vary greatly. For example, a lot more information is required to qualify for Level 3 rates which are among the lowest possible for any credit card transaction.
Lockstep Collect works predominantly through Solupay for the transactions within the EIPP solution, but you do not have to replace your current merchant processor for payment transactions captured from other retail point of sale devices, payments processed directly from your ERP software, or for payments from your online storefront. You can utilize Lockstep Collect and Solupay’s merchant processing services exclusively for payments processed from the secure Lockstep Collect customer portal or by collectors from within the Lockstep Collect software itself. However, many companies have chosen to switch to Solupay for all payment processing for additional cost savings throughout their business regardless of which system or device generated the credit card payment transaction.
UNDERWRITING & RATE QUOTES
Business credit card merchant service providers will inevitably need to assess the risk that your company and the nature of your products and the potential buyers have in respect to the potential for fraud and the buyer’s ability to pay for the goods and services they purchase from you. Certain industry verticals require a greater attention to detail and information in order to complete the underwriting process. In addition to this as merchants grow, naturally the level of underwriting information that is required tends to grow with it.
The underwriting process entails a review of the business’s financial history of accepting credit card payments. These reviews look to identify if there were past issues within the business such as excessive chargebacks, excessive fraud cases, or other red flags that would cause alarm for the merchant processor or the banks involved in the financial transactions. It also takes into account the factors involved in the typical and extreme transaction scenarios. Some of these factors can include if the transaction is accepted face to face, or card not present. It also includes maximum historical transaction limits or if there is any prepayment involved in the transaction or not. Prepayment could include a down payment for a product, or the payment for a product today that is being delivered or used at a later date such as furniture or event tickets.
Underwriting for transactions that involve business to business or business to government invoice payment typically center on the higher amounts that are common with payments of this sort. Invoice payments for hundreds of thousands of dollars are not uncommon, but need to be planned for to ensure proper cash flow and funding. There is a significant upside to these transaction types though. The Interchange rates for the card that typically are used for invoice payment can qualify for level three transaction rate benefits. These rates are common in the business to business and business to government sector where credit card payment transactions are typically larger than consumer credit card payments and where risk is typically lower. Level three (L3) processing requires that you provide enhanced transaction and line item data about the product or service being purchased. An additional benefit that comes with level three transaction rates is the ability for merchants to qualify for large ticket transaction rates as well.
If you’re able to qualify for level three data on a portion of your credit card transactions you could shave about .80% to 1.5% off your credit card rate for those transactions which could save your company tens of thousands of dollars annually.
The underwriting process is provided by your merchant processor in tandem with your Payment Processor. The rate they offer will depend on other factors including if the product or service is provided to the customer in advance of payment or after payment has been received. This makes sense since vendors (especially manufacturers, distributors, construction companies, and some business service providers) may accept payment or partial payment in advance of providing the customer with the product or service. If they are unable or unwilling to deliver the product or service to the satisfaction of the customer they could face chargebacks with little ability to defend their business credit.
Other factors that could affect your credit card processing underwriting process include how long you’ve been in business, the value of credit card payments accepted compared to the average amount of money you have in your business banking account, your debt to equity ratio, and even the credit rating of principle stakeholders in the business as they may be required to make a personal guarantee on the underwriting application to ensure that any credit issues will be covered by themselves personally (more common in small businesses).
Underwriting will also be determined greatly by your industry. For example, restaurants and retail establishments typically represent relatively low risk to the bank as purchases are relatively small with few incidents occurring in comparison to thousands or even millions of transactions. As such, the retail industry as a whole generally represents relatively low risk to the Payment Processor which will provide a lower rate than they can for businesses in other industries that represent significantly higher risk. Some industries, such as online auctions, adult-industry products, travel and lodging, online gambling, and health supplies (to name a few) are much more difficult to assess and typically have much higher rates.
While it’s very uncommon, sometimes you may need to get your business reclassified in order to smoothly underwrite – especially if the bank doesn’t understand what you do. For example, credit risk will vary significantly for software vendors depending on whether they’re accepting payment for software purchased as a monthly subscription compared to software purchased outright as a licensed and owned product.
Underwriting through Solupay is fast and easy. Once the paperwork is taken care of, Solupay will guide you through the rest of the process and inform you specifically what they will need to get the process moving forward for you. Approvals through their underwriting department can be as fast as one day or up to a week depending on the merchant. Solupay will work with you to get the right information in order to expedite this process.
UNDERSTANDING PCI COMPLIANCE
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.
THE VALUE OF CUSTOMER SELF-SERVICE FOR B2B INVOICE PAYMENTS
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.
There is most often a considerable return on investment to be had for businesses who reduce check-based payment transactions despite the fact that credit cards and direct ACH bank transactions are laden with fees.
Even large companies find it difficult to reduce their dependence on written checks. For example, Goodyear Tire & Rubber reported in 2014 that they continue to pay more than half of their invoices with check even though they estimate that the cost of writing each check is as much as five times as much as processing an electronic payment via credit card or electronic check (ACH).
Accepting credit cards and ACH transactions can also shave several days off the order to cash cycle time as cash is typically received much faster electronically improving your overall cash flow and accept to working capital. Electronic payments also have a much lower chance of failure compared to paper checks that have a much higher insufficient funds rate.
According to the Association for Financial Professionals, fraud is much more prevalent with checks than electronic payments with 85% of fraud cases associated with checks compared to just 28% with ACH and 5% with wire fraud.
Many studies suggest that the business cost associated with processing customer payments via check can represent 90% of the true costs which most businesses never consider. For example, one study suggests that companies invest approximately 260 hours to process 450 invoices monthly when they include the time it takes to prepare the invoice, record the receivables, reconcile payments, and time spent making bank deposits and pursuing delinquent accounts. That’s the equivalent of about 1.5 full time employees with an estimated annual cost of about $45,000 to send invoices with $41,000 of that directly related to labor. By comparison, it’s estimated that the costs associated with electronic payments can be 30% to 60% less with considerable savings in labor. Study after study confirm that electronic payments are much more cost effective than paper checks with another study estimating 50% savings in electronic payments compared to check payment processing.
But the question becomes how to make it easy for your customers to adopt electronic payments when they’re own culture may not support it? First of all, you need to make it as easy as possible for customers to pay you electronically. Forcing them to remember a user name and password to your online bill pay portal creates a barrier – especially when they are dealing with potentially thousands of vendors and you may be among one of the smaller vendors they work with. As such, you need to find a way to eliminate the barriers for your smaller customers while providing additional features for your larger customers.
With Lockstep Collect, you can setup the system to send your customers a secure hyperlink that takes them directly to their online statement where they can pay their invoices online via ACH or credit card without having to login to a customer portal. Or you can optionally provide your larger, high volume customers with a dedicated login to the customer portal where they too can pay their bills online. More information regarding these two online payment strategies is discussed in detail later in this document.
SETTING UP ANYTIME COLLECT FOR ONLINE BILL PAYMENT
There are several ways to leverage Lockstep Collect for electronic invoice presentment and payments (EIPP). It all starts with integration to the backend ERP accounting software where invoices are created and where payments are processed. While most ERP accounting systems have features to send invoices to customers electronically, few provide advanced capabilities to retransmit invoices a second or third time as a reminder before the invoice due date or attached to collection emails when the invoice is past due. Further, most systems don’t provide access to a customer self-service portal where customers can review invoices and pay their bills online.
ERP ACCOUNTING SYSTEM INTEGRATION
Lockstep Collect synchronizes customer account, contact, invoice, and payment information from your ERP accounting software into the Lockstep Collect database. PDF copies of invoices can also be synchronized and uploaded to Lockstep Collect making them available for retransmission to customers via email and accessible to both your internal credit and collections team or your customers via a secure online portal. There are several data synchronization strategies that vary depending on your specific ERP accounting system. For some applications, the data is synchronized based on a userdefined schedule (or manually) using a series of csv files extracted from your accounting or ERP system while other data synchronization strategies leverage direct integration with your ERP data or custom SQL views to access this information. Regardless of your ERP system, there is a way to get the data into Lockstep Collect required to implement EIPP within your organization.
ONLINE BILL PAY SETUP OPTIONS
Lockstep Collect allows you to control which companies in your ERP system support online bill payment. You can also enable or disable online bill pay for specific customer accounts within easy of your companies. Merchant accounts are also defined by ERP company so you can track payments to processed for each of your business entities and define the currency for each business as well as maximum payment amounts permitted for online payments and the associated payment page used for online payments which will include your corporate branding for the selected company. You can edit individual customer accounts as shown below for Kennedy Corporation so that specific customers may be permitted or excluded from making online payments within Lockstep Collect.
INVOICE PDF CREATION & DATE SYNCHRONIZATION
One way to make it easier for your customers to pay on-time is to provide PDF copies of invoices electronically. Some companies utilize document management systems such as Altec doc-link to create these original PDF copies while others do not have copies available and must reprint invoices to PDF format for transmittal to customers. Anytime Docs is an affordable solution which acts as a print driver to print or reprint multiple invoices in a batch to PDF. Anytime Docs works with most ERP and accounting systems and separates the print job into separate invoice PDF files named and stored automatically in a secure network location which can be integrated with the Lockstep Collect data synchronization process. Having the original PDF copy available enables the software to automatically attach the PDF invoice(s) to customer communication created manually or automatically by the software. It also provides access to the PDF invoices from the secured customer portal where customers can view and download invoices online.
SUPPORTING INVOICE DOCUMENTS
The data synchronization 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.
EMAIL INVOICE PRESENTMENT
Lockstep Collect allows you to create workflow based on invoice-level data from your accounting and ERP system where you can have the software automatically send out emails to customers with the PDF copies of the invoices attached. For example, 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.
CUSTOMER SELF-SERVICE PORTAL
You can also allow customers to access their statements online where they can download invoices and pay their invoices through the secure online bill pay site hosted by Solupay. There are two ways to leverage this self-service portal. The first method allows you to provide larger, repeat customers with a dedicated user name and password to login to your customer portal within Lockstep Collect. The customer portal can be private-labeled to include your logo and a link to your RSS newsfeed with information instructing the customer on your remit to address and contact information. Customers can be setup with their own dedicated user name and password to access their accounts securely online. Customers receive a welcome email with information on how to access the customer portal and their specific user name and login credentials. Note that setup of many customers with a dedicated user name and password may be tedious to manage manually. Lockstep Collect consulting services can provide assistance creating customer accounts where larger numbers of customers require user names and passwords. When the customer logs in they are presented with their online statement where they can view and download invoices and supporting documents and other information including customer documents you make available to them online as well as inquiries showing recent payments and invoice history.
GUEST ACCOUNT HYPERLINK ACCESS
Forcing customers to login with a user name and password may not be the right strategy for everyone. Instead, it may be easier for your customers if you send them 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.
Instead, the customer simply clicks the hyperlink which takes them to the portal as a guest user. Here they can view the same information you provide customers who have a dedicated user name or password so they can review information online and pay their invoices online.
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).
VERBAL PAYMENTS IN ANYTIME COLLECT
Credit and collection professionals may optionally take verbal credit card payments from customers from within Lockstep Collect by selecting Inquiries > By Account > Statement. This built-in inquiry provides the exact same customer portal for the collection representative as the online customer portal for the customer themselves. The collector can record the credit card payment for customers that prefer to pay now rather than wait. Further, it’s a best practice in many companies and industries to get payment as soon as possible. After all, why wait for a customer to maybe make a payment online or maybe send in a check when you can take the payment now via credit card and reduce the order to cash cycle time ensuring that you are paid – especially when it comes to higher risk customers.
CUSTOMIZED PAYMENT PAGES
The online bill pay portal connects to a special payment page hosted by Solupay for your company. You can tailor this page to include your logo and accepted methods of payment which may include credit card, ACH echeck, or both payment types.
The page itself can look very different depending on your specifications. You can also include convenience fees and other customized logic into the payment pages provided by Solupay’s consulting and professional services to handle specific situations that relate to your business, your customers’ needs, and industry practices.
Note that customer credit cards are not stored for customers accessing the portal from the guest hyperlink since the hyperlink could be accessed by different contacts within the organization. However, customer credit cards may be saved and retrieved from the secure Solupay vault if the customer has a dedicated user name and password which is defined by contact ensuring that the credit card information on file matches the contact accessing the secure customer portal.
INTEGRATION WITH THE ONLINE PAYMENT PAGE
Lockstep Collect passes the customer identification and amount to Solupay’s hosted payment page. Additional information can also be passed to the page to help you qualify for better rates on the payment transaction. Credit card information is stored only in Solupay’s secure credit card vault ensuring that you remain in compliance with PCI and other regulations. The payment is then processed by Solupay and the results of the transaction are recorded back into Lockstep Collect as a successful or failed online payment.
The Pending Payments Inquiry in Lockstep Collect provides a view of all online payments that have not been reconciled against actual payments in your accounting or ERP system. This information can be exported for import or entry into your ERP accounting system. You may also receive periodic email alerts containing a file with the pending payments if you are using the optional Anytime Alerts module and have configured an alert notification for pending payments.
Lockstep Collect records successful online payments from Solupay’s payment page as Pending Payments until they are recognized as recorded in your ERP accounting system on a subsequent data sync. A notification can be created to alert you if there are pending payments that are not reconciled with actual payments for a period of time such as Pending Payments Not Reconciled 7 Days. Other notifications may be setup for other scenarios such as online payments where the customer’s credit card was declined.
SETTING UP THE PAYMENT PAGE
Solupay will work with you to setup your merchant account and corresponding payment page for use with Lockstep Collect. The process typically takes only about 5 to 10 business days and setup is provided at no charge. A one-time gateway and account setup fee will be assesses initially for about $100. Minimum monthly service fees may be required for account maintenance which is typically around $50 per month assessed by Solupay.
GETTING PAYMENTS INTO YOUR ERP ACCOUNTING SYSTEM
You can export pending payment transactions from Lockstep Collect which can be imported into your accounting or ERP business system or manually entered into your backend software. Solupay can also provide you with remote access to your merchant account portal where you can also download online payment transactions or they can send you an email with the online payments which you can import or re-key into your software. Integration of online payments may also be available where the payments can be automatically uploaded to your accounting system. Automated integration is available for some versions of Intuit QuickBooks and other ERP accounting systems. Contact Solupay for more information about automated integration for your specific ERP software.
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. Credit card funds are typically EIPP-enabled accounts receivable credit and collections applications like Lockstep Collect include alerts to notify financial executives if online payments have not been properly recorded in the backend ERP accounting software to ensure that online payments are reconciled and matched against actual payments in the accounts receivable system. Deposited into your bank account either the same day or the next business day depending on the time of the transaction and some credit card payments may take an extra day to post to your bank account.
Lockstep Collect provides product support for customers with an active maintenance and support plan (for purchased licenses) and for customers with an active subscription to the software. Support for the customer portal is provided by Lockstep Collect. Any issues related to the online payment page or payment processing is supported by Solupay. Issues identified by Lockstep Collect may be passed to Solupay for assistance if they relate to their services.
Solupay supports companies in many geographies including payments from international companies accepting credit card payments in most parts of the world. ACH and bank wire transactions may not be available for some global markets. Contact Solupay for more information regarding the availability of credit card and echeck payments for your customers outside of North America.
Lockstep Collect includes two currencies – the home currency as defined by the ERP company used for aging accounts in a common currency – and a document currency which may be different and defined by customer or down to the transaction document as defined within the ERP system. For example, your ERP system may be setup where your company’s home currency is defined as US Dollars but you may have customers that receive invoices in Pesos, Yen, Euros, or other currencies. Customers and each invoice, payment, or other transaction documents can be presented in any currency supported by your ERP accounting system.