Monday, September 24, 2012

Next Day Funding: What It Means and When It's Necessary (Or Not)

Every now and again I discuss "next day funding" with a merchant in the course of a consultation. It's something I generally don't offer and few merchants ever mention, but once in a rare while it is a sticking point that the merchant holds as an important aspect of the service.

Case in point, I was chatting with a merchant this morning who must pre-order and pre-pay for product that she sells a "parties" set up in people's homes as sales events. Because she does not keep much inventory on hand until she has an idea about how much she is likely to sell, she is often out of pocket when she begins a sales event and needs to immediately recoup her expenses in order to pay her bills before it becomes an additional expense that cuts into her profits. Because of this, she is essentially attempting to pay her balance before it becomes due, to presumably somewhat mixed results.

Another client I worked with had to supply her store with new inventory on a near-daily schedule, without enough of a cushion or 30-day billable cycle in place for the goods sold because they were sourced directly from local artists who were, presumably, living hand to mouth. It was essential to her that the funds were available to pay her clients immediately. Upon examining this account further, it was clear that she was writing checks for funds that had not yet cleared her account, and so this was an important point for her. In practical application, however, she would write the check and the check would not then pass into her bank for an average of 3 to 4 days, giving ample time for the traditional 48 hour funds clearance.

Of these two case studies, the former had a much stronger need for immediate access to her funds and was willing to continue paying a significantly higher percentage in order to maintain the immediate accessibility she had through her processor. The second case had no quantifiable impact with the processing turn-around, however there was an emotional component that was very strong and even when the amount listed in the account was technically still "pending" clearance, being able to see her balance inclusive of the previous day's sales was very important to her.

How Most Merchants Deal With Their Balances

When I speak with merchants about their funding, they rarely know how long it takes to get the money into their account. I am often asked if it is immediate, because they assume that once the swipe is made the money goes straight to their bank account. My response is that it usually shows up within 2 days. This is the standard of the industry, although there are some variations on both sides depending on the processing set up and how many banks are in the loop.

It is possible to get funds in under 36 hours, or even the next day, when the clearinghouse bank and the merchant's bank are one and the same, and preferably working within the same time zone. This gives a disadvantage to west-coast merchants, as most clearinghouse banks are on the east coast. In actual practice, however, 48 hour funding is quite fast and certainly much faster than transactions used to be.

Most merchants, though certainly not all, deal with their accounts on a monthly basis. This means goods are ordered via purchase orders, paid for with checks and all bills are reconciled at the same time each month. Most likely, this is also when the accountant looks over the processing statements and bank account balances. It is all done at the same time and the most relevant information is whether all monies due are in the account at the time when  bills need to be paid. Therefore, whether funding is paid in 24, 36 or 48 hours becomes a moot point. What is important is whether the funding is there, period, and whether any discrepancies can be adjusted immediately. 

Customer Service Is More Important Component

At the end of the day, next day funding is nice if it is available, but sometimes it comes with a cost that is not offset by what it provides. Whether it is the higher percentage of the sales being paid in processing fees (even if the money is deposited into an interest baring account, it is highly unlikely that an extra day's interest will come close to the lost revenue from paying out higher fees) or the inability to resolve problems in a timely manner, there are many more issues to explore before deciding upon the  processing solution that will work best for a given merchant.

The truth is, digital signals are sent immediately with all the data to all relevant parties. These banks must approve the funds and send them along and even in cases where the totals are passed through to the merchant's bank account, it is possible that these have not been fully "approved" prior to posting. Because of this, amounts are subject to being withdrawn after posting if there is a risk issue identified. Vetting all amounts could take an extra day (thus the typical 48 hour period), so it is not surprising when amounts marked as pending the day after a charge was made are not always the same as the final amounts another day later. Tip-based totals are another reason that next-day totals sometimes differ. When approval codes are based on the initial amount of a sale, the tip might not go through with the initial posting.

Advice to Merchants

I always believe that it is important for merchants to feel confident that their money is getting into their account in an efficient and accurate manner. Merchants should understand how their funds are deposited and how the processing service is paid for. They should always take the time to go over their statements and learn how to read them accurately. 

When a business owner is in a position of needing to access funds that have not posted to their account, there are often ways to access the previous day's batch totals online so that checks can be written based on what is coming in. Working with their agent or a customer service representative, merchants should be able to verify what amount will be posting to their bank the next day. Tools for this will vary based on the network used and the processing company, but access should be available as necessary.

Remember that checks written at the end of a business day cannot be deposited until the following day, and it is standard for 24 hour holds to be placed on all local checks not drawn from the same bank. Some merchants and some suppliers do deposit checks the same day they are received, although usually after "banking hours." Many merchants and suppliers deposit checks weekly. There is a trend now toward digital deposits where merchants and suppliers deposit checks in the same way as bank card charges (at similar costs to accepting cards) by using a check scanner like the ones bank tellers have at their stations. More banks are also providing mobile deposit options with Smart Phones that allow for quicker deposits, though with longer holds placed on the funds.

Knowing the speed of deposits and how quickly funds really turn around is essential information for a merchant. Being prepared to check funds availability is always important. Knowledge is always power for any business owner, and nothing beats being well informed about all the services essential to keeping the business running. Like anything else, next day funding may seem like a good addition to the processing service, but the trade offs to get it may not be worth it in the long run and it may not offer anything tangible to benefit the merchant in the process.

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