Mastering Payments: Essential Insights for Seamless Billing and Collection

It doesn’t matter what kind of business you are running or planning to run—you must collect payments. When your business grows and expands, you have to pay your suppliers, vendors, or partners. Using a digital platform to sell goods or provide any kind of consumer or business service requires handling payments. It can be either accepting payment or making payments.

When we first launched ClassnPay marketplace, I never suspected that the most challenging task would be connecting a payment service to our platform. The idea of ClassnPay was to provide busy parents with a simpler way to handle their kids’ after-school activities. We were connecting parents who sign their kids up for afterschool classes, such as judo or dance lessons, with service providers, like judo trainers and dance studios. Back then, Accounts Payable and Accounts Receivable were just “funny words,” and we were sure that deploying a payment module would take only a few weeks and incur insignificant costs. Reality hit hard.

When we first approached acquiring banking (Visa & MasterCard) asking for permission to accept payments, their list of demands was a business killer. Visa’s compliance department told us that we were holding money that wasn’t ours and questioned how they could trust that we wouldn’t collect money from consumers and, instead of paying service providers (while taking just a commission), run away with it to the Bahamas to drink margaritas on the beach. The second demand was even more outrageous: “What if, instead of selling judo lessons, a drug dealer used your platform to sell cocaine to teenagers?” Back then, we were shocked and frustrated, but today I understand it was their way of explaining that we had to handle money laundering and ensure our platform wasn’t used for “bad transactions.”

Fast forward six years and many digital platform deployments later, I believe that sharing key takeaways related to payments planning and management will help you avoid the mistakes we made along the way.

Understanding Terminology and Basic Concepts

First, let’s define and understand the terminology used to describe the main payment aspects.

Accounts Receivable Software: A financial management tool that helps businesses track and manage the payments owed to them by their clients or customers. The software automates the process of creating and sending invoices, tracking payments, and generating reports.

Accounts Payable Software: Helps streamline the process of tracking and settling an organization’s outstanding bills to suppliers, vendors, partners, and other creditors. This solution typically includes features such as invoice management, purchase order matching, payment processing, and reporting.

A quick Google search will give you definitions and basic explanations, as well as some generic recommendations. But how do you choose the right vendor, the right service to best fit your business, country regulations, and align with rapid and unpredictable cashflows?

This article will help you better structure your financial module, understand hidden costs, and legal implications that might bankrupt your business or, worse, land you under criminal investigation unless you address all relevant issues.

Choosing the Right Service Providers

When you Google for Accounts Receivable solutions, you get 157 listings and 534 for Accounts Payable. Here are the top 5 services based on my knowledge and experience (disclaimer: these are not recommendations, but rather examples to explain different aspects of our topic):

Accounts Receivable: Stripe; PayPal; BlueSnap; Chargebee; QuickBooks Online; Square Accounts Payable: Tipalti; Payoneer; BlueSnap; Bill.com; SAP Concur

Parameters to Consider When Choosing Accounts Payable and Accounts Receivable Software

• Cost of the software, including any hidden fees and the pricing model.
• Integration Capabilities with your existing ERP, accounting, and CRM systems.
• Automation Features such as invoice processing, payment approvals, and reminders.
• Intuitive and User-Friendly Interface to ensure ease of use.
• Compliance and Security: Ensure the software complies with relevant regulations.
• Reporting and Analytics: Gain insights into your financial operations.
• Reliable Customer Support.
• Customization: The ability to customize the software to meet your specific business needs.

While most considerations are simple and intuitive, some require special attention and understanding: 1)Supported countries + 2)Hidden cost + 3)Chargbackes

Country of Legal Entity Registration: This is a go-no-go factor. For example, Stripe is considered by many the best software for Accounts Receivable, but if your company is registered in Israel, you cannot use it because Stripe does not support some countries. The same goes for Payoneer; it is considered by many the best software for Accounts Payable, but currently, it is not supported in Israel.

Hidden Costs: look carefully for third-party and “side” costs such as:

• Exchange Rates: If you plan to charge in local currency (non-dollar or Euro), check if the service supports it and how much it will cost. For example, if you want to accept payments in Shekels, be ready for several conversion rounds and banking commissions.
• Commissions: Depending on the type of business (B2B vs B2C) and the country your business operates in, the paying customer will have a preferred form of payment. For US transactions, you’d be able to collect 94-95% of the payment, with the rest going to the credit card processor. On the other hand, if you use ACH or direct wires, there are almost no commissions.
• Cost of Cash Landing in Your Bank Account: Some services, like PayPal and Payoneer, accept and keep money in a digital wallet. The cost they show is for accepting the payment in the digital PayPal wallet. If you want to withdraw the money to your bank account, you will need to pay an extra commission.

Chargebacks: A chargeback is the payment amount returned to a credit card after a customer disputes the transaction. This is an extremely important factor. Depending on your country’s regulations and legislation, you may lose a significant amount of money and incur high legal costs handling this issue. Two scenarios can lead to a consumer chargeback:

• Innocent Mistake: Your business’s legal name is not the same as the service you offer. For example, a consumer checks their credit card charges and sees a charge from an unknown company. Some will check and contact the service provider, while others will decline the payment immediately.
• Fraud: Customers may intentionally charge back to get a product or service without payment. For example, one company we provided services to expanded to the Brazilian market and within six months incurred a $3 million loss over chargeback fraud claims. Work out your payment acceptance criteria and processing workflows to protect yourself. Back to our US-based online health clinic (mentioned in my previous article), to demonstrate to our bank that the transactions were legitimate, we started to collect driver’s license photos and signed credit card authorization forms. We kept those on file and used them during payment disputes.

Financial Module Structure

CPA Accounting Module and Revenue Recognition: This section is crucial when operating a two-sided marketplace. Best examples are companies like Uber, Airbnb, Fiverr, and Upwork. They collect payments from consumers, take a commission, and pay the suppliers/service providers.

Depending on your country’s CPA regulations, you have to decide how to book revenue recognition. There are two options: book gross revenue (entire payment collected from the customer) or net (just the commission). A well-known case is when Groupon’s stock was cut in half after booking gross revenue instead of net. Revenue recognition is complex, and I encourage you to consult a certified accountant before choosing the right module. Generally, you can book gross revenue if you hold responsibility and accountability for the services you sell to consumers.

Terms and Conditions Document

A Terms and Conditions document is not just simple and generic. When we approached Visa to get approval to collect payments, they wanted us to take responsibility for all aspects of the services listed on our platform. If a kid got injured during a judo class, we would be responsible for medical treatment. If the quality of a guitar lesson did not meet consumer expectations, we would be responsible for consumer complaints. If the consumer demanded a refund, we would carry out the refund payments. After six negotiation rounds, we agreed to take financial responsibility only.

Remember, a T&C document not only defines how your business operates but also protects your business from lawsuits and adds clarity for consumers. Define responsibility, warranty, and who is responsible for service quality.

Automated Payments to Vendors and Service Providers

While it may sound like a good idea to make your Accounts Payable a fully automated service, consider several factors before jumping on this feature.

Tipalti, one of the biggest and most popular Accounts Payable services, offers fully automated payments. They support 196 countries in 120 currencies via 50 payment methods. They have a great user interface, reliable customer support, integration capabilities, and advanced compliance and security, but they require a tough KYC onboarding process. The technical implementation is easy and user-friendly, but the KYC process is long and some may find it intimidating. This is due to banking and financial institution demands intended to fight money laundering and black-market transactions.

Another question is choosing between accepting the entire payment and holding it in your bank account or splitting the payment in real-time—meaning you just get the commission while the payment to the service provider goes directly to the provider. There is no right or wrong answer; consider aspects like cash flow and control over collected payments.

Cancellations, Refunds, and Returns

Refunds and returns policies must be clear and transparent, especially in B2C transactions. Make sure your customers are fully aware of the nuances, such as if they prepay for a year of service but decide to cancel, they don’t get their money back. It is even more crucial if you have a physical product to ship and return. US consumers are spoiled by Amazon’s free shipping both ways and unlimited returns policy and would not be happy if yours is different. At one point in our D2C business, we had to include the R&R policy into each online order form to avoid people complaining that they didn’t know.

Recommendations

1. Before choosing and implementing a payment service, create a detailed chart of all payment-related triggers and events, such as discount vouchers, subscription methods or single payments, and refunds (both technical and legal aspects).
2. If you plan to accept payment locally in one country, choose a local payment provider. It will be the most cost-effective option with no conversion costs. With a local provider, it will be easier to comply with local regulations and financial institutions.
3. For vendor and service provider payments, you may use your banking app/web solution. Many banking applications offer easy consolidated payments.
4. Don’t start with automation. You will never fully know the entire workflow and its problems until you operate manually for some period and closely track and control each transaction. Only after making several hundred transactions manually are you ready to switch to an automation module.
5. Learn about chargebacks and prepare your business to handle them.
6. Don’t underestimate the importance of a correctly written Terms and Conditions document.
7. Define responsibility, warranty, who is responsible for service quality, and how you plan to solve disputes.