How to Reduce Payment Friction for MSPs: Key Techniques for Smoother Financial Operations
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Anything that makes it more difficult or time-consuming for your clients to pay or for you to receive payments is called payment friction — a common issue in B2B environments.
Whether MSP payment friction slows down or completely halts your payment cycle with a client, there is a significant cash flow impact to consider.
A reported 70% of MSP owners worry about cash flow issues. Without reliable cash flow, meeting financial obligations, including paying employees, is difficult, if not impossible.
An MSTS report on B2B sellers and buyer payment preferences found that 57% of B2B buyers do not complete payment if the checkout process takes too long.
However, an inefficient checkout process is just one of many causes of payment friction.
In addition to buyers who abandon purchases due to a lengthy checkout process, even more sales are lost due to other forms of payment friction, which we will discuss.
Considering the vulnerable financial position this leaves business owners in, proactively reducing payment friction is a worthwhile endeavor for MSPs.
This article will discuss the common sources of MSP payment friction and provide actionable strategies for overcoming them.
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8 Common Causes and Sources of Payment Friction in MSPs
Payment friction can stem from inefficiencies in the MSP’s payment system, resulting in delayed payments, cash-flow challenges, and dissatisfied clients. Knowing where these sources lie is the first step toward remedying them.
Let’s review eight of the most common causes of payment friction for MSPs.
1. Outdated Payment Infrastructure
Some MSPs still use legacy payment systems designed for a different era of business transactions. These systems can be slow and rigid.
With these legacy systems, MSPs are subject to payment delays, more invoicing/billing errors, and higher maintenance and operational costs.
This puts your MSP at a disadvantage from a client service standpoint. Clients expect smoother payments, and your payment platform needs to meet these demands.
These modern payment demands include:
- Smoother invoicing processes
- Secure checkout
A Federal Reserve study reports that 80% of Americans want to use faster payments to make business payments.
Modern MSP payment software makes this possible, and we will discuss this strategy later in this article.
2. Complex Payment Procedures
Payment procedure complexity is another issue that can delay payments and frustrate clients.
For example, if your client manually enters their payment information each time they need to make a payment, this creates extra steps and more room for error.
Along with more payment errors, this also leads to delays.
In the Digital Economy Payments: The Ascent of Digital Wallets survey published by PYMTS, entering incorrect payment information was the second most common cause of declined payments.
Manual data entry is inherently more prone to error than automated data entry. Whether you or your client manually enter payment information, the risk of mistakes increases.
3. Limited Payment Options
Clients want to choose their preferred method when they make a payment, and offering this flexibility can improve your MSP client satisfaction rates.
AFP’s 2022 Digital Payments Survey shows that 73% of organizations are transitioning their B2B payments from paper checks to electronic payments. Most (92%) cite increased efficiency as the driving factor behind this move.
Offering a variety of digital payment options modernizes your payment process and allows you to meet the demands of more clients.
A PYMNTS Intelligence research study, conducted in collaboration with Ingo Money, examined the importance of various payment options in client satisfaction.
It found that businesses that offer six or more instant payment methods score higher than average on the Customer Satisfaction Index.
B2B buyers also said that the top reason they would switch to another company is if they didn’t have access to their preferred payment method.
This emphasizes the importance of offering various payment options, including digital payments, to meet clients' needs and preferences.
4. Poor Client Communication
An estimated 70% of businesses experience faster payment cycles when they provide more detailed instructions and details on their invoices.
This is just one form of payment communication, and it’s one that many businesses overlook.
Not knowing when and how to make payments (including due dates, payment methods, and penalties for being late) can result in delayed payments without clients even being aware.
Communication issues can also lead to misunderstandings or disagreements over payment terms.
Consider the example of an MSP billing a new client.
The MSP's invoices don’t clearly spell out the payment terms, such as ‘NET 30 days’ and ‘Due by [date].’
This MSP also does not explicitly explain the consequences of late payment (e.g., ‘We will apply a 1.5% monthly late fee to our invoice if it remains unpaid after [date]’).
Lacking this information, their client does not realize the urgency of the payment and misses the due date.
Once the payment is overdue, the client could be charged late fees, which they were also unaware of. Their client might dispute the late charges or the entire payment.
This can also damage the relationship with the client and cause the MSP to lose their business.
5. Lack of Payment Automation
In a PYMNTS Intelligence survey of over 400 executives, respondents were questioned about payment automation and client satisfaction.
According to the survey, 70% of mid-sized businesses noted increased satisfaction after embracing full AP automation. For those who only partially automated their payments, this satisfaction level dropped to 40%.
A lack of payment automation will decrease client satisfaction and impact your MSP in other ways.
For example, according to a report from PYMNTS and American Express, businesses that rely on manual processes take 30% longer to follow up on overdue payments than those using automated processes.
6. Inflexible Payment Terms
Rigid payment terms that don’t consider your client’s financial conditions can also create payment friction.
Your MSP likely has a specific payment schedule for settling vendor invoices based on your unique cash flow and other factors.
Similarly, your clients will also have specific requirements and preferences when paying you.
If you do not offer flexible payment terms and attempt to accommodate your clients’ schedules, you will limit your potential client base and miss out on new business opportunities.
Consider an MSP that requires a NET 30 payment for services.
They might find that some clients, including smaller businesses or startups, won’t be able to make timely payments because of their own cash flow structure.
Broadening payment terms to NET 60, or even introducing an installment plan, could lower payment delinquency and improve client satisfaction.
7. Technical Issues with Payment Platforms
Payment technology platforms, including payment gateways, can also experience downtime, affecting clients' ability to make timely payments.
This can happen for many reasons, including technical issues such as server outages or network connectivity problems. Software bugs also cause disruptions, cyber-attacks, or other security breaches.
Whatever the cause, anything that disrupts a client's ability to pay results in payment friction. This can mean late fees and interest charges for delayed client payments.
For your MSP, delayed payments disrupt your cash flow and impact your ability to pay employees, suppliers, and vendors on time.
8. Limited Integration with Accounting Software
Seamless integration with accounting software (such as QuickBooks Online, QuickBooks Desktop, and Xero) should be a prerequisite for any MSP payment system. Without it, more unnecessary friction will be added to the process.
For example, you may need to reconcile payments manually, which is time-consuming and more error-prone than automated payments.
Beyond taking more time and resulting in errors, limited integration also impacts cash flow management.
MSPs cannot accurately forecast cash flow without timely and reliable data. This means they could either run short of cash or misdirect funds.
Limited integration also increases operational expenses, as the business might have to invest more in managing and correcting discrepancies.
One survey of IT decision-makers found that a lack of integration technology costs businesses an average of half a million dollars per year.
Whether one or several of these common causes of MSP payment friction are applicable, there are effective strategies to overcome them.
Next, we will detail nine ways to improve financial operations and reduce payment friction.
9 Strategic Approaches to Reduce Payment Friction
Although reducing payment friction involves a proactive approach, it does not have to be a complex process. It is a matter of applying modern technologies, simplifying procedures, and improving client communication.
Below are some key strategies you can deploy to streamline MSP payment procedures.
1. Integration with Accounting Software
Integrated systems facilitate automatic bookkeeping. When payments are automatically matched with invoices, manual errors are reduced. The system also ensures financial records are current to better manage cash flow.
Does your current payment system integrate seamlessly with bookkeeping tools like QuickBooks or Xero? If not, this is an important place to start.
Look for MSP-specific payment software that integrates with your existing workflows. Make sure the software you choose supports multiple integrations at once.
Along with accounting integrations, consider PSA integrations (such as ConnectWise, SuperOps) and API access, too. With API access, you can create custom integrations for a truly streamlined and efficient payment process.
Data published in APItoolkit reports that businesses that use APIs or integrations are 24% more likely to be profitable than those that don't. They can also help businesses reduce costs by 15%.
Offering API access and other integrations will make your payment process easier and show your clients your commitment to providing them with the best possible service and convenience.
2. Implementing Modern Payment Gateways
Payment technologies have changed a lot in recent years. Taking advantage of modern systems is an effective way to ensure payments are processed as efficiently as possible.
Payment gateways that work with all the primary payment methods — credit cards, ACH transfers, and digital wallets — allow your clients to pay for services how they want to.
Another advantage of modern payment gateways is their built-in compliance features, including PCI-DSS compliance.
PCI compliance refers to data security standards (DSS) developed by the Payment Card Industry Security Standards Council (PCI SSC). These compliance requirements apply to businesses that process, store, or transmit cardholder data.
Modern payment gateways use third-party card processors that are Level 1 PCI Compliant Service Providers.
PCI compliance benefits your clients by keeping their sensitive information safe. However, it also protects your business from potential legal and financial consequences.
The costs of PCI non-compliance can be significant.
The PCI SSC can impose fines of up to $500,000 per violation of the PCI Data Security Standards. For that reason, PCI compliance is also a financial imperative, not just a security one.
3. Simplifying Payment Processes
Streamlining payment procedures can significantly reduce friction.
Possible strategies include:
- Reducing the number of steps a client must complete to make a payment.
- Enabling one-click payments.
- Provide resources and education so clients see and know exactly what to do to make a payment.
- Allowing recurring payments.
- Enabling AutoPay.
Streamlining payment procedures can significantly reduce payment friction.
The more streamlined the process, the more client-friendly it becomes, and the less likely a payment will be delayed.
For example, an MSP simplifies its payment process by directly integrating a ‘Pay Now’ button into an invoice email. Now, clients have to do little more than click the button to complete the payment.
Not only does this speed up the payment cycle, but it would also improve the client experience.
4. Standardizing Payment Policies
Confusion due to ambiguity or a lack of information leads to payment friction, causing payment processing delays.
Standardized payment policies across all services and client agreements clarify and remove opportunities for confusion. Clients will then better understand their payment obligations and due dates.
This promotes timely payments and reduces the need for follow-ups and chasing late payments.
As a result, businesses improve their cash flow and limit disruptions in operations caused by late payments.
For example, consider a managed service provider that offers IT support, cybersecurity, and cloud services.
They use different payment terms for each service – NET 30 for IT support, NET 45 for cybersecurity, and NET 60 for cloud services.
This payment variance resulted in clients paying late because they couldn’t keep track of the different payment periods.
It also created an administrative challenge for the MSP’s accounts receivable/billing department, managing the various payment periods while following up on late payments from each of the three services separately.
Switching to a streamlined payment term of NET 45 for all services helped the MSP improve its cash flow and reduce the time spent on accounts receivable tasks.
Clients could also keep on top of their payments, knowing they were all due at the same interval.
5. Expanding Payment Methods
As discussed above, offering your clients their preferred payment method is beneficial from a client service standpoint.
According to data from EMARKETER, the most common B2B payment methods (by transaction volume) in the United States are:
- ACH payments (47.9%)
- Checks and cash (32.1%)
- Wire transfers and other (13.3%)
- Credit cards (6.7%)
This variety of preferred payment methods highlights the importance of accepting multiple forms of payment.
Mobile and digital payments will help you meet client demands and accept the aforementioned payment methods.
Statista estimates the total digital payment market transaction value will reach $11.55 trillion in 2024.
This is indicative of a growing trend towards online and digital transactions. Your MSP is at a competitive disadvantage if it does not keep up with these modern payment methods.
6. Enhancing Client Communication
Maintaining regular communication with clients about payment obligations reduces friction and speeds up the payment cycle.
MSP services (e.g., IT support, cybersecurity, cloud management) are typically ongoing, and client communication should be, too.
Regular communication keeps payments at the top of your client's minds, making them less likely to forget to complete them. This can prevent cash flow disruptions or other budgeting issues due to late payments.
Along with routine reminders, provide detailed explanations of any changes to terms of payment or invoicing that happen throughout the life of a service.
If you’re raising your service pricing, changing how you bill, or altering your billing cycle, let the client know beforehand and in detail.
Make yourself readily available to address your clients' questions or concerns about payment practices.
By being responsive and accessible, you can improve the client experience and address payment issues before they become bigger problems.
7. Flexible Payment Solutions
As we've seen, standardized payment terms have their benefits. They include predictability, streamlined operations, and improved cash flow management.
However, there is also an argument for the value of offering flexible payment terms. This means offering your clients flexibility in when and how they make payments.
For example, you might offer installment plans, incentives for early payment, or even negotiate individualized terms with some clients.
a. Flexible Financing
Installment plans are a form of flexible financing that can lead to more sales and a larger client base.
For example, on purchases over $10,000, your clients could quickly access financing to make payments over one to 12 months rather than all at once.
With one-click financing, you can make it easier than ever for your clients to access working capital, which increases their buying power and the speed of their payments.
This fast, frictionless option removes barriers to technology purchases. It increases your clients’ purchasing power and, in turn, your revenue.
According to data from ClickLease, offering B2B customer financing can increase average order values by more than 41%.
b. Dynamic Discounting
Dynamic discounting is another strategy MSPs can use to strike a balance between payment terms standardization and flexibility.
Dynamic discounting is applied on an invoice-to-invoice basis. This allows you to set a discount rate for payments made at certain times.
For example, you might offer a 5% discount for payments made within ten days of sending an invoice.
This incentivizes your clients to pay early, improving your cash flow and reducing the risk of late payments.
c. Case-by-Case Approach
You can also offer payment flexibility to your clients on a case-by-case basis.
If they come to you with an unexpected financial challenge, you can work with them to create a modified payment plan that works for them.
However, you can still use standardized payment terms for clients who consistently pay on time and for new clients. This maintains consistency and predictability in your cash flow.
8. Monitoring Payment Systems
Routine monitoring and maintenance of payment systems allow you to fix relatively small glitches or inefficiencies proactively. In doing so, you avert more serious problems that might otherwise slow down the payment process.
Monitor payment reports and track any trends or patterns in late payments to identify areas for improvement in your invoicing process.
Payment software with customizable reporting features makes it easy to track cash flow, revenue, and expenses in one place.
You can monitor key metrics and other information that offer insights into your payment systems and take action accordingly.
Regularly monitoring and testing networks is also a PCI-DSS compliance requirement.
This pertains to the cardholder data environment (CDE) where customer payment information is stored, processed, or transmitted.
Again, if you choose modern MSP-specific payment automation software, the burden of PCI-DSS and SAQ-A compliance is significantly reduced.
Conclusion: Enhancing Efficiency and Client Satisfaction in MSP Payment Processes
Creating a frictionless payment experience has challenges, including outdated payment infrastructure and complex payment procedures.
However, modern payment software overcomes many challenges with minimal client intervention.
Consider IT Vortex, a New Jersey-based cloud migration and IT services provider that entrusted FlexPoint to streamline cash flow and eliminate manual invoicing and reconciliation. In doing so, they experienced first-hand the benefits of frictionless payments.
Before switching to FlexPoint, IT Vortex clients had to leave the IT Vortex site to pay, which left clients confused and making late payments.
With FlexPoint, IT Vortex clients can quickly make payments using a passwordless portal complete with AutoPay functionality.
As a result of this significant reduction in payment friction, IT Vortex saw:
- Payment cycles that were 2x to 30x faster.
- Savings of $15,000 per month on invoice processing.
- Savings of 60 hours per year on manual invoicing.
FlexPoint can reduce payment friction in your business, too.
Optimize your MSP's payment operations with FlexPoint's innovative solutions. Reduce payment friction and enhance both efficiency and client satisfaction.
Visit our website or contact us to learn how our tools can transform your payment processes.
Additional FAQs: Reducing MSP Payment Friction
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