A More Strategic Approach to Payment Acceptance

Transcription

1 A More Strategic Approach to Payment Acceptance A guide to help your institution optimize your payment acceptance processes.

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3 Table of Contents Introduction Payments A Brief History Strategy Formulation Credit Card Scrutiny The Barbell Model About TMS

4 Introduction Despite the progress made in recent years, education still lags behind other industries in adoption of electronic payments. Although cost is a major driving factor, your approach to payment acceptance should be balanced. e Payments This ebook will present a guide to decision making in order to help your institution optimize your payment acceptance processes: Balancing cash flow Reducing direct costs Increasing convenience Easing workload Managing delinquency Raising stakeholder satisfaction 4

5 Payments A Brief History Pre 1970s Interest rate limits on credit cards lifted. Issuance explodes. Dot Com Boom Most credit cards store issued. Cash and check dominate the payment landscape Online shopping leads to an explosion on credit card usage. The payment system in the United States remained largely unchanged from the early part of the twentieth century until the late 1990s with the arrival of the dot-com boom. Sure, credit cards have been around for quite some time, however, prior to the 1970s, most consumer credit was store issued. MasterCard, Visa, and American Express were all established as national brands in the 1970s but didn t really take off until the early 1980 s. In 1982, limitations on the amount of interest credit cards could charge were lifted and as a result more people were able to acquire a credit card (albeit at a high interest rate). The rise of online retail in the 1990s led to an explosion in the usage of credit cards due to their convenience for online purchases. It is amazing, however, that it wasn t that long ago that most people paid by cash or check. 5

6 In some ways, payment acceptance in education has followed the broader trends while in some important areas it has diverged significantly. The payment acceptance trends in bookstores, online courses, and food services have followed that of their for-profit counterparts. Tuition and fees paid through the business office, however, differ significantly from broader commerce trends. Although electronic payments have increased in recent years, a recent NACUBO study indicates that paper checks still make up approximately 1/3 of all payments. Although there are many factors that lead to the high rate of paper checks, including payer demographics / preferences, clearly the most important factor is credit card acceptance for tuition and fees. Many institutions either don t accept credit cards altogether or accept credit cards only with a convenience fee added to the payment. Decisions on payment acceptance are often made based on direct costs and are often binary in nature. In other words, credit cards are either accepted by the business office or they are not. Confusion over credit card network Operating Guidelines lead many to believe that this sort of all or nothing approach is necessary. However, institutions have more flexibility over what payment methods, including credit cards, to accept than they might realize. 6

7 Strategy Formulation 1) Who is the payer? Who is the payer? Is the payer typically a student, a family member, members of the community, an alumnus, or some combination thereof? Students may have access to more limited payment methods than other types of payers. 2) Number of international payments? Do you need to accommodate many international payments? International students face many unique challenges their domestic counterparts don t, including many cultural, logistical, and financial complexities. If this demographic is strategic to your institution it may pay to explore additional options beyond international wires. Electronic bank transfer solutions can be less expensive to the payer and provide better reporting for the institution. International credit card acceptance is easier than it once was due to new partnerships. For example, China UnionPay, BC Card, and JCB Cards can all be accepted through the Discover Network. Dynamic Currency Conversion (DCC) solutions even allow you to present the amount due to the payer in their local currency and take the foreign currency conversion uncertainty away for both payer and institution alike. 7

8 3) Through what channels are they paying? Through what channels are they paying? Electronic payments of all types are faster than manual channels and new technologies such as EMV (also referred to as Chip and PIN) offer the promise of reduced fraud rates. Electronic payment acceptance can speed lines in a Point of Sale/Service environment. 4) What are payments for? What are they paying for? What is the good or service being paid for? In addition to influencing payment amount, payment volume, and collectability, it can also influence the cost of the transaction. Merchants are categorized based on the type of business they primarily transact. That Merchant Category Code can have a significant impact on credit card cost as well as whether convenience fees can be assessed. 5) What is the range of payment amounts? What is the range of typical payment amounts? Your average payment amount is also referred to as average ticket and is a number that is worth analyzing. Credit card processing costs typically vary with the amount of the payment so understanding not only the average ticket but also the variability of payment amounts is important to help understand cost drivers. Credit card payment amounts can also be limited to help cap costs. Car dealerships use this strategy quite frequently. You can imagine that a car dealership might be quite willing to accept credit cards for service visits but quite reluctant to accept credit cards for the purchase of a vehicle. They typically manage this through the setting of credit card maximum amounts which is allowable under Association Operating Guidelines. 8

9 6) How many payments? How many payments do I anticipate receiving? The pain of manual payment processing is magnified with volume. Processing a few hundred checks a year isn t going to kill anyone; however, a few thousand can become an operational nightmare. The pain is intensified when payments are concentrated into peak cycles. 7) Is collectability a concern? Is collectability a concern? In addition to creating additional workload, paper checks have another major drawback to merchants--they sometimes bounce! ACH and EFT payments have the same issue, albeit with a shorter cycle time. Domestic and international wires offer guaranteed funds but at a high cost to payer and payee alike. The real-time authorization of credit cards is an important feature to consider if collectability is a concern. 8) Do I want the payer to buy more? Do I want the payer to buy more? The reason why virtually all restaurants and retail outlets accept credit cards is simple--the cost of credit card acceptance is more than made up for in additional sales. A study commissioned by American Express* found that 25% of AmEx cardholders made charitable contributions while only 15% of non-cardholders made contributions. In addition, 26% of AmEx donations were greater than $500. *GFK-MRI conducted the Survey of the American Consumer from March 1, 2011 through April 1,

10 9) Can I dictate payment method? Do I have the leverage to dictate payment methods? The relative control and influence over payment methods can differ greatly from institution to institution and within institution based on payment category and payer constituency. For example, even at the most selective institutions, alumni can have significant influence on payment methods based on their payment preferences. 10) What is the value of customer convenience? What is the value of customer convenience? This may sound like a loaded question since every well-intended individual would place value on customer convenience. The question is at what cost and what benefits to the institution does customer convenience bring in the form of increased sales, reduced delinquency, and increased advocacy. 10

11 Before answering the questions above, please take into consideration the relative advantages and disadvantages of each of the payment methods within the context of your institution s unique culture and priorities. The chart below summarizes the major advantages and disadvantages of the major consumer payment methods: Payment Method Fraud Risk Cash Flow Direct Cost Convenience Efficiency Collection Risk Brand Impact Paper Checks Moderate 5 7 Days Float ~ $2 per check Inconvenient but familiar Inefficient Return Risk No Impact ACH Moderate 1 2 Days Float echeck Moderate 1 2 Days Float ~$.25 per payment ~$.25 per payment Convenient, but payer less control Efficient Return Risk High Efficient Return Risk No Impact No Impact Cash High Immediate Varies, but potentially high Credit Card Low 1-2 Days Float Debit Card Low 1-2 Days Float 1.75% 3.00% of payment.50% - 1.5% of payment Low Inefficient None No Impact High Efficient Low Potentially positive impact High Efficient Low Potentially positive impact 11

12 Credit Card Scrutiny Of all the payment methods, the one that is most scrutinized, debated, and of the greatest concern is clearly credit cards. The most obvious reason for this is the direct costs as compared to other payment methods. For a closer look at credit card costs, check out our blog post at Talking Edu: A Clearer View of Payment Acceptance. Credit card regulations have been very dramatic the past few years and can vary greatly from state to state. While high direct costs are the major disadvantage of credit cards, they carry many advantages including high collectability, accelerated cash flow, and customer convenience. In our personal lives, most of us use credit and debit cards to make a wide variety of payments and purchases. I personally almost never carry cash, rarely step in a bank branch, and begrudgingly write paper checks when I don t have another option. Nowhere is the love/hate relationship with credit cards more evident than in the payment of tuition. Most institutions adopt one of three approaches: 1. Accept credit cards without limitation and absorb the costs. 2. Accept credit cards with a convenience fee. 3. Don t accept credit cards at all. 12

13 Each of the three approaches has merit and may make absolute sense given institutional priorities. Enrollment driven institutions may look at credit card acceptance as a necessary cost of doing business, recognizing, or at least fearful, about what impact not accepting credit cards would have on enrollment. Institutions with lower tuition rates may gladly trade the fees for the advantages of earlier cash flow and improved collectability. Institutions with higher tuition levels and sufficient enrollment pipelines may decide the cost of credit cards outweighs the advantages and opt to either stop acceptance altogether or to accept only with a convenience fee. Convenience Fees? Convenience fees were originally established by the card networks when the internet was in its more nascent stage as a way of offsetting the cost of offering alternate payment channels such as web or IVR. They were never intended to pass to the consumer costs that the merchant incurs for accepting credit cards. More networks have taken a more flexible stance on credit cards to where they are tolerated if not embraced. Percentagebased convenience fees are most common in education so that the fee effectively scales with the amount of the payment. One nice thing about this approach is the fees are more tolerated for small ticket purchases while discouraging large dollar transactions. The issue with convenience fees of course is that by their very nature they are a source of customer dissatisfaction. Understandably, payers don t see the convenience benefit in convenience fees and don t understand why they can t use their preferred payment method. 13

14 The Barbell Model When considering your institution s approach to credit card acceptance, keep in mind that a more nuanced approach is possible. There are likely certain payment categories where the benefits of credit card acceptance outweigh the higher direct costs. Likewise, there are other categories where the benefits are not as clear where you may want to limit credit card acceptance or eliminate it altogether. When considering your institutional strategy, know that you needn t take an all or nothing approach to credit card acceptance. It is possible to customize your acceptance strategy to your unique institutional needs. I call this more targeted approach to credit card acceptance the Barbell Model. This approach allows you to make the cost/benefit decision to credit card acceptance in a much more surgical fashion. Adopting the Barbell Model, your credit card acceptance strategy might look something like this: 14

15 So, let s look at an example of the Barbell Model in action. If you are like most institutions, you don t want to put up any barriers to donations, so you most likely want to accept credit cards for donations with no fee or limitations. You may have a bookstore, a cafeteria, or similar retail commerce locations where the convenience of credit card acceptance is critical to sales, so you want to accept credit cards along with other payment methods without limitation. Additionally, there may be populations such as continuing education where you wish to accept credit cards without limitation. These payment categories in which you want to accept credit cards at all times without limitations make up the bar of your barbell. They are important, but probably don t make up the majority of your receivables. Most schools have the highest percentage of their revenues in tuition and mandatory fees. These receivable categories are typically less discretionary in nature and therefore the decision of credit card acceptance is much more complicated. For the sake of example, let s say you are willing to accept credit cards for pre-payment of tuition. This can be a legitimate quid pro quo the cardholder gets their rewards points and you get early cash flow. Managing delinquency is a time consuming yet critical process for many schools. Credit cards can be an effective way of clearing up residual balances before they become collection concerns. For more strategies on managing delinquency, please download our free ebook, A Guide to Managing Delinquency at Your School. Admission deposits are another area where you most likely want to reduce friction in the process, and by accepting a wide set of payment options including credit cards, you can increase your yield. Your institutional barbell may look very similar to what I have outlined here or may bear no resemblance whatsoever. The important thing is to carefully weigh the benefits and costs on a situational basis. From my observations, most institutions take more of an all or nothing approach to credit cards, which is understandable. I prefer to look at credit cards as neither good or bad, worth it or not worth it, but rather simply as a tool. Like all tools there are appropriate and inappropriate uses, scenarios where they make your job easier and scenarios where they don t make sense. In addition, the industry keeps evolving and seems to be heading in a more education-friendly direction as evidenced by the recent modifications to the Visa Government and Education program. For this reason, along with the general dynamic nature of education, it is important you evaluate your approach no less frequently than on an annual basis. 15

16 While the Barbell Model might not make your credit card acceptance strategy any simpler, it might just make it more effective. It recognizes the unique differences between difference balance and item types and views the institution and even the Business Office not as one monolithic entity, but as a collection of affiliated points of commerce. The larger point is that you don t need to restrict your credit card acceptance strategy to the three most common approaches outlined above. The Barbell Model is just one of many alternative approaches that may be a better fit for your institution. With any of the approaches, you should consult with your merchant processor to confirm that you are within compliance with Network Association Rules. 16

17 About TMS Tuition Management Systems (TMS) has been an innovator in the education payment services for almost 30 years- and our mission has remained steadfast: to help families afford education and schools prosper. We offer colleges, universities and K12 Independent schools an education payment process process that ensures a quality experience and financial fit for students and families trying to managing the cost of education coupled with a fully integrated payment solution. The TMS suite of products and services delivers the tools, resources and expertise to generate significant cost savings and workload reduction for schools, while increasing the service provided to students and families. Our services include: Affordability Planning and Counseling Billing Services Payment Portals & Gateways Payment Plans Payment Acceptance Refunding & Disbursement Management 1098-T Processing 17