Silver or Gold, Debit or Credit

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Silver or Gold, Debit or Credit

• Steve McArthur
• AMCORE Bank, GFOA Advisor

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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 effective
• Posting errors may be reduced

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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

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Just give me the money!!

• 2000 60 of payments were checks
• 2003 50 of payments were checks
• 19 were Debit Cards
• 23 were Credit Cards
• 8 were ACH
• 2009E 13 of payments will be check
• 49 will be Debit Cards
• 18 will be Credit Cards
• 19 will be ACH

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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

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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

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Cost of Processing

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

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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?

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Advantages

• Reduction of time to clear the customer account
• First in, first out- reduce of NSF checks
• Automated electronic copy, may be sorted for
  updating A/R files

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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

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Cost Consideration

• Equivalent or less than clearing paper
• Some equipment may be needed
• Scanner if using RDC - 300 and up
• Lockbox- varies from 0 to a few pennies
• Reduced storage and copying requirements
• Reduced effort to post payments

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Definitions of Terms

• ARC- Accounts Receivable Conversion A check is
  received for deposit but then converted to an ACH
  item
• WEB- Web or internet initiated. No paper is ever
  issued, but check number and info is used
• POP- Point of Purchase
• TEL- Telephone created

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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.

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Policy

• Authorizations- define who has access to what
  information
• Audit Trails- establish for all electronic
  payments, they will be different from paper
• Segregate Duties
• Supervisor Review
• Background Checks of Employees
• Timely Bank Account Reconciliations- Specify

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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

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Fee

• Discount the amount deducted from the amount
  the customer pays. Negotiate!
• Per Item
• Method- Manual, dedicated line, dial-up,
  internet, terminal style, color
• Type of Payment

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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

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PCI Compliance (Payment Card Industry)

• Significant requirement and responsibility for
  Governments
• Attempts to safeguard information and ensure
  integrity of the industry
• Third party service providers may reduce this
  contingency
• Failure to comply may result in significant
  financial penalties.

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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.

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Getting the numbers

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

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Break-Even Methodology

• Time and hard-cost to create/evaluate the RFP for
  Merchant Card Services. (50 hours _at_ 30
  1,500)
• Time to create new internal policy and procedures
  (30 hours _at_ 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

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Per Item Cost / Savings

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

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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

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RFP Outline

• Intro- special attention to what will be
  collected, estimated volume, average ticket
• Equipment needed
• Settlement period
• Reports
• Fees
• PCI Compliance
• Convenience Fees
• Data Security / Disaster / Liability

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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.

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Payment Consolidators

• Third party service providers
• Receive all payments regardless of the form
  lockbox, auto deduct, credit/debit cards
• Deposit into your bank
• Present payment reconciliation to you in one
  format

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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 system
• Strong relationship to automated bill payment

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Security and Fraud

• Percentages of Organizations that Reported
  Payments Fraud Activity in 2006
• Checks 93
• ACH Debits 35
• Credit Cards 17
• Debit Cards 5
• 2007 AFP Payments Fraud Survey

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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

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Discussion, Success Stories