Confido's Dan Lear writing for ABA Law Practice Today: Three Payments Hacks To Improve Your Firm’s Profit Margin Today

Small law firms live or die by cash flow. A few extra percentage points on revenue can help a firm make payroll or pay rent (hopefully not, but “gulp!”), buy software, hire, experiment with a new practice area, or even innovate on a new product or service. But extra revenue rarely comes easy. What if you had a way—using existing systems—to immediately find additional revenue for your law firm?

Most modern firms accept electronic payments—credit, debit, and, if they’re fancy, eCheck or “ACH.” But many of them don’t know that their seemingly pedestrian payment processing system represents an opportunity. Firms can use their payment processing platform to find extra revenue. By using technology to their advantage, strategically deploying different payment methods, and considering shifting fees, firms can find extra revenue in a place they wouldn’t even think to look.

But how much?

As some quick background, let’s talk quickly about what payment processing costs. Card processors typically charge based upon payment “volume” or the total amount of a particular card transaction. On average, that number is about 3% of volume: on a $100 transaction, approximately $3 for credit cards. Debit card processing in some cases can be a bit less expensive at around 2%, though this is not always the case. ACH or eCheck is even less expensive, with varying amounts, but, as examples, 0.35%, 1%, or even a flat $2 (up to certain payment amounts) are common.

Technology is the answer

First, if your firm isn’t accepting electronic payments, it’s probably time to start. If the pandemic didn’t convince you that being able to get paid without having to meet someone face-to-face is imperative, mounds of data now support the proposition that firms that accept electronic payments get paid faster, more, and more often. So, if we’re talking technology, we need to start there.

Moving on, tech can also help reduce costs. As we’ve already mentioned, debit cards are often cheaper to process than credit cards. Some smart payment processors, including some in legal, are using technology to empower their law firms not just to accept all cards, but to choose which cards, credit cards, or debit cards, the firm wishes to accept. Given that it can be less expensive, sometimes by a whole percentage point, for firms to process debit cards as opposed to credit cards, firms can save some serious money if they can move their clients from credit cards to debit cards. As a quick example: a firm that does $1 million in annual revenue purely on credit cards is paying around $30,000 annually in processing fees. This would be ambitious, but assuming the pricing listed above (3% for credit, 2% for debit), if the firm moved all its clients from credit cards to debit cards, it could increase firm revenue by 1%, or $10,000. That’s serious dough.

And speaking of excluding credit cards, shout out to the bankruptcy attorneys out there! Excluding credit cards from the payment mix really matters for them, because a bankruptcy attorney who accepts a credit card from a prospective debtor is almost certainly facilitating fraud, and could become the unfortunate defendant in a class-action lawsuit. So, using tech to strategically deploy debit cards not only helps increase revenue for a firm, it can help bankruptcy lawyers meaningfully reduce risk.

Beyond plastic

Next, did you know you could get paid electronically without any kind of plastic (real or virtual) at all? No, we’re not talking about cryptocurrency. While paper checks are a largely forgotten payment method, the paper check’s electronic sibling, the eCheck, is thriving in the digital age. eChecks are also known as an ACH payment or a “bank transfer.” ACH stands for Automated Clearing House—which is a U.S. financial network used for electronic payments and money transfers. There’s more good news: these electronic bank transfers are dramatically cheaper than cards, especially credit cards. The cost for an eCheck can vary, but in most cases, it’s 1/10th the cost of processing a credit card. This means that the charge on a $100 transaction is about 30¢ for an ACH instead of $3 for a credit card. With a modest but important caveat, firms can start saving money on processing immediately by simply offering eChecks to their clients. The caveat is that in order to have law firm clients shift from cards to ACH/eCheck, it has to be easy for clients to pay with eCheck. Some banks offer eCheck services to their customers, but they make it really hard for a client to actually pay with an eCheck. Similarly, many practice management systems have integrated payments but, often, these integrations only offer cards. They don’t make eChecks a part of the integration. If clients can’t either: 1) pay with an eCheck (obviously); or 2) pay with an eCheck almost as easily as they can pay with a card, clients won’t use eCheck, and the opportunity for savings is lost.

Have you considered a shift?

Finally, firms that are serious about finding revenue in their existing operations should consider shifting the cost of processing to their clients. This is a lengthy and complex topic (if you want more information, I wrote a blog post and a 15+ page white paper on it) but very briefly, most states permit businesses to shift the cost of payment processing to their clients. A handful of states—Alabama, Colorado, Connecticut, Indiana, Iowa, Maine, Massachusetts, Michigan, Mississippi, Nebraska, West Virginia—prohibit shifting these fees either by state law or by ethics opinion, but the landscape is constantly shifting (see what I did there?) in favor of the practice. For example, Kansas had a state law prohibiting fee-shifting that was recently struck down by a court case.

The ways that a firm could use this fee-shifting tool are many and varied, but law firms that shift credit card fees and also offer payment via debit cards (debit cards can’t have their fees shifted) or eCheck (which can be legally shifted but is so inexpensive as to make is somewhat silly to shift) such that their clients still have a way to pay that’s “free to them,” often save 60-80% of their processing costs. To make that a bit more meaningful, let’s take our firm that’s doing $1 million annually through cards. Assuming the firm has a mix of credit and debit, the firm is paying around $15,000 in processing fees each year. A reduction of that cost by 80% means it’s saving $12,000 annually. But the opportunity to find revenue doesn’t stop there.

Some daring firms offer only credit cards with the fee shifted and eCheck, for which the firm picks up the tab. These firms strike a bold balance between reducing their annual costs even further, because the cost of eCheck is so low, while still offering clients a means to pay that remains effectively “free” to the client. Finally, a firm could opt to offer credit cards as the only payment method for clients. This shifts all the processing fees to clients. This firm would pay virtually nothing in processing fees – increasing the revenue that a firm brings home by as much as 3%.

Bonus

Using tech, expanding to eCheck, and considering shifting processing fees are meaningful ways to use payments to enhance a firm’s revenue, but firms can also protect revenue by avoiding dodgy practices common in the processing industry. First, firms should avoid processors with a tiered pricing scheme. Tiered pricing has a bunch of problems, but to name just a few: tiered pricing processors often manipulate the tiers to their advantage; advertise a low rate for a bottom tier of pricing but exclude nearly all cards from that tier; and add in all sorts of card brand and network fees that jack up their seemingly reasonably tiered rates. Second, firms shouldn’t pay a monthly fee for processing. Processors already make money on processing. They don’t need to charge a firm twice. Finally, firms should beware of hardware leases and other long-term obligations. Reputable processing companies don’t need to charge an exorbitant amount for their hardware – and, frankly, most firms can likely get by without hardware in this day and age.

Firms probably don’t see payment processing as the most likely business process to help them recoup or boost revenue. Payments isn’t as sexy as practice management or AI or even productized legal services. But don’t sleep on payments. Payments is the way that money gets in the door for most firms. And that fact that the processor takes a part of that revenue, often before it even gets to the firm, is a huge opportunity for the firm. By using tech, expanding to eCheck, and considering shifting processing fees, firms can have an immediate and meaningful impact on their financial health really quickly.

©2021. Published in Law Practice Today, August 2021, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.