Silver or Gold, Debit or Credit

Steve McArthurAMCORE Bank, GFOA Advisor

When is a decision, not a decision?

Accepting electronic payments is expected by customers.Processing costs, everything considered is often cheaper.Fraud prevention, can be more effectivePosting errors may be reduced

Receiving and Billing

Receiving Direct, recurring

payments At the point of

sale Phone On time, on-line Credit Debit

Billing Paper and

electronic Electronic only,

paper on request Services only Tax Licenses and User

Fees

Just give me the money!!

2000: 60% of payments were checks2003: 50% of payments were checks

19% were Debit Cards 23% were Credit Cards 8% were ACH

2009:E 13% of payments will be check 49% will be Debit Cards 18% will be Credit Cards 19% will be ACH

Top Benefits Cited for Receiving Electronic Payments

Cost Savings 59%Improved Cash Forecasting 41%STP to A/R 32%More efficient reconciliation 31%Fraud control 29%

AFP 2007 Survey Results

Barriers to Increasing Use of Electronic Payments

Difficult to convince customers to pay electronically 32%Customers lack ability to pay electronically 25%Internal shortage of IT resources for implementation 38%

AFP 2007 Survey Results

Cost of Processing

Trend: Checks are decreasing in volume, Fed continues to close check processing centersPrice to clear paper checks has risen and will continue to rise

Payments Convergence

Definition: The migration from paper to ACH Remote Deposit Capture- converts paper at

your office into an ACH Lockbox Services On-Line- Paying all bills on-line (Growth rate

equal to 3% per year) Automated Payments Decreased usage of Credit Cards? Affinity

programs losing popularity?

Advantages

Reduction of time to clear the customer accountFirst in, first out- reduce # of NSF checksAutomated electronic copy, may be sorted for updating A/R files

Customer Consideration

Customer Notification Consumers must be given notification

that their check may be converted to ACH. They have the right to opt-out if they take certain action. History has proven less than ½ of 1% opt-out. Statement stuffer On-line notification Counter notice

Cost Consideration

Equivalent or less than clearing paperSome equipment may be needed: Scanner if using RDC - $300 and up Lockbox- varies from 0 to a few pennies

Reduced storage and copying requirementsReduced effort to post payments

Definitions of Terms

ARC- Accounts Receivable Conversion: A check is received for deposit but then converted to an ACH itemWEB- Web or internet initiated. No paper is ever issued, but check number and info is usedPOP- Point of PurchaseTEL- Telephone created

Getting Started

Some methods are as easy as calling your bank, notifying your customers, and turning the key!Internet payment options offer more challenges, including unique data integrity and security concerns.Internal written procedures are often neglected, but are vital.

Policy

Authorizations- define who has access to what informationAudit Trails- establish for all electronic payments, they will be different from paperSegregate DutiesSupervisor ReviewBackground Checks of EmployeesTimely Bank Account Reconciliations- Specify

Credit and Debit Cards

Merchant Card Services Provide an entry point into a clearing

system Third party- industry dominated by a

few players, banks- while offering the service- are rarely the actual providers

Fees and rules apply

Fee

Discount – the amount deducted from the amount the customer pays. Negotiate!Per ItemMethod- Manual, dedicated line, dial-up, internet, terminal style, colorType of Payment

GFOA Recommended Practice

Benefits Increased certainty of collection Reduced return check processing cost Accelerated payment and availability Improved Audit Trail Reduced Cashiering Cost Enhanced Customer Convenience Increased Participation Improved overall Cash Flow Reduced Collection Cost

PCI Compliance (Payment Card Industry)

Significant requirement and responsibility for GovernmentsAttempts to safeguard information and ensure integrity of the industryThird party service providers may reduce this contingencyFailure to comply may result in significant financial penalties.

Convenience Fees

Consider whether or not to charge a convenience fee. They may be used to recoup the cost of merchant fees.Disadvantage is that they may deter some from using cards.Card companies have strict (and confusing) regulations that limit the use of convenience fees.

Getting the numbers

Adding more payment options will require more procedures, redundant systems, and add liabilityBenefits will accrue when you begin receiving enough volume to get benefits that will offset cost.How?

Break-Even Methodology

Time and hard-cost to create/evaluate the RFP for Merchant Card Services. (50 hours @ $30 = $1,500)Time to create new internal policy and procedures (30 hours @ $30 = $900)Training staff (16 hours X 4 X $30 = $1,920)Upgrade A/R System ($2,500)Added Audit Fee ($1,000)Total Start Up Costs: $7,820

Per Item Cost / Savings

Discount Fee 1.9% ($3,000,000 charged, 6,000 transactions) $57,000Reduced Return Check Processing (reduced 50%,300 fewer at $30) $9,000Accelerated Availability – one day, $170Reduced Cashiering, 25% of one person, $31,000Increased sales (1% growth) $30,000Net first year: $5,350 positive

Two Keys

Maintain tight control of fees paid to card processors and third parties RFP Process Risk Management

Gain Rapid Participation Fast volume equals fast breakeven Reduction of legacy payments

reduces cost

RFP Outline

Intro- special attention to what will be collected, estimated volume, average ticketEquipment neededSettlement periodReportsFeesPCI ComplianceConvenience FeesData Security / Disaster / Liability

Selling the Service

Demographics are always in your favor!Take a page from a sales manual: make electronic payments the second option you present! (Auto debit is always the first)Use electronic billing.

Payment Consolidators

Third party service providersReceive all payments regardless of the form: lockbox, auto deduct, credit/debit cardsDeposit into your bankPresent payment reconciliation to you in one format

Electronic Bill Presentment

Most cost efficient method- reduces paper and printing, postage, time delay, and encourages electronic payments.Improve internal processes, reduce errors, integrate with bank, A/R, and constituent relationship management systemStrong relationship to automated bill payment

Security and Fraud

Percentages of Organizations that Reported Payments Fraud Activity in 2006

1. Checks 93%2. ACH Debits 35%3. Credit Cards 17%4. Debit Cards 5%2007 AFP Payments Fraud Survey

References

Payment Card Industry Standards: https://www.pcisecuritystandards.org

GFOA Recommended Practice Acceptance of Credit and Debit Cards

GFOA Recommended Practice Payment Consolidation Services

AFP 2007 Payments Fraud Survey

Discussion, Success Stories