A major concern among merchants is their ability to get paid in time by their payment processor. And rightfully so, a business that’s unable to receive its funds timely will not be in business for long. This concern has been the source of ire and numerous complaints about payment processors’ customer support efficiency. Often business owners reach out to their merchant account providers about where their funds are, or when they can expect to have funds in their account. Sometimes the cause can be more alarming and detrimental to their liquidity; why have funds been withheld? Why weren’t they proactively notified of the action rather than the merchant having to inquire themselves, especially after considerable time has passed?
Even when there are no issues with the payment processing, funds from credit and debit card transactions can take anywhere from 1-3 days to clear and transfer into the merchant’s bank account. It’s not hard to understand why merchants would like to get paid quickly, especially if they are relatively new and light on capital. The issue becomes even more pronounced as more consumers are shifting their payment habits to cashless means. This has created the demand for a new type of service; Next Day Funding.
What is Next Day Funding?
The Next day funding service allows merchants to receive their payments faster. Merchants receive payments into their bank accounts either the next day or within 24 hours of a payment batch being processed.
It is important to note that this service is available on normal business days and usually excludes weekends and holidays.
Merchants get their funds much quicker, plus there are additional benefits. As a payment processor looks to offer next day funding, it will scrutinize a merchant’s transaction profile. Some payment processors offer this service as a form of lending for which the processor has a recourse to recoup unprocessed funds by the card networks.
This program has additional scrutiny regarding which transactions can be processed the next day, leading to more efficient account management and continuous monitoring of funds clearing.
Another benefit is that there is a quicker turnaround to spot and investigate any fraudulent transactions or chargebacks.
How does it work?
There are some technicalities about next day funding. Usually, this service is available for transactions processed for major card networks such as American Express, Discover, Mastercard, Visa, and automated clearing house (ACH) transactions.
Each payment network has different turnaround times to clear funds and varying cutoff times to assign a transaction to a specific date, for next day funding purposes.
For example, a clothing retailer sells a jacket for $500 on Tuesday and the store personnel settles the batch for that day at closing time at 9 PM. Let’s say that this retailer usually receives funds, net of processing fees, by Thursday.
Within those two days, the retailer has submitted the batch of credit and debit card transactions to process for a funds transfer to the retailer’s bank account. This submission is sent on Wednesday morning. This fund transfer is accomplished using the ACH network and is completed overnight, with the retailer getting paid on Thursday morning.
With Next day funding, the batch submission happens much quicker and is sent directly for payment via the ACH network that same day. The ACH network, as usual, completes the fund transfer overnight, with the retailer getting paid on Wednesday morning. The only caveat is that the payment processor has a cutoff time for the batch submission to send it to the ACH network for overnight funds transfer in a timely fashion. If merchants can’t process their batch before that cutoff, they will not be able to receive next day funding for those transactions.
What merchants should be aware of?
Not all merchants need next day funding. If a payment processor markets this service to you, consider the overall cost of this funding and compare it to other lending facilities, such as a traditional term loan or revolving credit from a bank. A business may have sufficient history and credit to qualify for traditional bank lending channels.
If merchants decide that they can benefit from cash flow and liquidity offered by non-traditional funding, they may want to consider other sources as well, such as same-day funding, merchant cash advances, and ACH advances. Although they may carry different costs, they may be more suitable for a business’s funding needs.
If merchants decide that it is next day funding they want, they should carefully review the cutoff times for the facility and evaluate that based on their transaction history by the network, and the time of day they process those transactions to ensure that funding actually will be the next day. If a business incurs most transactions during the evening/night shifts via Mastercard and Visa, they may already receive their funds within 1-2 days. For those merchants, next day funding may not be speeding up the funding process by that much.
For merchants, the ability to get paid as quickly as possible for their non-cash payments is always top of mind. It is even more distinct now as more consumers choose to pay with a myriad of non-cash payment methods. Innovative as ever, payment processors are looking for new ways to address this pain point for merchants and offering solutions such as Next Day Funding to reduce the time it takes for merchants to have access to their hard-earned money. However, there are limitations to the program, and it may not be suitable or needed for all merchants. For merchants that benefit from next day funding, it is a great option for efficient account management and ample cash flow and liquidity.