From the February 2012 issue of Treasury & Risk magazine

Chucking Checks

Companies succeed in persuading suppliers to accept ACH payments, eliminating the cost and effort involved in paper checks.

Led by concerted efforts on the accounts payable side, projects to convert check payments to ACH are starting to produce real benefits. When $12 billion Dean Foods decided to streamline vendor payments in late 2009, the Dallas, Texas-based company had the foundation for an impressive turnaround—a bloated vendor base of nearly 200,000, roughly 100 employees tied up handling invoices and check payments, only 7% of 52,000 monthly invoices arriving electronically, and 80% of supplier payments going out as checks, requiring a daily check run of up to 5,000. Days payable outstanding (DPO) stood at 19 days.

Now the vendor base is a svelte 60,000. There is only a limited check run because 86% of supplier invoices are now paid by ACH. Settling an invoice with a check is the rare exception, reports Julie Mingus, director of corporate treasury operations and disbursements. About 50 employees now handle invoices and payments, and all but 24% of invoices arrive electronically after a three-stage campaign to get suppliers to e-mail their invoices in TIFF format. 

Experts consider such a high conversion rate essentially impossible, but Dean Foods could do it because it had multiple suppliers for almost everything it bought. As the company shrunk its supplier base, in most cases only those that would agree to card or ACH payments survived. “If a supplier wouldn’t take ACH payment, we’d go to the next one on the list,” Mingus says.

The payoff includes a $65,000 annual savings in postage costs. DPO was stretched to 26 days by applying standard net-35-day terms to all vendors, Mingus explains. The annual savings from early-pay discounts has risen from about $2 million to more than $4 million.

At $4.5 billion PulteGroup, a project to convert vendors from check payments to ACH is well under way, reports Dory Malouf, treasury cash operations manager at the Bloomfield Hills, Mich., home builder. So far, approximately 2,100 vendors have converted. Pulte does not count the number of payments per converted vendor, but if they averaged one a month, the savings already realized would be about $216,000 a year, and the project has the potential to provide a lot more savings.

If trying to eliminate vendor check payments is pretty much a no-brainer, it takes plenty of brains to set up a program correctly, and Malouf is pleased with the way Pulte’s is working. For one thing, the company requires vendors to provide a letter from their bank confirming the account number and attesting that the account is in good standing.

“We know the information they provided is correct,” Malouf says. “This means we have no return issues. One company we talked with has 15% returns, but we found a way to avoid that problem.”

Pulte also elected to use a separate account for ACH payments, rather than running them through its controlled disbursement account. That segregation and the use of debit blocks add an important layer of security. “Vendors have to see your bank account information, but this way they can’t get any more money than we authorized,” Malouf says. “This protects us from fraud and vendor conflict issues.”

As a critical first step in the project, generally decentralized Pulte centralized its A/P operations. “We now have a national financial services center downstairs to handle all A/P,” Malouf notes. “This allowed us to make vendor ACH payments very efficiently.”

And since the payments are not extremely time sensitive, vendors are paid the second day after the bank receives the file, not the next day. “This way we never incur late fees from the bank,” he says, “and we have more time to react if any payment needs to be recalled.”

Converting vendors requires consent, and at the end of the day, supplier acceptance probably depends on “what will happen in their A/R operation,” says Greg Cicero, a principal at consultancy Treasury Strategies. “If they don’t get the invoice detail they need with an ACH payment, or if their back office system can’t apply the payment, it won’t work.”

Often the issue is remittance information. Checks arrive in the mail with paper remittance data that are hard to automate but complete in many cases. Moving to ACH could mean losing some of that data, explains Arthur Brieske, head of product management for the Americas in global transaction banking at Deutsche Bank. The trick is to decouple the information from the payment and send it separately but identified so it can automatically be matched up with the payment for posting and reconciliation in the payee’s A/R system, he says.

Conveying remittance data was not a big stumbling block for Dean Foods, Mingus says. The company simply put the data in an e-mail attachment, sent the same day the ACH payment was made, and vendors went along, in many cases printing out a PDF and treating it like a paper document. Now, for large national suppliers that want data feeds to A/R systems, Dean Foods has a Web portal where they can log on and download remittance data into a spreadsheet.

The other challenge in converting vendors from checks to ACH is getting their bank information—account number and transit routing number—Brieske explains. “It works best when there is a portal where vendors provide bank account information and receive remittance detail, thereby streamlining the execution and reporting process,” he says. Companies that use vendor portals typically are more successful, with conversion rates as high as 80%, than the companies that don’t, with conversion rates under 30%, he reports.

Darrin Brown, manager of revenue management at $4.3 billion YRC Worldwide, a freight carrier in Overland Park, Kan., looks at the issue from the other side—as a vendor trying to switch its customers from checks to ACH. And Brown has found a partial solution for receiving remittance data: “We get it by e-mail. Our system can link the customer account to the e-mail address and pull the remittance data into a spreadsheet that shows the customer account. The matching is still somewhat manual, but it’s a lot more efficient than trying to work from paper or images of paper remittance documents. It’s matching at a higher level.”

YRCW moved from 28% electronic payments in 2009 to 32% in 2011, using a green sell.

“We sent out a flier with invoices in 2009, pointing out that paper payments help to destroy rain forests and are bad for the environment,” Brown explains. “And we showed them how simple it was to switch. A lot of them thought it would involve EDI, but they can just send us a text file or spreadsheet and we take it from there.”

 

For a 2011 look at how benefits administrator SHPS kept on top of its payments, see Beefing Up Payment Systems.

 

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