Aside from paying taxes, one thing’s certain – all businesses need to be able to receive payments for their products and services. But what might seem the most cost-effective solution may actually end up with a higher cost. With the rise of technology, processing payments on a daily basis has changed dramatically over the last 20 years. Cheques, in particular, are becoming a novelty of the past and as we move further ahead in the digital era, there are a plethora of different options available. Put simply, it’s a minefield – gateways, terminals, merchant accounts, PCI, processing fees etc can be particularly confusing even for more experienced business owners. In this brief guide, we’ll explain how to narrow down the best solution for your business.
Identify your customer expectations
When considering which options to process payment, the customer’s experience and expectations should be at the forefront of your decision. Converting a lead or enquiry into a transaction needs to be made as easy and convenient as possible for a potential customer. Whether you’re a tradesman or run an e-commerce business, in today’s society, consumers expect the process to be hassle-free. Whilst accepting cash or a bank transfer has no direct fees associated, you may find that by not accepting credit or debit cards could cause you to lose more business than it would cost to have a payment terminal! Particularly so at the moment, cash can be very inconvenient for a consumer to get hold of and best case, it may delay a purchase. There are some key questions to consider when narrowing down payment methods:
- Which payment methods are my primary competitors offering? It may be that your competition’s methods are inconvenient, in which case there is an opportunity to make the buyer journey easier through your business.
- Is there at least one option for every customer type which would be considered quick and easy? If your target audience needs your services in a hurry and they’re often on the road (eg. tradespeople) then telephone payments are likely to be more convenient than ordering online. If you have a brick and mortar store, contactless payment should be an option.
- Would your customers expect to pay in full upfront for your service? Higher value transactions, particularly in B2C will often benefit from offering a finance option. There are many different providers such as Divido which handle this aspect, enabling you to receive the full payment upfront whilst your customer pays in instalments.
Choosing your payment methods – consider the benefits and drawbacks of each
Each payment method has it’s pros and cons. Some of which are less obvious, particularly if you’ve never had to setup that method of payment before. We’ve identified some of the less obvious benefits and drawbacks of each popular payment method below:
One of the key advantages of bank transfer to a business is that the transaction is final. Unlike card terminals, there are very few circumstances where a BACs transfer can be reversed. This helps to reduce the stress and financial risk of a potentially fraudulent transaction for your business. If there is a dispute, the funds are in your control and then ensures customers follow your dispute or complaints procedure as opposed to pre-emptively issuing a costly chargeback. On the other hand, bank transfer is a higher risk for the consumer as they have no easy recourse if there’s a problem and as such, if this is the only option, it may be a barrier to purchase. Bank transfer may be the best solution for businesses charging for high-value products or services and a deposit is required as there are no transaction fees (depending on your banking).
We’re all familiar with using Direct Debit to pay for our utilities, loans and subscriptions, but over the past 5 years there has been a huge increase in the number of payments via Direct Debit. New services such as Go Cardless are enabling businesses to process Direct Debit payments for both subscription and one-off payments. There’s no paperwork or physical signature required and your customer can fill out a simple online form in less than 60 seconds. They’re also protected by the Direct Debit Guarantee for peace of mind, unlike Bank Transfer. Typically, processing fees are considerably less than a card terminal, with some providers capping the fee at a maximum of £2. The primary disadvantages of this method is that processing times can be 3-5 working days, so if the product or service is time-sensitive, you may not wish to part with goods until the payment has cleared. There is occasionally the risk of the payment bouncing in a similar way to a cheque.
A household brand name for many, PayPal is renowned for its simplicity, allowing customers to purchase goods online with pre-saved card details. Unfortunately the cost of PayPal for SMEs turning over under £250k per year, it’s perhaps the most expensive option with fees currently at 3.4%+20p. The advantage here is that it’s almost as easy to create a PayPal business account to receive payments as it is to create a Facebook account, unlike a traditional credit/debit card processor which can take weeks to setup. If you opt for PayPal, although they do accept guest purchases (ie. just with a credit/debit card), many consumers are not aware of this which can result in lost sales. If possible, have another payment option available too.
Credit/Debit Card Processor
For most businesses, this is a fundamental option. If you’re unfamiliar with how these are setup, it’s best to speak to a provider for more in-depth information. At it’s simplest, to process credit card payments either via the telephone, physically via a card machine or digitally online, you require two services: a merchant account and a processor. The merchant account acts as an intermediary bank to hold the funds and the processor handles the actual transaction and security checks. Confusingly, some providers such as Stripe or Sage offer a combined service, whereas others may only provide one of the two. The advantage of a combined service is that some will handle the PCI compliance (legal procedures which must be adhered to for security) for you.
Handling PCI compliance yourself involves a lot of documentation, procedures and forms and if you’re not familiar with it, it may be best to go with a combined service. Stripe for example, offers a very simple setup solution and can be used for both telephone and website transactions, however when opting for a combined service, usually the transaction fees tend to be slightly higher. If your predicted turnover is above £1 million per year, savings on fees can be substantial and to get the best rates, often you’ll need to shop around for the most competitive merchant account. Some processors may offer Apple or Android Pay, which for low-value transactions under £100 can really aid with your conversion rates.
Other considerations and final thoughts
When deciding which payment methods to offer, it’s also important to consider how they will integrate with your bookkeeping and accounting services. Depending on your accounting software, you may have access to bank feeds which automatically import the transactions into your account. For example, on Xero, Go Cardless and Stripe both have a seamless integration which will import the transactions each day, making it very easy to reconcile your payments to invoices. On the other hand, PayPal, whilst it offers an integration, it can be very time consuming to reconcile payments because PayPal deducts its fees at the source (ie. from each payment). This means that the net amount you receive for each payment is different from the invoice amount, making it more time consuming to match payments to invoices and to account for the deducted fees. If you’re processing a high volume of orders via an online or telephone payment terminal, Stripe will save a lot of time bookkeeping as the fees are a separate transaction when the statements import.
The best payment methods to accept depend on your particular use case. Remember that although some methods may have higher fees, the cost of not having certain payment methods may outweigh the outlay. It’s important to ensure you’re clear on the fees and any compliance involved before committing to any provider.