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Consumers Ahead in Electronic Payments, Businesses Catching Up
February 21, 2005
Elizabeth Johns
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Anyone who made it through the holidays knows that checks are out of style. This January, most of us have a bit less tinsel and paper to clean up because we did our shopping online.
Your nephew received a Best Buy gift card. Your niece got her first Hello Kitty MasterCard. You gave the college kids a cash infusion to their debit accounts. The few actual presents you purchased were selected from online catalog companies and paid for with plastic, with minimum hassle and a lot more spare time. Even your year-end charitable contributions were initiated electronically. If you’re the practical sort, you’re looking forward to the days when your cell phone can be activated to make micro-payments.
None of this surprises anyone. Use of credit and debit cards and other electronic bill paying systems has completely overtaken paper checks at the consumer level. The Federal Reserve reported in December that the total number of electronic payment transactions in America in 2003 totaled 44.5 billion, higher than the number of checks, 36.7 billion. Data show that since 2000, the use of electronic payments has grown by about 13.2% each year.
The same can’t be said in the business-to-business market.
A survey released by AFP in the fourth quarter found that while organizations are a bit more comfortable with electronic B2B payments than they were four years ago, they have yet to embrace them. The “AFP 2004 Electronic Payments Survey” showed that there are still barriers obstructing wider use of electronic payments by businesses.
Overcoming Barriers
The AFP survey found that a full 75% of B2B payments continue to be made by paper check, although change does appear to be flickering on the horizon. About 28% of respondents to the survey said their organization was very likely to move to electronics for the majority of their B2B payments in the next three years, and about half said that it was somewhat likely.
That 28% is in sharp contrast to a similar AFP survey four years ago that showed only 9% strongly agreed that their organization was likely to convert to electronic payments within the following three years.
The reason businesses have been slower to adopt electronic payments than consumers is more than just the cost, but a difficulty in making a business case for their use in the first place. That’s because the benefit of electronic B2B payments isn’t greater than the cost associated with the change, given the fact that checks work pretty well. Not surprisingly, the big organizations, the ones with the most money to spend on fancy IT systems, are the ones most likely to be moving toward electronic payments.
“Most B2B payments continue to be made by paper check, though the future of payments is clearly electronic,” Arlene S. Chapman, CTP, the Association for Financial Professionals’ Senior Consultant, Technical Services, said. “Electronic payments are gaining ground among some organizations, especially those with annual revenues greater than $1 billion.”
One reason large organizations handle fewer paper checks is that they are more likely to have integrated their accounting systems with their payments systems, the survey found. Some 56% of larger organizations said they had already integrated part or all of their accounting systems with an electronic payments system, compared to only 35% of smaller organizations. Big companies can afford to do that.
The organizations that couldn’t move to electronic payments in the near term cited several reasons: Either their accounting systems weren’t integrated with their payments systems; they didn’t have the IT resources; there isn’t a single standard format for remittance information; or their trading partners couldn’t process electronic payments with enough remittance information. They also said their existing check systems worked well—so why change?
“When existing check systems work well—as most respondents reported in the survey—it can be difficult to make a business case for systems changes that would make electronic payments more efficient, or even feasible,” said Douglas E. Downey, CTP, Assistant Vice President at HCA Inc. and Chairman of AFP’s Payments Advisory Group.
Survey respondents pointed to four “wish list” solutions from bankers and vendors that would increase their use of electronic payments: (1) accounting software that integrates with electronic payments; (2) bank services that provide straight-through electronic payment processing to accounting systems; (3) a standard data format; and (4) improved fraud control over Automated Clearing House (ACH) payments.
Treasury As Decision Maker
AFP found the treasury department typically is involved in the selection of payment method for both disbursements and collections, but it isn’t the only decision maker. While treasury departments play at least some role in at least two-thirds of the organizations surveyed, they are the sole decision makers in only about 30% of the cases. Authority is usually shared with the controller and in about 20% of the organizations surveyed, the controller is the sole decision maker.
Just over half the respondents said the treasury department’s increasing influence over payments decisions would speed the move away from paper checks.
Nudge From Sarbanes-Oxley
What’s likely to spur organizations on to adopt electronic payments is the need for better internal controls, as mandated by Sarbanes-Oxley. Some 28% of respondents say their organizations will purchase software or use a third party service to integrate accounting and electronic payment systems. About 18% will implement software that links their financial systems with those of their suppliers or customers.
Others will take a different route to an electronic system. Using the check image capabilities that are an outgrowth of Check 21, over a quarter of organizations surveyed say they plan to image the checks they receive and send images to their banks for clearing and settlement. ACH credits are currently the most widely used electronic payments method, followed by wire transfers. Purchasing cards, though in the news, aren’t often used as a primary payment method, AFP found.
Organizations would be more receptive to converting their business checks to ACH debits if banks were to eliminate the communication silos between their check and ACH systems. Some 58% of respondents said that if their bank were to combine ACH and check reconciliation and preserve positive pay, they wouldn’t object if their checks were converted to ACH debits.
Looking Ahead
Looking ahead, businesses will in fact move toward using electronic payment methods over checks, but not nearly at the same rate as consumers. The nephew with the gift card, the niece with the credit card, the college kid with the debit account, have embraced the electronic payments trend earlier because the cost for consumers to do this is low. Businesses will take a while longer because they first must make the business case, then set up the systems and processes.
“We expect to see moderate growth in B2B electronic payments in the next two years, and especially among the larger organizations,” Chapman says. “AFP will take the lead in working with its members, financial institutions and software providers to enable our members’ organizations to realize the full potential of electronic payments.”
Note:Kevin Roth, Director of Research and Arlene Chapman, Senior Consultant, Technical Services, contributed to this report.
Copyright © 2005 Association for Financial Professionals. All Rights Reserved.
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