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Why you would want PayPoint

There are many reasons that people choose to grab the opportunity of a PayPoint terminal in their shop. The most compelling is that it will increase the footfall and there is little doubt that it can achieve this. This is particularly attractive to a failing shop, or one with strong local competition. I would like to talk about the costs of PayPoint; many retailers offered the possibility of a terminal will dismiss these, but it can do no harm to at least look at these, if only to minimise them.

Commission structure

When I had PayPoint, the commission was 0.5% up to a maximum of 13p. At that time, mobile phone topup and credit card processing were not offered. These will affect the figures favourably, and you should consider these in your own analysis.

Banking costs

All money taken has to be banked so that PayPoint can subsequently debit the money from your account. Any cheques taken are returned to PayPoint for processing, resulting in no cost to you. Cash paid into your account will meet a charge from the bank of up to 0.5%. Oh dear, this has wiped out all of your margin. Any receipts exceeding the maximum commission will cost you money. PayPoint do offer a number of accounts with lower agreed charges. Certainly look at these, and possibly use the terms offered as a bargaining tool with your existing bank. If you have a favourable record, they will be unwilling to loose your custom. If you do not believe that your bank is charging this much, start off by getting a true list of bank charges. The most favourable account offered was through the Post Office, with a charge of 0.3%.

There are other charges to be met. Banks charge a fixed fee for each transaction. So paying cash in will attract a fixed fee in addition to the percentage charge. The deductions by PayPoint will also be charged for, as will the payment of commission You need to add these cost to your banking charge. You also need to stay in credit. Unauthorised overdrafts will cost you very dearly; authorised overdrafts will be costly, but as these are to meet the needs of the business (or your profligate lifestyle) they cannot be attributed to PayPoint The point to be aware of is that unless you have a substantial credit balance, you need to be very consistent in banking money received. Skipping a day because you have the 'flu could cost you £50.

The situation with business banking has improved of late. I can recommendAlliance and Leicester who have a 0.2% cash handling fee with a minimum of £2. These deposits can be made into a Post Office. There are 50 free transactions per month as well.

A number of banks offer free accounts for the first year to eighteen months of trading but there may be turnover limits that make these inapplicable.

Insurance

There are two insurance issues to consider. The additional money held on the premises overnight, and the money in transit. You probably have insurance for both these events, but you need to check the limits and increase them if necessary. More than £1000 held on the premises will probably require an approved safe. More than £2000 in transit is unlikely to be covered, or will require two people. These costs must be met.

Security

Carrying more than £2000 to the bank is a severe risk. This will probably mean that you need to bank each day, or at least three days per week. Vary your route and time and use different branches whenever possible. If possible, go accompanied. A Post Office on the same parade may pose the minimum risk, although be aware that in time people will come to know what you are doing when you bank.

Costs of going to the bank

Each time you go to the bank, there are further costs to be met. If you cannot bank in a neighbouring premises, you will occur travelling costs, made worse by the need to vary routes and destinations. Try to combine these visits with necessary shopping trips whenever possible. There may well be parking charges to be found as well. In addition there is the cost of your time. This will be more pressing if you employ staff to do this, or to cover for you while you are out of the shop.

Processing times

Each time a transaction is undertaken, the terminal connects by telephone for authorisation using PayPoint's own telephone line. This takes a surprisingly long time, and will lower the level of service to the all customers. If you are busy, you may need to open up a second till on more occasions. I calculated that if you had a member of staff working throughout my shops opening hours taking money non-stop solely for PayPoint, the commission would be insufficient to pay them a minimum wage. Nothing to cover overheads or idle time.

Benefits of footfall

This you may think is imponderable. I did some experiments to investigate this before finally scrapping PayPoint

Unfortunately, I no longer have the actual results after a hard disk crash, but I can still give you a flavour of what I discovered.

I found that the probability of a customer who bought some items, of buying an additional item was roughly fixed at 40%. That is all recorded customers bought at least one item. Forty percent of these bought two or more. Forty percent of these bought three or more. And so on. I would guess that this figure would vary with different shops. A supermarket would have a much higher percentage than a convenience store.

Now, if we make the assumption that PayPoint customers are no different, then 60% will buy nothing else, 40% will buy at least one item, and 16% two or more, etc. knowing the average price of an item, and the average margin, you can work out the benefit of the extra PayPoint customers. Use your own figures, or try 50p and 20% for simple numbers. You will then end up with about 5p profit per customer.

So who is to blame?

Why exactly are the commissions so low. We have to go back in history to when, prior to privatisation, cash was collected at large palatial offices and showrooms. The cost of processing cash was absorbed into administration, and just ignored.

Then, after privatisation, the suppliers started to close these showrooms and offices, making it increasingly hard for people to buy electricity and gas with cash. PayPoint came along with a solution, but the companies failed to recognise the true costs and insisted on exceedingly low margins. PayPoint's margin is around 0.25% net. Subsequent entries such as PayZone have had to compete on margin. To be fair to Paypoint, they have gone after higher margin business such as mobile topup whenever possible.

Bank chares are another matter. Competition is beginning to herald in lower charges but there is a long way to go. This is an issue for another topic.

So how could things be improved? For a start, PayPoint could switch to broadband on the shops own telephone line. This would save £15 per terminal per month which could be passed on to the retailer. The terminal would also work considerably quicker. Paypoint could also try to negotiate far better terms with a bank; preferably the payments could be made directly into PayPoint's own account, with no cost to the retailer.

Conclusion

I cannot tell you whether it is advisable to take a PayPoint terminal or not. This will have to be your decision, but I hope that these thoughts will help you look at the benefits and costs in a rational manner.

Dave

Contacts:

PayPoint plc
1 The Boulevard
Shire Park
Welwyn Garden City
Hertfordshire
AL7 1EL

website: www.paypoint.com

Other providers: PAYzone.

Terms and conditions

If anyone can provide me with updated terms and conditions, I will gladly revise this article.

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Thursday, 6 September, 2007

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