The Fed’s latest small businesses survey found that 80% of respondents reported challenges related to how they send and receive payments, including credit card processing fees and slow payments systems.

Brian Clarke is a payments analyst and deputy director in the Regional & Community Outreach department at the Boston Fed. He breaks down the most important findings from the survey – and how advancements in payments technology might help businesses address their top challenges.

Visit bostonfed.org to learn more about payments-related findings from the Small Business Credit Survey. You can read the full report on fedsmallbusiness.org. For more interviews and analysis of the economy in New England and nationwide, visit BostonFed.org/SixHundredAtlantic.aspx. Subscribe to our email list to stay updated on new episodes.

Amanda Blanco:

Hello and thank you for joining us on this episode of Six Hundred Atlantic. I'm your host, Amanda Blanco, and today we're talking with Brian Clarke. He's a deputy director in Regional and Community Outreach at the Boston Fed, and he's also a payments analyst. So, a recent Fed survey that Brian worked on found that many small businesses in the U.S. are facing big challenges when it comes to how they send and receive payments from customers and other businesses. So we're here to talk about what those are, figure out why they exist, and whether recent tech advancements could help. So welcome Brian, and thanks for joining us today.

Brian Clarke:

Thanks, Amanda.

Amanda Blanco:

So, Brian, can you tell us a little bit more about this annual survey, which is called the Small Business Credit Survey? I mean, who is that aimed toward, and what is it asking?

Brian Clarke:

So, the Small Business Credit Survey is aimed at small businesses, which we define as 500 employees or less. And it asks sentiment questions, things like revenue change over the last 12 months, and looking ahead, revenue change over the next 12 months, expected headcount – are you growing your headcount? Are you staying the same? Or are you decreasing your headcount? And then we ask questions about their credit experience. So, if you've tried to borrow money in the past 12 months, we'll ask you questions about that. And then we also ask questions about payments.

Amanda Blanco:

Why is it important for the Fed to ask small businesses about their experiences accessing credit and using payments?

Brian Clarke:

Studies show that small businesses in the United States employ about 50% of all Americans. So small businesses are very important to the economy, and therefore important to the Federal Reserve.

The Federal Reserve is interested in asking small businesses about their experiences, because things such as monetary policy – which is the provision of setting interest rates – impacts what interest rate firms can borrow at. And the Fed also helps with the provision of the payment system, which is how firms accept payments and move money between each other. So, it's critical to understand what businesses are experiencing on the ground.

And the thing that I really like about the Small Business Credit Survey is that more than a third of the businesses that respond to it have between one and five employees. And so, we're talking about really the smallest businesses in the United States, and that's exciting for me. We also want to know about businesses’ experiences in the credit market, and we ask questions that dig a little deeper than some of the surveys you see out there offered by private firms. And payments are critical to firms’ operations. And we need to understand the challenges, especially in the backdrop of rising costs, where every dollar matters to a small business owner.

Amanda Blanco:

This report also showed us that some of the most common challenges for small businesses are related to credit card processing fees. I mean, could you explain a little bit about how that works? Because most of us don't really know.

Brian Clarke:

I can, but first I have a question for you, Amanda. When was the last time you went to a small business?

Amanda Blanco:

So, this morning I went to my local coffee shop.

Brian Clarke:

Great. And after you got your coffee and maybe your pastry, what form of payment did you use?

Amanda Blanco:

I just used my credit card.

Brian Clarke:

And did you tap it, swipe it, or do something else?

Amanda Blanco:

Swiped.

Brian Clarke:

So, all of those decisions you made this morning had an impact on that small business, in the way that you paid for it, and then the amount of money that they received for that transaction.

So, credit card processing fees are the fees that credit card companies charge for the merchant or the small business owner in this case, for accepting that form of payment. And they charge the fees because they make it really easy to use credit and debit cards. So, when you go to pay at a store, your payment choice can impact that small business in ways that you may not be thinking of. For example, let's say you owe a small business $10 for a product you picked up in their store. If you go to the cash register, and you pay with a $10 bill, the small business owner receives $10 for that transaction, and you receive that good that was worth $10.

Now let's say, you go up to the cash register, and you choose your credit or debit card. The small business owner is actually going to not be receiving the full $10 for that transaction. They're going to be receiving less than $10. They're going to be receiving probably somewhere between $9.70 and $9.80 cents, because standard credit card processing fees are around 2 – 3%. That can be a big deal to the small business owner, because the credit card processing fees from their perspective comes directly from their bottom line. And in some ways, this is reliant on the choice that the person that's paying for things makes when they're checking out.

Amanda Blanco:

And I can imagine that over time those small amounts of money for each transaction, do they add up?

Brian Clarke:

So, if you're talking about a very high-volume small business, they'll add up. And then the credit card processing fees also apply to larger dollar volume transactions. They reduce as you go up to really somewhat larger numbers, if we're talking about several thousands of dollars, but they add up over time. And generally, you can sum that up and they’ll be between probably 1.5 – 3% of a small business’s sales over the course of time, and that does add up. And what I'll say is, it's painful to small businesses as you can see from the survey, and the data in our survey.

Amanda Blanco:

Now, this survey also indicated that checks are the most commonly accepted form of payment among small businesses, then followed by credit cards and cash. That stood out to me because a lot of us rarely use checks anymore. But was that something that surprised you as well?

Brian Clarke:

I don't know that it would've surprised me, because of the way that I know that small businesses pay each other a lot of times. When you're thinking about it from the perspective of a consumer, say shopping in a small business, then yes, I would say it would be surprising. You don't often see people whip out their checkbook at the cash register and write a check there on the spot. When you get into businesses that are paying each other, I think you're much more likely to see check usage and our survey backs that up.

And especially – and this is also in the survey data – for businesses that aren't paid at the time of the delivery of the good or service, where you make the delivery and then you send an invoice, I think that type of transaction lends itself naturally to being more reliant on checks. You're not in the same place, the business that's receiving the money is probably more likely to want a check because of the credit card processing fees that we had talked about before. So, you're seeing different incentives in different ways that people pay, based on the type of businesses that they're operating, and whether or not it's a business-to-business transaction or a person-to-business transaction.

Amanda Blanco:

And going off that, we also saw that popular payment methods tended to vary by industry, for example, hospitality versus manufacturing. What are some of the factors behind that?

Brian Clarke:

So, I think some of the factors that go into that are the nature of the business itself. And you mentioned manufacturing, you mentioned hospitality, I'll throw in retail on that as well. If you're at a retail shop, one of the worst things that can happen to you is you have someone in your store say, browsing, they pick something up, they want to buy it, and then they find out that you don't accept the form of payment that they have at that moment. And they have a few more minutes to think about it and then they put it back. And now you've lost a sale because you don't accept a payment method that they wanted to use, even if it's going to cost you 3%, 2% on the credit card processing fees.

So for them, you see accepting as many forms of payment as they possibly can offer, because they don't want to lose the sale. I think when you look at the other side, even when you look at the manufacturing, you're talking about transactions that are much larger in nature. If you're receiving the funds, you may not necessarily want to see that credit card come out, because you know you're going to lose some money, in your mind, on the processing fees. You would actually probably prefer a check to be sent in that case. So even though it's painful to wait for the check to arrive, to deposit it takes longer, you're going to be not losing money to the credit card processing fees. And in your mind, you have to make that trade off about what you're going to accept and what you prefer to accept – and whether or not the day spent waiting for that is worth the money that you may lose to accepting a form of payment that is expensive to you.

Amanda Blanco:

And I'm glad that you just talked about the challenges that can happen when a business might be waiting for checks. Because one thing we also saw was that businesses reported challenges related to how long it even takes to access the funds they're being paid. And I was wondering if you could walk us through a little bit how that payment process works and why it's sometimes so slow?

Brian Clarke:

Depending on the form of payment, the processing times can be slow. Obviously, a check is going to be probably the slowest form of payment, in the sense that especially if the businesses are, say, not located next door to each other. Let's say it's a mailed invoice. You have to get the invoice, write a check, put it in the mail, that takes a couple of days. It's going to show up at the business that's receiving it, they're going to open their mail, they're going to put it through their backend accounting. They're going to go deposit the check, and then even once you present the check at the bank, it's probably going to take some time for the check to actually hit your account.

And when you think about the other payment methods, they all speed up a little bit from there. ACH generally settles within one to three days. Cash obviously, settles instantly, so that's the fastest form of payment. But there are pitfalls with that as well. If you receive a large amount of cash at your business, you have to deposit it. There are obviously safety issues that go into that. So, each form of payment you accept, you have to make the trade-offs with the costs, and the security, and the speed that come with those different forms of payment.

Amanda Blanco:

And when you're operating your own business, and you're responsible for it, I'm assuming that quick access to funds really does matter, right?

Brian Clarke:

Yes. And I think what's interesting is that when you see there's this tension between the manufacturing firms that we discussed before. If you're receiving payment, you've delivered the goods, and then you don't expect to receive payment until after that. You've taken working capital, you've had to purchase the goods that you're delivering, that the cost of goods is high there. You've delivered them, so that money has gone out the door in the form of whatever you're delivering, and now you need to receive payment for that. So, you are not only out the goods, but you haven't received payment yet. You maybe can't make that next delivery until you receive payment from your previous customer. Even though that's the form you take in checks, it may be somewhat painful to you to have to wait the extra couple of days, because it may lead to reduction in business in the future if you're a cash-strapped business, which many are. In that case the speed of getting the funds in your account would be especially important.

Amanda Blanco:

And as we're talking about speed, looking forward, are there any promising tech advancements that might be able to help small businesses with these challenges, and get them access to their funds sooner?

Brian Clarke:

I think one of the biggest technological advances on the horizon for small businesses as it relates to payments, is instant payment networks. You wouldn't think that a check and an instant payment would have anything in common, but in fact they are extremely alike in one sense, that the money goes from one account into the other for the full value of what was agreed upon. There's no processing fees, nothing comes out of that transaction in between one bank and the other bank settling with each other. That's where the similarities end.

In an instant payment transaction, that the amount of money that you owe someone goes out instantly and then arrives in their account, in the other person's account instantly. Instead of having to wait for the check, and wait for the mail, and all those other things we talked about before, invoices, one business is able to pay another business instantly, and it's settled, and the money's good, and there's no processing fees. And I think that that's a technological advancement that is going to help businesses. And hopefully, we'll see some of that improvement in the survey, and it'll become less of a challenge that businesses are facing with their processing fees. And I think that would be a useful thing for small businesses, if more of them were able to adopt instant payment networks.

Amanda Blanco:

And is there anything else that small business owners can do to avoid being left behind as tech continues to advance here?

Brian Clarke:

I would say that small businesses can keep adding payment acceptance choices as well. I think that that's a win for both the small businesses and the consumers, provided that the small businesses are able to offer them affordably to the small business. I think that that's critical. And I think that as technology advances, small businesses will find ways to become more efficient in their payment acceptance methods. And then that also has effects in the things like the back office, your accounting, and other things that aren't maybe the most popular things for a small business to talk about, or exciting for a small business. But as we digitize some forms of payment, you can have wins in streamlining processes that are costly for small businesses, but at the end of the day, add up over time.

Amanda Blanco:

Well, this has been great. Thank you so much for joining us, Brian. We really appreciate it.

Brian Clarke:

Anytime.

Amanda Blanco:

You can find more information on everything we discussed today on our website. Check out bostonfed.org/sixhundredatlantic, where you can listen to interviews, as well as our podcast seasons. You can also subscribe to our email list to stay up to date on new episodes. And don't forget to rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app. I'm Amanda Blanco, signing off on another episode of Six Hundred Atlantic. Thanks for listening.