As an industry, payment card processing has seen a good deal of innovation over the past years impacting every form of business, not just e-commerce. From POS to online and mobile, from credit card to prepaid debit, from single-use to reloadable, their utilization and the use cases for how they are being utilized continue to expand.
But the underlying entities (and their fees) remain largely unchanged: Issuers, Merchant Processors, and the Networks (Visa, MasterCard, Discover, and American Express). The net effect is that the typical B2B organizations generally pay an effective rate between 2.5% and 3%.
No wonder there’s a lot of attention paid to the card processing cost of receivables as a percentage of revenue. And new competitors entering the market. It is a significant bottom-line cost - and a significant revenue source for the players involved.
Enter big tech. Issuers, processors, and networks face new competition: GooglePay, ApplePay, SamsungPay and the like are clever and may improve the user experience of payers but they don’t change the cost of receivables.
What About Processing Fees for Payables?
More and more companies are not only receiving payments via card processing but also using cards to make payments. But at what cost? On the receivables side of the ledger, merchant fees are a cost of doing business -- a significant one. But on the payables side, in many cases, there’s no apparent cost to using the cards. Or is there?
Just think about it. If you’re paying a company with a card, your supplier or partner is effectively receiving 97%, not 100%. That’s not good for their bottom line (nor yours). There’s a reason why more than half of all B2B payments are still made via check -- despite the enormous inefficiency that manual processing places on both the payer and the payee.
Digital payments offer all the benefits of automation -- fewer errors, lower administrative costs, etc. But often, these payment processes are controlled by the same entities that control the receivables process -- banks, processors, and networks -- and the fees associated with them.
What if there were an alternative to this cabal of cost-drivers? Could this create a better user experience and lower the cost of payables -- and your suppliers’ receivables?
No Processor Digital Wallets
An intelligent payments architecture featuring a global payment platform containing multi-currency digital wallets offers such promise. Using APIs to embed these capabilities in software and services with payments use cases is the pathway to achieving that end.
First, the platform needs to provide the ability to create digital wallets and store funds in as many currencies as needed based on an organization’s business requirements so that transactions can be completed instantly. This, of course, requires that all participants on the platform be properly vetted so that KYC and AML compliance is assured.
Next, it must provide the ability to send payments via wallet-to-wallet transactions from anyone on the platform to anyone on the platform --- and dynamically create new payee accounts as needed.
Third, it requires external entry points to allow the wallets to be funded from the traditional sources using existing methods – EFT, ACH, wire transfer, and card processing – and for funds to be transferred readily to external endpoints –banks, bank checks, prepaid debit, etc. – so that payees using the platform can easily access their funds to use as they see fit.
On this platform, built-in currency exchange functionality allows funds to move seamlessly across borders – and at lower FX rates than traditional banks. Moving monies between currency-specific wallets allows anyone to create as many currency-specific wallets as needed to conduct their business. If you’re paid in Euros but your organization does business in USD, it’s easy to move the funds to your USD wallet before transferring to your bank. Similarly, if you’re doing business in USD but your partners or suppliers need to be in their local currency you can create a digital wallet to hold enough funds to pay them in their currency.
Innovation – It’s Not in the Cards, It’s Up to You
Clearly, digital wallets have advantages in cost and speed as we’ve laid out here and in prior posts. The challenge, of course, is adoption.
The ubiquity of cards and using banks to process financial transactions is not going to change anytime soon. That’s why the entry points and endpoints are so critical. The platform may provide options to bypass banks, processors, and card networks but it leaves that choice to its payers and lets them determine how to integrate them into their business processes or leave the choice to their payees.
For example, not every payee may want to be paid digitally. To see the benefit, barriers to receiving payments digitally may need to be lowered incrementally and not every payee use case is not the same. For instance, it may prove easier in some use cases to send a payment directly to a payee’s bank account.
This can be readily accomplished using APIs to directly send a payment to the payee’s bank, but it requires the payer to know the payee's account and routing information. Whereas by using the platform, the payee enters all this information securely and it doesn’t require to capture, maintain, and store any PII.
Another example is that the best source for funding a payer’s wallet may well be from card processing, while the primary advantage of using the platform is the ability to aggregate the funds and automate their disbursement instantly to suppliers and partners. Effectively, it doesn’t impact the cost of receivables, but it can dramatically improve payables workflows.
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