C HAPTER 10 C REDIT C ARD S ERVICES AND R ECEIVABLES M ANAGEMENT EBD-301 A CCOUNTING AND F INANCE...

1

CHAPTER 10CREDIT CARD SERVICES

AND RECEIVABLES MANAGEMENT

EBD-301ACCOUNTING AND FINANCE FOR

ENTREPRENEURS

All Rights ReservedDr. David P Echevarria

Dr. David P Echevarria 2

CREDIT CARD SERVICES

BUSINESSES PREFER TO SELL FOR CASH. CONSUMERS INCREASINGLY PREFER TO USE CREDIT OR

DEBIT CARDS TO PAY FOR GOODS AND SERVICES STARTUPS CANNOT AFFORD TO GRANT CREDIT

DIRECTLY FOR TWO REASONS.1. GRANTING CREDIT REQUIRES SIGNIFICANT UPFRONT

CAPITAL2. RECEIVABLES MANAGEMENT IS COSTLY AND TIME

CONSUMINGAll Rights Reserved



• FOUR PARTIES TO EACH CREDIT TRANSACTION1. THE MERCHANT (SELLER)2. THE CUSTOMER (BUYER)3. THE ISSUING BANK (CARD ISSUER)4. THE ACQUIRING BANK (TRANSACTION PROCESSOR)

All Rights Reserved



• THE PROCESS• BUYER SWIPES CARD AT THE POINT-OF-SALE READER• TRANSACTION INFORMATION TRANSMITTED TO THE ACQUIRING

BANK WHICH VERIFIES THE INFORMATION WITH ISSUING BANK AND SENDS BACK THE APPROVAL TO THE MERCHANT

• ACQUIRING BANK CREDITS MERCHANT ACCOUNT WITH PAYMENT LESS DISCOUNT FEE.

• ACQUIRING BANK RECEIVES FUNDS FROM ISSUER BANK LESS AN INTERCHANGE FEE.

All Rights Reserved



• OTHER FEES MAY BE IMPOSED• ONLINE AND PHONE TRANSACTIONS INCUR ADDITIONAL

FEE TO COVER POSSIBLE CHARGEBACK COSTS• CHARGEBACK: A CREDIT TO CUSTOMER’S ACCOUNT• THERE IS ALWAYS THE POSSIBILITY THAT CHARGE IS

INCORRECT OR FRAUDULENT – REASON FOR CVV CODE

All Rights Reserved


CREDIT CARD SERVICE PROCESS

• ALL CREDIT TRANSACTIONS ARE CHANNELED THROUGH A PAYMENT GATEWAY• PAYMENT GATEWAY VERIFIES CARDHOLDER INFORMATION

AND AUTHORIZES PAYMENTS TO MERCHANT’S ACCOUNT• SENDS DATA TO CARD HOLDER’S BANK WHICH THEN

ACCEPTS OR REJECTS TRANSACTION• IF ACCEPTED, PAYMENT TO MERCHANT FOLLOWS AND

TRANSACTION IS COMPLETE.

All Rights Reserved


SETTING UP CREDIT CARD SERVICES

• TWO STEPS REQUIRED1. SETTING UP A GATEWAY ACCOUNT

•VERIFICATION AND PROCESSING OF CREDIT CARD TRANSACTIONS•PROVIDE TRANSACTION SUMMARIES•PROVIDE MEANS FOR MERCHANT-CUSTOMER COMMUNICATION

2. SETTING UP A MERCHANT ACCOUNT•RECEIVE PAYMENTS – CREDIT TO MERCHANT ACCOUNT

All Rights Reserved


SETTING UP CREDIT CARD SERVICES

•GATEWAY REQUIREMENTS1. COMPLY WITH PAYMENT CARD INDUSTRY DATA SECURITY

STANDARD (PCI DSS)2. INCORPORATE A SECURE SOCKET LAYER (SSL) TO ENCRYPT AND

PROTECT TRANSACTION INFORMATION3. PROVIDE FULL ECOMMERCE CAPABILITIES

SHOPPING CART EMAIL RECEIPT (TRANSACTION VERIFICATION RECORD) SUPPORT RECURRING PAYMENTS

All Rights Reserved


GATEWAY FEE SCHEDULES

Processors Retail Internet Evolution Bankcard 1.79% to 2.99% 0.49% to 1.79% Flagship 0.98% to 1.98% 0.38% to 1.58% Merchant Warehouse 0.99% to 2.09% 0.39% to 1.69% National Bankcard 1.99% to 2.19% 0.49% to 1.79%

All Rights Reserved


CAVEATS

• INVESTIGATE BEFORE YOU SIGN A CONTRACT• READ ALL THE FINE PRINT

• DOES THE PROVIDER IMPOSE ANY ADDITIONAL FEES?• IS THERE AN AUTO-RENEWAL FEATURE?• WHERE IS THEIR CALL CENTER LOCATED?• HOW EASY IS IT TO CONTACT THEM TO RESOLVE

PROBLEMS?

All Rights Reserved


RECEIVABLES MANAGEMENT

• THE CASH CYCLE• CASH TO INVENTORY TO SALES TO RECEIVABLES TO CASH• RECEIVABLES A FUNCTION OF CREDIT POLICY• RECEIVABLES MUST BE FINANCED UP FRONT• PROFITABILITY AFFECTED BY COLLECTIONS EXPERIENCE• COLLECTIONS EXPERIENCE REFLECTS CREDIT POLICY• MORAL OF THE STORY: IN WCM, EVERYTHING AFFECTS

EVERYTHING ELSE...

All Rights Reserved


GRANTING TRADE CREDIT

• CREDIT RATING AGENCIES• BUSINESS CUSTOMERS = DUN $ BRADSTREET• CONSUMERS = EXPERIAN, TRANS UNION, EQUIFAX• LARGE CORPORATIONS = STANDARD & POOR

All Rights Reserved


CREDIT INSTRUMENTS• OPEN ACCOUNT

• LIMITS IMPOSE WHEN PAYMENTS DON’T ARRIVE.• MOST COMMON FORM OF TRADE CREDIT ACCOUNT.

• BANKERS’ ACCEPTANCES• BANKS GUARANTEE PAYMENT.• GOODS ARE COLLATERAL AGAINST GUARANTEE.

• PROMISSORY NOTES• DOCUMENTARY EVIDENCE OF AMOUNT OWED + TERMS

All Rights Reserved


CREDIT POLICY VARIABLES

• MAXIMUM CREDIT PERIOD• HOW LONG CAN FIRM CARRY RECEIVABLES AND STILL BE

PROFITABLE?• MINIMUM CREDIT STANDARD

• IS BEING WARM AND BREATHING ENOUGH?• COLLECTION POLICY

• HOW DO WE DEAL WITH DEADBEATS?

All Rights Reserved


CREDIT POLICY VARIABLES

• DISCOUNTS• GRANTING DISCOUNTS TO ENCOURAGE EARLY PAYMENT• ADVANTAGE - REDUCE CARRY TIME AND RELATED

EXPENSE.• DISADVANTAGE - REDUCES CASH INFLOW, SOME FIRMS PAY

LATE AND STILL TAKE DISCOUNT!

All Rights Reserved


DETERMINING CREDITWORTHINESS

• FIVE C’S OF CREDITWORTHINESS• CHARACTER - PAST HISTORY• CAPACITY - INCOME• CAPITAL - WHAT THE OWN LESS WHAT THEY OWE• COLLATERAL - REDUCING THE RISK OF LOSS• CONDITIONS - EXPECTATIONS RELATIVE TO ECONOMY

• ASSIGNING RELATIVE WEIGHTS AND SETTING MINIMUMS

All Rights Reserved


ALTERNATIVE STRATEGIES

• WHAT CAN FIRMS DO IF CASH IS SLOW IN BEING RECEIVED?• FACTORING - SELLING RECEIVABLES (AT A DISCOUNT)

• WITH RECOURSE• WITHOUT RECOURSE

• FORFAITING - SELLING RECEIVABLES IN THE INTERNATIONAL MARKET

All Rights Reserved


COST OF CARRYING RECEIVABLES

• FUNCTIONAL RELATIONSHIP• CCR = DSO * ACSPD * VCR * KF

• WHERE: DSO = DAYS SALES OUTSTANDING• ACSPD = AVERAGE CREDIT SALES PER DAY• VCR = VARIABLE COST RATIO• KF = COST OF FUNDS UTILIZED

All Rights Reserved


INCREMENTAL ANALYSIS

• IDENTIFYING OPPORTUNITY COSTS• WHAT HAPPENS WHEN WE RECEIVE CASH LATER?

• OC = DDSO * DACSPD * (1 - VCR) * KF

• WHERE:• DDSO = CHANGE IN DSO• DACSPD = CHANGE IN ACSPD• (1 - VCR) = CONTRIBUTION MARGIN• KF = OPPORTUNITY COST OF FUNDS

All Rights Reserved


CREDIT STANDARD CHANGE

• IMPACT ON RECEIVABLES INVESTMENT (DI)• ASSUMPTION: LOOSENING CREDIT STANDARDS WILL

RESULT IN MORE SALES BUT SLOWER PAYMENT.• DI = DDSO*ACSPDO + VCR*DSON* DACSPD

• ASSUMPTION: TIGHTENING CREDIT STANDARDS WILL RESULT IN LESS SALES BUT QUICKER PAYMENT.

• DI = DDSO*ACSPDN + VCR*DSOO* DACSPD

All Rights Reserved


CREDIT STANDARD CHANGE

• CHANGES IN PROFITABILITY• DOP = DGP - DCCR - DBDE - DCD• WHERE:• DOP = CHANGES IN OPERATING PROFITS• DGP = CHANGES IN GROSS PROFITS• DCCR = CHANGES IN COST OF CARRYING A/R• DBDE = CHANGES IN BAD DEBT EXPERIENCE• DCD = CHANGES IN COST OF DISCOUNTS TAKEN

All Rights Reserved


CREDIT STANDARD CHANGE• ALTERNATIVE METHOD FOR CHANGE IN OP PROFITS

• DOP = DS*(1-VCR) - (KF*DI) - (BNSN - BOSO) - (DNSNPN - DOSOPO)

• WHERE:• DS = CHANGE IN OPERATING PROFITS• BO,N = BAD DEBT EXPENSE RATE (OLD, NEW)• SO,N = SALES ACTIVITY• PO,N = PERCENT OF CUSTOMERS TAKING

DISCOUNT• DO,N = DISCOUNT PERCENT

All Rights Reserved

C HAPTER 10 C REDIT C ARD S ERVICES AND R ECEIVABLES M ANAGEMENT EBD-301 A CCOUNTING AND F INANCE...

Documents

Transcript of C HAPTER 10 C REDIT C ARD S ERVICES AND R ECEIVABLES M ANAGEMENT EBD-301 A CCOUNTING AND F INANCE...