The system you use to get paid might not be the most glamorous part of your business, but it could be having a huge impact on its performance. The right payment system can help you get paid on time, improve your cash flow and reduce the time you spend on admin. The wrong one could leave you chasing debt and burden you with hours of unnecessary admin.
With technology constantly improving how payments are made and received, you should measure up all your options to ensure you are using the best formula for your business, as well as protecting its long-term health.
This guide covers the main payment methods available to small and medium sized businesses (SMBs) in Australia and the pros and cons of each.
Cash and cheques
Digital payments are on the rise, but for many SMBs, particularly those running service businesses such as restaurants and smaller shops, hard currency remains a big part of everyday life.
Small firms are also more likely to use cheques than their larger peers, though cheques account for just five per cent of all non-cash payments made each day by businesses or individuals in Australia, according to the Australian Payments Network (APN).
One in five Australians say they often pay in cash because the merchant has given them no other option, the Consumer Payments Survey reveals. Those who pay by cheque also insist it is frequently not their choice, but because merchants prefer it.
This old-fashioned approach typically stems from a stubborn belief that handling card transactions or digital payments is expensive. But a huge amount of time and money is wasted by business owners processing cash and cheques.
- Speed. Cash payments are immediate (although cheques are not - see Cons below)
- Costs. Cash and cheque payments incur no transaction fees.
- Payment failures. Failure rates are non-existent with cash, though cheques have been known to bounce.
- Consumer preference. People increasingly carry no cash. Only one in three consumer payments in Australia in 2016 was made by cash compared with almost 70 per cent a decade earlier, the Reserve Bank of Australia (RBA) says. Businesses may lose sales if they insist on cash payments.
- Admin time. Banking cash or cheques involves a lot of admin. What's more, keeping track of cash and cheques can complicate bookkeeping. The taxman will expect to see detailed records of cash transactions.
- Speed. Cheques usually take three days to clear, causing delays in cash flow.
- Fraud. Cash and cheques can be counterfeited. Retail and hospitality businesses are particularly vulnerable to being paid in counterfeits.
Credit and debit cards
Aussies love their plastic – there are 45.6 million debit cards in circulation in the country, and 16.7 million credit cards, RBA figures show.
The Australian Payments Network (formerly the Australian Payments Clearing Association) clears card payments via its IAC network. And, increasingly, the sums involved are getting smaller as more people use cards for everyday items, such as buying a cup of coffee.
Australians are using their cards more often both in person and online for one-off purchases. Credit and debit card transactions have increased at an average annual rate of 11 per cent since 2007, so SMBs in the retail and e-commerce sectors must take card payments if they want to stay relevant, for example through an online payment gateway or by having a point of sale or EFTPOS machine to process cards.
Merchants who collect regular payments from customers (for example subscriptions, instalments or monthly invoices), may also process these by debit or credit card, since card details can be stored for future use. However there are downsides to using card for collecting regular payments, since transaction fees are high and payments are more likely to fail (see Cons below).
- Consumer preference. Debit and credit cards are in everyone’s wallets, so they are an easy way to take payment for one-off and spontaneous purchases.
- Flexibility. For businesses who take regular payments from customers, setting up automated recurring card payments can help avoid late payment, since a business can charge a customer’s card automatically when money is due (card details can be stored for future transactions). Cards are also flexible, as businesses can take varying amounts at differing times.
- Speed. Cards are efficient for making one-off purchases that need upfront payment. Funds arrive in the business’s account very quickly.
- Cost. For businesses who take recurring payments, card processing fees can be expensive, with costs per payment (typically 2-3%), plus monthly charges. If you are a retail business dealing in spontaneous payments, EFTPOS machines can be costly to run (and sometimes fail to connect in areas with poor reception).
- Payment failures. Payment failure rates can be higher than expected, particularly when taking regular payments on the same card. This can be due to cards expiring, being cancelled (when lost or stolen), or being declined if a customer goes over their spending limit.
BPAY is a bill payment platform that operates through the online, mobile and telephone banking services of more than 150 banks and financial institutions in Australia, allowing payments to be made to businesses or individuals registered as BPAY billers.
About one in five of all bill payments in 2016 were made by BPAY, with the system accounting for 1.5 million transactions every day worth $1.3 billion.
BPAY has been around for 20 years, but its use has seen a slight decline in recent years. The RBA puts this down to the growing trend for automated payments and Direct Debit.
- Speed. BPAY payments are fast. Money hits a business’s bank account the next banking business day. Funds are collected efficiently, which is good for a company’s cash flow.
- Set-up. It is relatively quick and easy to set up as a BPAY biller. A business applies to its bank, which typically takes between five and ten days to complete the process. Alternatively, SMBs can use third party providers who will set up businesses with BPAY via their merchant account, so companies do not have the hassle or cost of getting one of their own.
- Customer preference. Customers have a choice about how and when they make payments since they can use a bank’s full range of services - mobile, online or by telephone.
- Costs. There can be hidden costs. Each financial institution sets its own fees for the BPAY service, which vary dramatically. Some charge for every transaction, while others impose a large fee if a company exceeds monthly activity limits. There are also costs associated with transaction errors. Customers can make mistakes, for example sending money via BPAY to the wrong biller or using an incorrect reference number. Banks then charge the individual a trace fee of anything between $15 and $35 to recall funds.
- Customer preference. Some businesses will not accept credit card payments through BPAY as they incur higher bank fees. This may limit a B2B company’s customer reach.
- Access. Access is occasionally a problem if a bank’s services are disrupted.
PayPal is third party processor of online payments. Providers like PayPal don’t require sellers to have a merchant account. They are often cheap and easy to set up in the short term, but they don’t settle funds daily and their fees may be high.
- Customer preference. PayPal is a well-known brand, which customers may find reassuring.
- Set-up. Set up is fast and there are no set-up, withdrawal or cancellation fees, and no lock-in contracts.
- Costs. PayPal charges 1.5-2.6% per transaction depending on your sales volumes, plus a $0.30 transaction fee (more for international transactions).
- Payment failures. Since PayPal uses card network, payment failure rates tend to be high (when compared to BECS Direct Debit for example) - typically 3-5%.
BECS Direct Debit
The BECS Direct Debit system, also known as Direct Entry, allows for payments to be taken automatically by businesses directly from customers’ bank accounts, avoiding expensive card networks.
These types of transaction are simple, fast, flexible, and especially suited to recurring or regular payments, such as memberships, paying by invoice or subscriptions.
After the initial set-up or ‘mandate’, which authorises the business to take funds from the customer’s bank account, the company can then take payments of variable amounts at variable intervals without the need for further customer consent.
Many Australian SMBs use a third-party processor, such as GoCardless, to handle Direct Debit transactions for them, since this means they can avoid the cost and effort of setting up a merchant account and managing the ongoing process.
This regular payment method is proving increasingly popular – use of BECS Direct Debit grew by almost 37 per cent between 2011 and 2016, APN research shows. In particular, small firms favour it as a simple, low cost process, which sees money reaching their accounts reliably.
- Control. Late payments damage an SMB’s cashflow, and companies in Australia have the worst record in the world when it comes to paying outstanding invoices, according to research by MarketInvoice. Automated Direct Debit payments ensure monies owed are paid on time and in full.
- Flexibility. The amounts paid and the frequency with which they are delivered can be varied by the merchant.
- Costs. There are no hidden costs to BECS Direct Debit, and, while charges vary between providers, about one per cent per transaction is the norm. Direct Debit is so cheap because it does not use Australia’s expensive card network.
- Payment failures. Payments rarely fail via BECS Direct Debit because funds clear through the BECS system – bank to bank – rather than using cards, which may expire, be lost, or get stolen. Payment failure rates vary from company to company, but as little as 0.5 per cent of payments via GoCardless ever fail. Fewer payment failures and reduced customer churn leads to better retention of customers for the long term.
- Speed. BECS Direct Debit is not ideal for one-off payments that need to be paid immediately, such as e-commerce transactions, as it takes at least three days to collect funds. However, GoCardless does process one-time payments for customers where time is not an issue, or for those concerned about cost (BECS Direct Debit is significantly cheaper than card payments).
BECS Direct Debit payments through GoCardless
SMBs need payments delivered quickly and reliably in a manner that is both secure and affordable. And that is what GoCardless provides:
- Plug in to your business. Use GoCardless from within your existing accounting, billing and membership software, including Xero and Sage, so you don’t have to disrupt your workflow
- Set and forget. Simple online management and automated payment collection.
- Fast and free set up. Import existing customers and start taking payments within minutes.