RBA to ban "excessive" credit card fees

[Timtammi]

We are primarily selling to trade so many have credit accounts



Surely this costs you more than the CC fees?

I guess you could argue it does but its expected in our industry. We would be out of business if we could not offer credit facilities. Its not an obvious cost though, just means we have to manage cash flow and it takes up some of the time of the employee who administers running the receivables/chases the money but her salary is a sunk cost anyway. We run it pretty tight and don't offer credit to everyone, we also shut the bag pretty quickly for those who don't pay. On top of that we offer an EPD to induce those with credit accounts to pay early.

Cheers

 

[Alanslegal]

I have no issue with surcharging as long as its FULLY disclosed before I commence any transaction, not when I have entered in all my details and about to hit the "are you really sure you want to continue?" button.

 

[Timtammi]

I have no issue with surcharging as long as its FULLY disclosed before I commence any transaction, not when I have entered in all my details and about to hit the "are you really sure you want to continue?" button.

Totally agree with the above. Very annoying. Our invoices show the amount due and our banking details for EFT and then to the side it has a box which indicates we also accept Visa/MC with a 2% surcharge and calculates the cost including the extra 2%. Can't be clearer than that!

 

[dajop]

My main problem with surcharging and what is reasonable is that it needs to take into account that every form of payment has a cost. So if it costs a hotel 1.5% for processing credit card transactions which builds its whole business model around CC payments, then the question how much more than other forms of payment is that?

IIRC, EFTPOS is cheapest, then cash, then CC, then accounts .... this is the rubbish bit about the whole CC charging is that all types of transactions have either direct or indirect costs associated with them. I guess the real cost of CC and other non-cash transactions is that tax cannot be avoided in the same way that it can on cash transactions

Just interesting having now seen the other side of the table in Singapore where I often get rebates or discounts for paying by CC as opposed to surcharges!

 

[Cruiser Elite]

I am one who des have major issues with CC surcharges - IMHO it just should never have been made legal.

Again IMHO it is just a cost that should be build into product / service pricing. I have a number of business that accept CC and never have nor never will implement a policy of CC surcharging.

We have 1 long standing business that for is totally self service and 100% cash - and by cash I mean $1 and $2 coins - handling cash is so onerous - banks are absolute pains in cough how they now require cash to be counted / bagged / recorded / presented for deposit - in the early days we would just front up to bank with calico bags of $1,000 in $1's and $2,000 in $2's. Coupla years back we installed CC terminals and we just cannot convert enough customers over to CC usage.

But of course this aint Russia so we are all free to have our opinions.

 

[Moopere]

I guess you could argue it does but its expected in our industry. We would be out of business if we could not offer credit facilities. Its not an obvious cost though, just means we have to manage cash flow and it takes up some of the time of the employee who administers running the receivables/chases the money but her salary is a sunk cost anyway. We run it pretty tight and don't offer credit to everyone, we also shut the bag pretty quickly for those who don't pay. On top of that we offer an EPD to induce those with credit accounts to pay early.

Cheers

Surely though, the lost opportunity cost of money you have invested in stock, which then goes out to your customer on account, who then pays you in 30-60 days is larger than 2%? In other words, you'd be better off swallowing the 2% CC cost and getting your money in 2d rather than letting stock out the door for 30-60d with no cost-of-money recovery?

When I was dealing wholesale/retail the cost of accounts was part of the cost of doing business, as almost everyone had an account. So, the customer facing price was the price of the stock + overhead (including account) + margin.

$100K for 60d at shall we say 8% P.A. = $1315, say you made 5% as nett margin on the sale before cost of money = 5000. 5000 - 1315 = $3685 on 100K every 60d

Money invested in customer account over 60d = 100K, return on the 100K in the 60d = 3685


$100K returned via CC transaction every 2d say, at 2% = $2,000. 5% margin = 5,000. 5000 - 2000 = 3000. But you can do this 30 times during the equivalent 60d "account" period, so,

Money invested over 60d = $3M, CC fee's = 60K. Margin over 60d = $90K


The above assumes your business is ultimately constrained by your own ability to buy stock of course, but if this is not the case, and you have idle cash, you still have the opportunity (or lost opportunity) cost of money ... you could invest the spare money in the bank for example or other income producing activity.

My business dealings have pretty much always been money constrained. ie; If I could get more money/credit/overdraft I'd make more money. The "wall" has always been the maximum credit line I could obtain for the business. I understand that different businesses have different problems and strategies ... however, in general, and speaking with my peers, cashflow is always king. Getting paid early means one then has the opportunity to make more money.

 

[Timtammi]

Surely though, the lost opportunity cost of money you have invested in stock, which then goes out to your customer on account, who then pays you in 30-60 days is larger than 2%? In other words, you'd be better off swallowing the 2% CC cost and getting your money in 2d rather than letting stock out the door for 30-60d with no cost-of-money recovery?

This assumes an either/or scenario. That is, that the account customer would happily pay via CC instead of purchasing on account if I did not charge a credit card surcharge. Nothing could be further from the truth. Most want to purchase from us and then onsell to their customer, collect the money from their customer and then pay us. They need the 30 - 50 days we provide as a credit line in order to do this. Most would sell to their customers cash up front as they are one off sales but they are buying from us on a regular basis so we provide them with a credit account. The 2% EPD we provide as an incentive for them to pay within 7 days of invoice means a small percentage (those with no cash flow issues!) choose to take this up and we get our money sooner. The CC option (with surcharge) is not even offered to our account customers, its there for the occasional customer who has no credit facility with us anyway. Our ERP system provides different invoice templates with different payment options depending on the type of account the customer has.

 

[Timtammi]

I should also add that for the account customer it means that they can place a PO and we will just ship on account and they only need to pay us once a month (we do EOM + 20 payment terms) without having to worry about lots of CC transactions. Plus some of what we sell are fairly large ticket items so for some resellers who don't have high CC limits paying by CC would not really work for them either.

 

[simongr]

Those EPD are a risk though - you need to have really worked through the cost/benefit on them...

 

[Timtammi]

Hi there Simongr

How is offering an EPD (early payment discount) to account customers to pay early a risk? I guess if everyone took them up we make less, but we do get our money faster. I actually wish more of our customers took them up but these days less and less choose to do so it seems.

 

[simongr]

Depending on the terms we have found that the EPD amounted to effective interest rates in the hundreds or %. You get money faster but the interest you earn on getting the money faster is far outweighed by the discount you provide - if the discount you are providing is quite small and for very early payment then the risk is lessened.

 

[Timtammi]

Ok, I see what you mean.. interesting.. I've never done an analysis of that, might have to crunch some numbers! Although we aren't earning any interest on the money in the bank, simply minimising interest paid on our overdraft. My head is starting to hurt now..

 

[awilcockson]

My head is starting to hurt now..

LOL, I started to do up a scenario to show why CC would be cheaper than credit accounts, but gave up for the same reason

 

[trippin_the_rift]

Surely this costs you more than the CC fees?

We did a cost analysis of this many years ago and discovered it was of more value to the business to accept CC and absorb the %.
Off the top of my head, this included things like...

- Cash upfront (combank now does same day settlements), no need to wait on 30-45 day terms with credit accounts (infact this gave our customers more time to pay as most cards are 45+ days).
- Less work for bookkeeper to chase up (saves us 1/day week in wages).
- Increased volume through merchant which allowed for better merchant rates overall (a touch over 1%)
- Virtually zero risk of any accounts defaulting, which can be devistating when operating on lower margains.
- More customers will come to the business because of zero surcharging.

Even without any commitment or history with the bank were able to get a 1.3% merchant. The director/s didn't have any PB or special relationship either. This is the standard rate so I don't know why some businesses think that 2, 3,or 10% is even nearly justified as a 'cc surcharge'. Perhaps a 'boat fund' description is more appropriate.

For any business owner saying that CC% is required - I'd love to see the cost/benefit model used, because I'm betting there are factors not looked at which are costing MORE money. I'll give one example: Hilton. I book prepaid rates because there is no surcharge%. If I book a flexible rate (often 80% more $$$), I get surcharged and therefore won't book them. Lost revenue for Hilton.

 

[Timtammi]

I agree that having everyone pay upfront on CC would be better for us, for all the reasons outlined by trippin. However, I think our resellers would mutiny if we pulled credit facilities from everyone and just told them they could pay on CC instead with no surcharge. I just don't think that would go down well at all.

 

[trippin_the_rift]

I agree that having everyone pay upfront on CC would be better for us, for all the reasons outlined by trippin. However, I think our resellers would mutiny if we pulled credit facilities from everyone and just told them they could pay on CC instead with no surcharge. I just don't think that would go down well at all.

Get their CC's on file and auto-charge them every 7 days. If they want to keep their extended payment terms, impose a 'credit facility' monthly charge of $500.

Win Win!

AFF is a great business resource

 

[Timtammi]

I like the way you think trippin I really do... not sure they would think its win/win though. Something to surely think about though. Right now I am working through our new Terms of Trade to take into consideration this new PPSA stuff so it would be an ideal time to change things if I was going to.. hmmmmm..

 

[Moopere]

This assumes an either/or scenario. That is, that the account customer would happily pay via CC instead of purchasing on account if I did not charge a credit card surcharge. Nothing could be further from the truth. Most want to purchase from us and then onsell to their customer, collect the money from their customer and then pay us. They need the 30 - 50 days we provide as a credit line in order to do this.

Yep, I understand and agree. Was also the case for me when I was in this game. My created scenario above won't be a whole of business solution, but it was working the numbers to show a point.

A certain percentage of small business who deals with you will value the 'untaxed' FF points gained by doing business in that way. If they can be convinced to use a CC instead of their current 30d account then you would, I think, ultimately win because your cash is back working for you sooner. Part of the carrot/stick is to offer this service surcharge free, I'd be surprised if you actually lost out of the deal, and its a huge statement of goodwill to your customers.

Even for those not savy on the FF thing, don't forget that many business type CC and charge cards can be obtained with essentially 55d interest free (not all by any means, I know), which also gets around the problem, for your customers, of wanting to be paid before they settle their wholesale accounts. So, you transfer the burden of being the "bank" to a ... bank (smile).

So, sure, surcharge free CC acceptance won't overnight change a long established business model completely. The key to me, in this type of situation, is getting paid in full and early. You gain a significant competitive edge and appear to be really flexible to your customers.

But, of course, you can't beat your existing customer base around the head with a CC baton

 

[Timtammi]

Actually any account customer that chooses to pay their account early with a credit card would not be charged a CC surcharge as things stand now. Maybe I should just make that obvious to them! It just doesn't come up as they all pay us via EFT run on or around when the invoices fall due.

 

[anat0l]

I like the way you think trippin I really do... not sure they would think its win/win though. Something to surely think about though. Right now I am working through our new Terms of Trade to take into consideration this new PPSA stuff so it would be an ideal time to change things if I was going to.. hmmmmm..

Should you possibly consider enlisting trippin_the_rift's analysis and expertise as a business consultant? :mrgreen: