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The hidden costs of NSFs are a challenge businesses need to overcome. Non-sufficient funds, NSF, and insufficient funds all mean the same thing and are fairly self-explanatory: a lack of funds in one’s account to cover a transaction. When a transaction or payment attempts to go through an account, the bank takes time to compare how much money is in the said account versus how much money is required for the payment. When there is a lack of funds, the bank either rejects (NSF) or allows (overdraft) the transaction to go through. Both options have costly repercussions, especially for businesses.
Interestingly, there are plenty of articles on the costs of an NSF for consumers—and how to avoid insufficient funds in personal bank accounts with overdraft protection and proper budgeting—however, there isn’t much information out there for businesses.
Business owners are the ones most likely to incur the very real and highly damaging costs of an NSF, and that’s what we’ll talk about today.
Charging NSF fees are good and very bad for business
Let’s quickly look at the repercussions of a “bad cheque” (or check), for example, on a customer. This is important because the business and consumer are inextricably linked and are often one and the same (as in business-to-business B2B relationships).
According to Nerd Wallet, some U.S. states allow businesses and merchants to charge customers up to $30 for handling costs of an NSF. On top of this cost, the banks can also charge the consumer a fee of around $30. That consumer now owes $60 in processing fees on top of the original amount, which has yet to come out of their bank account—and may eventually require legal action and collections agencies, which could damage their credit rating.
For a business owner, the ability to charge customers for NSF fees is both good and bad for business, depending on how you look at it. Hitting customers with NSF fees, of course, is not a great way to build a good brand reputation and credibility or encourage repeat, loyal customers. The same applies if the business and consumer are one and the same in a B2B relationship. For example, if a business owner pays a contractor or landlord with a “bad cheque,” their reputation and credibility are on the line at the very least.
Regardless of whether the business owner can, in fact, collect a fee for the bounced or bad cheque, this is still not the most costly offence of an NSF.
Beyond fees and reputation damage, the actual cost of an NSF for businesses is the damage that it does to its regular business flow. That is the daily workflow, transactions, accounts receivable, and above all else, the available cash flow.
Let’s say that a small business budgets for a certain large payment to come in at the beginning of the month and planned their cash flow, projects, bills, and other payments according to that invoice. They receive the cheque on time and mail it to the bank to be processed. Several weeks later, they receive a notice that the cheque bounced and that they owe a processing fee.
The tardiness of this NSF notice is the first and perhaps biggest offence. Had the small business owner known that the cheque was bad weeks ago, they could have adjusted their cash flow, budgets, and bills accordingly—and simply not gone through with the transaction (or tried billing a different account).
Worse, the customer could be long gone or difficult to track down now that the quid pro quo doesn’t apply. Also, if a trusting relationship wasn’t previously established, the business owner could be out of luck with this payment or have a difficult and expensive time collecting.
This slow turnaround time can be detrimental to the available cash flow for businesses, especially those on a tight budget, large invoices, and many bills. There is, of course, always the risk of not getting paid or having to spend valuable time and money doing accounts receivable—and chasing people down for money weeks after the fact.
Here at VoPay, we’ve found a solution to eliminate the risk for businesses and digitize bank payments. Our platform tells the business right away if there are sufficient funds in the customer’s account immediately—without ever sharing bank account details or introducing security risks.
VoPay uses open banking technology to authenticate EFT and ACH transactions instantly with lower transaction fees than a credit card. This allows businesses to reduce and prevent NSF fees, process payments faster, track transactions easily and stay on top of cash flow.
