Merchant fees - to oncharge or not to oncharge?

Let’s start at the beginning, what are Merchant Fees? Put simply they are charges that a business incurs from using certain payment types, primarily credit cards. They are usually a percentage of the transaction cost and vary depending on your provider. Ignition charges between 1.75% and 2.50% depending on what payment method is used and what plan you are on (Professional or Scale).

In the service industry, the traditional method of taking payment has been via electronic transfer, cheque or even cash (remember those days 😉).

The reality of this situation for many were debtors that dragged on for days, weeks, months and even years with some turning into bad debts that needed to be written off. The reason for this is that you really had no way to protect your position and guarantee payment and your clients were in complete control over when they wanted to pay you.

If you were an accountant you may have run a trust account, which meant that you could take payment out of a client refund with the appropriate authority. I remember those processes well, the paper authorities requiring manual signing, the need to reconcile refunds to the correct client accounts, splitting payments to transfer to the correct bank accounts and then having the accounts audited every year. It also relied on your client having no outstanding ATO debts and always getting refunds.

If things got out of hand you may have even used a debt collection service (at a fee) and spent hours of your time or your team's time chasing those debts (billable hours down the drain).

So for many accountants you were left in a situation where you had no control over payments coming to you, but had a regular payroll and other creditors that needed to be paid.

Service providers, including accountants now have many options available to them to take payments from clients including credit cards and direct debits. There are also a few providers including Ignition that allow you to take those payment details upfront with the engagement and approved by your clients. Giving you total control over your payments.

This means that now when you do work, you get paid. How awesome is that!

But let's be clear, this freedom is not free. Most things aren't. All banks and merchant providers charge businesses a fee for this service. For accountants, it is a charge that has replaced most of the costs and time associated with chasing debts and being paid late.

You may recall there was a time when almost every business on-charged merchant fees. Actually, a lot of businesses did more than that, they added a surcharge that was above their costs and they actually made money out of the process. This resulted in the Australian Competition and Consumer Commission getting involved and wrapping some rules around this practice and businesses brought their charges back in line with their actual costs.

This has seen over time less and less businesses on-charging these costs to their customers. The reasons for this will be different for everyone, but broadly if you sell products, especially face to face, removing that hesitation for people to tap their cards means they are likely to purchase more, and more often. For service businesses, removing obstacles to pay via credit cards means removing an obstacle to getting paid on time.

There is also the client experience to think about and often oncharging merchant fees can have a detrimental impact on that experience and can negatively impact customer sentiment. It's becoming much more of a consumer expectation that they won't be charged the fees. Imagine if McDonalds charged you an extra 2% for your Big Mac Meal because you wanted to tap your credit card - how would you react?

But I get it, you aren't McDonalds. It still doesn't mean that you shouldn't be trying to remove the barriers to getting paid, and for many consumers merchant fees are a barrier.

Every firm will have a different cost of getting paid under their current arrangements. If your business has debtor days that exceeds your creditor days and your payroll cycle, then you are funding that gap somehow, either with savings or debt.

If you use debt you will be incurring interest on this funding. Current interest rates in Australia for an unsecured business overdraft are floating at about 6%, or a business loan at about 5%, and even worse credit card rates which can be disgustingly high if not managed well.

Or if you are using savings to fund the gap - what is the opportunity cost of that - what are you not investing in because your savings are tied up paying your team and creditors?

Add to this the time spent managing debtors, chasing for payment, running trust accounts. It all adds up.

When I review all of the above, the cost of absorbing a 1-2% merchant fee seems like a common-sense move to get paid on time, have payment details upfront and to take control of my business finances.

If after all of this you still want to charge merchant fees, please contact your account manager who can go through the steps required to make this happen in Ignition.

If you do decide to on-charge merchant fees to your clients, don't forget that the Australian Competition and Consumer Commission has guidelines for businesses utilising payment surcharges, more information can be found here: Credit, debit & prepaid card surcharges.