c hapter 10 c redit c ard s ervices and r eceivables m anagement ebd-301 a ccounting and f inance...
DESCRIPTION
CREDIT CARD SERVICES FOUR PARTIES TO EACH CREDIT TRANSACTION 1.THE MERCHANT (SELLER) 2.THE CUSTOMER (BUYER) 3.THE ISSUING BANK (CARD ISSUER) 4.THE ACQUIRING BANK (TRANSACTION PROCESSOR) All Rights Reserved Dr. David P Echevarria3TRANSCRIPT
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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
Dr. David P Echevarria 3
CREDIT CARD SERVICES
• 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)
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Dr. David P Echevarria 4
CREDIT CARD SERVICES
• 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.
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CREDIT CARD SERVICES
• 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
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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.
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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
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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
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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%
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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?
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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...
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GRANTING TRADE CREDIT
• CREDIT RATING AGENCIES• BUSINESS CUSTOMERS = DUN $ BRADSTREET• CONSUMERS = EXPERIAN, TRANS UNION, EQUIFAX• LARGE CORPORATIONS = STANDARD & POOR
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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
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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?
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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!
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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
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COLLECTION PERFORMANCE
• HOW WELL ARE WE MANAGING A/R?• DAYS SALES OUTSTANDING (DSO);• DSO = S DI / N
• ACP = A/R DIVIDED BY AVG. DAILY CREDIT SALES
• ACP = [1/ARTO] * 360
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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
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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
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INCREMENTAL ANALYSIS
• EVALUATING CHANGES IN CREDIT STANDARDS• CCRO = DSOO * ACSPDO * VCRO * KF• CCRN = DSON * ACSPDN * VCRN * KF
• DCCR = CCRN - CCRO
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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
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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
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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
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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
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