As a corporate treasurer, are you serious about electronic payments, or just dabbling? Do you have a programmatic approach, or are e-payments just a necessary evil for doing business with some vendors? If your answer was “necessary evil”, it's time for a change. You can do much better with the right strategy and the right payments solution.
Companies have been doing e-payments for a long time, but not strategically. Most got into e-payments because some of their vendors pushed them to pay by card or ACH. So, they're using the bank’s pipes to submit some payments. It’s a reactive approach. The payments process as a whole is not optimized.
If you haven’t optimized payments already, 25 percent check, 20 percent card and 55 percent ACH is a good mix to shoot for, depending on your industry. That adds up to a minimum of 75 percent e-payments.
In a company that hasn’t optimized payments, the typical mix is 65-70 percent check, 10 percent card and 25 percent ACH. With today’s technology, most businesses can easily flip that and get to 70 percent electronic payments. If you’re running a really good program, you can make it to 80 percent, or even 85 percent.
Card is king
Card is the best way to pay, because the payer can get rebates from the card issuer. But, not all vendors accept cards. Those that do get charged a fee by the card issuer, between 2-3 percent of the transaction value.
For low margin businesses such as supermarkets or distributors, you won’t see a lot of vendors accepting card payments. But if you’re a treasurer in the retail or automotive sector, there are a lot of vendors who are willing to pay a small transaction fee in exchange for expedited payment.
ACH and EFT payments usually have a processing fee on both ends. The fee depends on your banking relationship, but it’s usually in the range of about .15 cents per transaction. That makes them less desirable to the buyer (fees instead of rebates) but less expensive and therefore more desirable to suppliers.
So, although it would be ideal to make most of your payments by card, it’s difficult for most businesses to make that happen. ACH is the next best thing.
Cutting down on cutting checks
Whether treasurers are paying by card or by ACH, the main focus should be cutting down on checks. Paying by check is costly and labor intensive.
Up until now, paying electronically has been too. The actual electronic money transfer is the easiest and least costly part of it. The real bear is all of the manual work that paying vendors electronically requires managing supplier payment information and bank information on the front end and following up the payment on the back end.
Someone has to maintain every individual vendor’s payment preference and banking information and keep it up to date in the accounting system. It’s an overwhelming amount of work and that’s where it usually breaks down. The idea of moving to electronic payments is to simplify and streamline a paperbound process—however, maintaining vendor information is anything but simple and streamlined.
Not for big companies only
Up until now, the only companies that have been able to get to 75 percent or 85 percent e-payments are large enterprise organizations that can afford the AP headcount to do all the manual work managing vendor information and following up on payment errors. But really, is that how you want skilled people spending their time?
Fortunately, cloud technology and new payments solutions are making it so companies of every size can get to at least 70 percent automated payments with a minimum of staff. They can pay using the smartest, most cost-effective method every time, without worrying about supplier information management on the front end or chasing down errors on the back end.
”We wanted to pay our vendors electronically for a long time but the burden was on us to keep all their bank information and tell the bank how they wanted to be paid,” said Raouf Kassisieh, controller at VCC, one of the top general contractors in the United States. “I didn’t want to have responsibility for that data for security reasons.”
A payment solutions provider started managing the whole payment process for VCC a year ago., “Our payment provider handles vendor payment data and the actual payments from start to finish. There’s no administrative burden for us,” said Kassisieh. With the majority of payments now being made electronically, his team have shifted their focus to cash flow management and real-time reporting.
It may not be possible to get to 100 percent electronic payments, but once your program is up and running, it’s something to shoot for. You can easily get to 70 percent. There will always be some holdouts, usually smaller vendors, that aren’t willing to give you their bank information. There also will always be a small percentage of payments that have to be made by check. However, if you’re serious about electronic payments, those should be the exception, not the rule.
Tana Law is the SVP and co-founder of Nvoicepay, a provider of strategic payment solutions.