Most businesses review their borrowing facilities, insurance costs and supplier contracts regularly. Far fewer take the same approach to the systems they use to receive customer payments with many taking the service from their incumbent bankers but this won’t always be the best fit for your business.
For many businesses, merchant card services represent a significant and recurring operating cost. Card processing fees, acquiring charges, terminal costs and settlement delays can quietly erode profit margins and place unnecessary pressure on working capital.
The issue is often not the headline fee itself. It's the cumulative impact of years spent on legacy arrangements, changing transaction volumes, evolving customer payment behaviours and contracts that no longer reflect the business's current needs.
In a period where many businesses are focused on protecting financial headroom, reviewing the cost and efficiency of receiving payments can be a simple way to improve cash flow, release working capital and strengthen margins.
How customer card payments are processed
Whenever a customer pays by credit card or debit card, several parties are involved in processing the transaction. The acquiring provider facilitates the payment, settles funds into your bank account and charges fees for that service.
For businesses processing large volumes of transactions, even small differences in merchant service charges can have a significant impact over a year.
For example, a business processing £5 million in card transactions annually could achieve meaningful savings if its effective processing rate were reduced by even a fraction of a percentage point. Shortening settlement periods by one or two days could also make cash available sooner and support day-to-day liquidity.
Many business owners know what they pay in total, but have limited visibility over:
- The effective rate they are paying on transactions
- Whether pricing remains competitive
- How settlement periods compare with alternative providers
- Hidden or layered processing costs
- The impact payment delays have on cash flow
- Whether their current arrangement reflects their transaction profile
The impact on financial headroom
When discussing headroom, attention often turns to funding facilities, debt structures or cash reserves. However, working capital efficiency can be just as important.
Consider a business that processes millions of pounds in card transactions annually. If merchant fees are higher than necessary, margin is being lost on every transaction. If settlement takes three or four days rather than one or two, cash remains unavailable for longer.
If payment processes create administration and reconciliation challenges, additional internal costs are incurred. Yes, Individually these issues may seem small. Collectively they can have a meaningful impact on liquidity and the financial flexibility available to management.
Improving headroom is not always about finding new funding. Sometimes it is about ensuring the business keeps more of the cash it already generates.
Why settlement periods matter
Many businesses focus solely on transaction fees when reviewing merchant services, but settlement speed can be equally important.
Card payment settlement often takes between one and three business days, depending on the provider and payment arrangements. A faster settlement cycle can make cash available earlier and give management greater control over short-term working capital.
Receiving funds one or two days earlier may not appear significant in isolation, but across hundreds or thousands of transactions, the cumulative benefit can become material.
Faster access to cash can help businesses:
- Reduce working capital pressure
- Improve day-to-day liquidity
- Meet supplier obligations more efficiently
- Reduce reliance on overdrafts or short-term funding
- Increase confidence when planning investment decisions
For businesses operating on tight margins or in sectors with significant cash flow fluctuations, earlier access to cash can provide valuable additional flexibility..
Signs it may be time for a review
Many businesses have not reviewed their merchant acquiring arrangements for several years.
A review may be worthwhile if:
- Transaction volumes have increased significantly
- Customer payment habits have changed
- The business has expanded online sales activity
- Settlement times feel slow compared with expectations
- Merchant fees have increased over time
- Contract terms have rolled over automatically
- Payment processing costs have never been benchmarked
- Your business requires deposit and/or advanced payments which are treated differently by your provider
In many cases, businesses discover their arrangements no longer reflect the scale or complexity of their operations.
A simple opportunity to strengthen margins
In challenging economic conditions, business leaders are rightly focused on improving operational efficiency and protecting profitability.
While merchant card services are often viewed as a routine administration function, they can represent a meaningful opportunity to improve both margins and cash flow.
Reducing acquiring costs, challenging existing fee structures and improving settlement periods can all contribute to greater financial headroom and improved resilience.
The businesses with the greatest flexibility are often not those generating the most revenue, but those retaining more of it and gaining access to it sooner.
Improving financial headroom is often associated with refinancing, securing new facilities or implementing wide-ranging cost-reduction programmes. However, businesses can also unlock value by examining existing processes and recurring operating costs more closely. Merchant card services are a good example of an area that is frequently overlooked, despite the direct impact it can have on profitability and cash availability.
Could your current arrangements be improved?
Do you know how your merchant fees, settlement times and processing costs compare with the wider market?
A review of your merchant card services could help identify opportunities to:
- Reduce acquiring and processing costs
- Improve settlement times
- Strengthen working capital
- Enhance cash flow visibility
- Increase financial headroom
Azets can help you benchmark your existing arrangements, understand the effective cost of receiving customer payments and assess the impact of settlement periods on cash flow, as part of our wider business funding and debt advisory services, which include card services benchmarking and arranging new merchant services.
In many cases, businesses are surprised by how much pricing, settlement periods and service levels can vary between arrangements. A focused review can provide greater transparency over current costs and help determine whether the existing solution continues to meet the needs of the business.
If you would like to review the cost and efficiency of your customer payment arrangements, please contact your usual Azets adviser or a member of our specialist Debt Advisory team.
