Cheaper, faster, more secure—what’s not to like about electronic payments? While the advantages that e-payments provide over paper checks seem obvious and sizable, business-to-business (B2B) transactions are making the switch somewhat slowly. Meanwhile, though, financial institutions are making new efforts to simplify companies’ adoption of electronic payment methods.
A survey released by the Association for Financial Professionals (AFP) late last year found companies were making 50% of B2B payments by check, down from 57% in a 2010 AFP survey. Other research suggests the use of checks is even more prevalent among smaller businesses. Moreover, the AFP data point to a deceleration in the move to electronic payments. The organization’s previous electronic payments survey showed a 23% drop in the use of checks over three years, from 74% of B2B payments in 2007 down to 57% in 2010.
The persistence of checks stems from their ease of use and businesses’ familiarity with them, observers say.
“Checks are ubiquitous,” said Nancy Atkinson, a senior analyst at Aite Group, a technology research and advisory firm. “Everybody on both the payer and the receiver side knows what to do if they receive a check or write a check. It’s habit, it’s what there’s a comfort level with, and it’s difficult to change behavior in those regards.”
For a company, its payments are its “cash flow, the life blood of the business,” said Mark Webster, a partner at consultancy Treasury Alliance Group. As such, companies are reluctant to make changes. “If it works, why change it?” Webster said.
And while Europe has moved away from checks, in the United States, technological innovations like check truncation and remote deposit capture have made it easier to use them, a development that has lessened companies’ motivation to push toward electronic payments.
“In the U.S., we established Check 21, which allows us to process checks electronically after they’ve been written, which in essence lengthens the life of checks,” said Michael Vigue, vice president of the corporate payments division at Bottomline Technologies, which provides payments automation and cash management software and services.
“In the U.S., check processing is a very efficient thing,” Atkinson said. “While there’s money to be saved by doing most payments electronically rather than by paper check, the difference in the cost of a paper check versus electronic payment is far smaller than in other parts of the world.”
Vigue, pictured at left, also noted that in the fight for scarce IT resources, companies tend to favor projects that bolster their ability to make money, rather than cost-cutting projects like shifting to electronic payments.
One factor that makes checks easy to use is the minimal amount of information required to issue one. “All you need to know is the payee name and address, and you can send out a check,” said Dennis Sweeney, a managing director and treasury solutions executive at Bank of America Merrill Lynch.
If billers included only their electronic remittance information on invoices, and not their address, the use of e-payments would probably be a lot higher, he said. “You give somebody a mailing address, that’s where they’re going to send it. If you only give them an electronic address, that’s where they’re going to send it.
The challenge for a lot of companies is: How do I know how to pay someone electronically?” Sweeney said. “I don’t have their bank account information; I don’t know if they accept credit cards.”
Gathering that information poses logistical challenges, especially for companies with large numbers of suppliers.
Signing up Suppliers for E-Payments
Cox Enterprises, the Atlanta-based media, communications, and automotive services company with more than $15 billion in revenue, is working to switch from checks to e-payments.
“The ‘why’ is for cost savings, to gain efficiencies and really better control over what you’re doing,” said Anita Patterson, the company’s director of treasury services and Patriot Act compliance officer. The switch to e-payments also aims to eliminate the use of paper, in line with Cox’s sustainability program, she said.
The process starts with business units asking vendors if they would be willing to accept electronic payments, Patterson said. “There’s some easy wins that you have with companies, but others take a little more collaboration, a little more finesse to convince them they want to receive ACH [Automated Clearing House] payments.
“You might have to have someone call them, talk to them, work with them,” she said, adding, “If you have a vested interest in getting the paper out of the business and converting to electronic means, you have to invest the effort to do it.”
Sometimes the wording used can be important. One of Cox’s business units deals with a lot of small shops, and many of them weren’t familiar with the term “ACH.” “They’re not as aware of payments methods as some of the large companies might be,” Patterson said.
So the business unit switched to asking vendors whether they would be willing to accept payment via “direct deposit,” the term used to describe ACH payroll and benefits payments. “Everybody knows what direct deposit is,” Patterson said.
Cox also encountered security concerns among its suppliers. “They have to have a trust factor with you,” Patterson said. “If they don’t trust you, they’re really not going to give up their account information, especially if they’re not aware of safeguards that they can take to safeguard their accounts, [such as] a debit block or a debit filter.”
At the same time that Cox’s businesses are trying to shift to e-payments, they’re asking suppliers to invoice them electronically. “Sometimes electronic invoicing is a bigger challenge,” Patterson said, noting that some small suppliers still submit handwritten invoices. “It depends on the company.”
Patterson’s advice to other companies that want to move from checks to e-payments? First, “define your goals,” she said. “Once you do that, you need to engage the proper people and the proper resources. You need to get buy-in within your own organization. If you don’t have the buy-in, you’re not going to be successful.
“You also need to engage your banking partner,” Patterson added. “They can be a huge resource for you when you go into a program like this.”
Masco Corp. outsourced its effort to sign suppliers up for ACH and virtual card payments to a third party. Marcel Santiz, director of treasury at the $8.2 million maker of home improvement products in Taylor, Mich., said companies that take this approach should be sure they understand the outsourcer’s practices.
“Not every provider is going to go through all the vendors more than one time,” Santiz said. “Not all the providers will go down to the smallest vendors. Some will stop at a set monthly or annual spend amount and not contact any vendor below that limit.
“One of the things that was important to us was that we define what the campaign script is,” he added. “What are our vendors being told? How are they being contacted? And if they ask a question specific to their relationship with us, we want that turned over to our A/P people.”
For companies that are wary of handing out their bank account information for fear it will be used by fraudsters, Universal Payment Identification Codes (UPICs) may provide a solution. UPICs are pseudonyms for bank accounts—numbers that look like regular account numbers but can’t be used to debit the account. [See sidebar, "An Alias for Your Bank Accounts," below.]
Sweeney said a UPIC can be used as “a receive-only electronic address. If I know your UPIC because it’s on your bill, I can send you a payment, but I can’t fraudulently send a check against it. UPIC is a way to protect your banking information,” he said.
And for companies tired of tracking down suppliers’ bank account information, the Remittance Coalition, a group of organizations working to promote B2B e-payments and electronic remittance information, is considering putting together a directory of companies that take electronic payments and making their remittance information available in a secure way.
Such a directory would help large corporations deal with the chore of compiling all their suppliers’ bank account data and payment requirements, said Robert Unger, senior director of e-billing and payments at NACHA, the governing body that develops the rules for ACH transactions. “You need a phone book; you need a way to look up ‘How does A Corp. pay B Corp.?’” he said.
Unger, pictured at right, noted that at this point, there are a number of different directories of remittance information out there. The Remittance Coalition’s directory would also help companies that want to receive payments electronically and face the challenge of posting their requirements on all the different directories, he said.
Mark Webster of Treasury Alliance said a directory would also come in handy when a company gets a letter from a supplier saying it is changing its remittance information, by giving the company a way to confirm that the letter is accurate and not an attempt at payment fraud.
Companies that use an e-commerce business network, such as Ariba, Basware, or Bottomline’s Paymode-X, can funnel e-payments to their suppliers that participate in the network without having to obtain the vendors’ bank account data.
The biggest hurdle for a company making electronic payments “is knowing what the receiver can accept, in terms of format and quantity of content,” said BofA’s Sweeney. “That’s one area where the e-commerce portals like Ariba and Paymode-X do a good job. As a receiver of a payment, I can sign up for whatever I want. I can look at it online and download a file in several formats to upload to my ERP.”
Paymode-X, a cloud-based service that facilitates the exchange of payments and remittance information electronically, not only relieves companies of the need to collect suppliers’ bank account information and distributes the remittance information to suppliers, but it also handles returns and notices of changes, according to Bottomline’s Vigue. “When you pay someone electronically, about 2% to 3% of those transactions will require intervention,” he said.
One consideration for companies choosing an e-commerce network is how many of their suppliers participate.
Vigue noted that 250,000 companies receive payments through Paymode-X. If a company that is considering using the network is a manufacturer, “even if they have a considerable number of vendors,” he said, “I’d suggest we do a vendor analysis because it’s highly probable that Bottomline could move a large portion of their check payments today to electronic.”
Another way to sidestep the effort involved in gathering bank account information is to use procurement cards or virtual cards to pay vendors that accept them. [See accompanying story, Paying Without Plastic.]
The card companies are moving to accommodate the market for B2B payments. Last fall, MasterCard and Basware announced a new e-payment system with supply chain finance aspects. The companies say suppliers will be paid quickly, while buyers will get extended payment terms. And in January, VISA and ERP provider SAP announced a partnership that will allow companies that use VISA to make payments through the SAP Financial Services Network.
The Push for Electronic
While habit and ease of use favor checks, there are plenty of factors sending companies toward electronic payments.
Andrew Gelb, head of Citi’s treasury and trade solutions North America, cited risk management considerations. “The move away from paper can definitely help improve risk management because of better transparency and better tracking, etc., with electronic payments,” said Gelb, pictured at left.
Certainly one key risk for payments, the risk of fraud, favors the use of electronic payments.
“Most of the fraud has to do with checks, so if I can move to other payment methods, I may be able to reduce the risk of fraud,” Webster said.
An AFP survey conducted last year showed checks are by far the payment method most attractive to criminals. The survey found that among companies that had experienced payments fraud, 87% said checks were targeted, versus 29% that experienced fraud related to corporate or procurement cards and just 8% whose ACH credits were targeted.
“The ability to protect yourself is much stronger in the electronic space than in the check space,” he said. Advances in security are also more likely to benefit e-payments than checks, he said. “The new tech measures are all geared to securing electronic data.”
Vigue argued that banks and vendors have gotten better at helping companies that want to adopt electronic payments.
“Customers want one place to send all their payments to, they want to know they’ve been made, and with as little cost as possible,” he said. “Depending on whether it’s A/P, a dividend or an insurance payment, the way in which you make the payment might differ.” Accounts payable might work best as ACH transactions made through a settlement network, he said, while insurance payouts might still be done as checks.
Instead of focusing specifically on electronic payments, companies should create an overall strategy that takes into account all types of payments, Citi’s Gelb said. The strategy “may include checks; it may include a variety of electronic payment types, as well as a supply chain financing solution.”
Citi offers tools to help companies put together a payment strategy, he said, including Citi Working Capital Analytics. The platform “allows us to analyze payments and make a recommendation on whether we think they are best made through card or ACH or check, and compare that to industry benchmarks and best practices overall,” Gelb said. He also cited Citi’s Payment Exchange, which lets payees specify how they want to be paid and gives them access to details about their payments.
“More and more banks are helping their customers by saying, ‘Send us a flat file or an unformatted payments file or a mixed payments file,’” said Aite Group’s Atkinson. “‘We’ll take it from you, follow rules you establish, and make the payments in the best way.’”
In B2B commerce, payments are just part of a process that starts with a purchase order, continues with an invoice, and finishes when the buyer has reconciled its accounts.
For many corporations, the real goal is not switching to e-payments, but completely automating the process of exchanging both the payment and remittance information, said NACHA’s Unger.
“What people really want is straight-through processing,” he said. “It’s not just the payments; it’s so important to get the remittance information to get to that holy grail.
“Sometimes if they can’t get that, they don’t even want e-payments,” Unger added.
In 2012, there were more than 21 billion ACH transactions, according to NACHA, up 4.28% from the total in 2011. Companies use two types of ACH transactions: cash concentration or disbursement (CCD) and corporate trade exchange (CTX). In 2012, Unger noted that CTX transactions, which carry a greater amount of remittance information, grew 13.77%, while CCD transactions grew just 5.4%. That “would indicate to me that a lot of people are looking at the opportunity here to send payments plus information,” he said.
“When you want to tackle the B2B payments problems, you have to tackle both of those problems,” Unger said. “One of the things we’re doing to try to help things out [is] we’re trying to provide the ability to use modern data formats in remittance information.”
Until recently, data-rich ACH transactions had to be done in the EDI format. While many large businesses use EDI, Unger said, many small and midsize businesses don’t. Last year, NACHA announced a program that allows companies sending CTX transactions to use a more up-to-date, XML-based format, ISO 20022.
“At this point, to spur some innovation and develop some experience, it is a voluntary program,” Unger said. “Both sender and receiver have to opt in to participate.”
Sweeney, pictured at right, said the variety of formats used for remittance information is a challenge, and standardization would be helpful. “I think the XML [ISO] 20022 is a more universal format that can be used around the world rather than the proprietary formats in the U.S.,” he said. “I think it is counterproductive to have multiple standards to do the same thing.”
Shifting the whole payment process to an electronic platform also means much greater cost savings, Webster argued.
By switching a payment to ACH or a card, “I can reduce the processing cost by 10 to 15 cents” per transaction, he said. “If I can change the whole process from procurement on through, I’m looking at $10 to $15.”
Of course, an organization might prefer electronic processes for procurement, payments, and the exchange of remittance information, but if it does business with a diverse group of companies, it likely will continue to deal with an assortment of different processes and payment types for some time to come.
At this point, companies that electronify remittance information face a “chicken and egg” situation, Unger said. “I can send it, but who can receive it?”
Fed Payments Initiative
Last fall, the Federal Reserve launched a discussion of ways to improve the U.S. payments system. The initiative included a Fed white paper that companies were invited to comment on and a series of public meetings.
In its white paper, the Fed suggested five goals that it would like to accomplish within the next 10 years, including “greater electronification and process improvements” to reduce the costs of transactions; “a ubiquitous electronic solution(s) for making retail payments … that does not require the sender to know the bank account number of the recipient”; and a greater selection of “convenient, cost-effective, and timely cross-border payments.”
“Part of what the Fed is trying to push is more immediate payments,” said Aite Group’s Atkinson. “They’re looking at what’s happening in other parts of the world.” She noted that in the U.K., “ACH transactions are cleared and settled within two hours.” A number of other countries are also working on accelerating payments, Atkinson said.
“Newer generations of people are going to have less tolerance for waiting a minimum of two days to get their money,” she said. “Technology is moving fast enough and coming up with new ways that it is something that should be able to be done.”
Atkinson noted, though, that the U.S. payments system is organized differently than the U.K.’s. “What allowed the U.K. to get faster payments up is there’s one single payments group that has some amount of responsibility and care for all payments, including paper checks. That does allow them then to look at the total picture of payments and potentially make some good decisions,” she said. “In the U.S., there’s no centralized body looking at our payments overall.”
The evolution in B2B payments is occurring against the backdrop of big changes in other types of payments.
BofA’s Sweeney noted the considerable amount of activity that is occurring these days in e-payments, ranging from the e-commerce networks to mobile wallets.
“Alias payments are going to be a big growth area,” he said. “It’s where I send money to your email or cell phone number and then you retrieve it.”
He cited ClearXchange, operated by Bank of America and other banks, which allows people to send payments via email or text as long as they know the email or cell phone number of the person they’re paying. “If the receiver is already enrolled with ClearXchange, it will be deposited to their account,” Sweeney said. If not, the recipient will be directed to sign up online.
While ClearXchange is currently used for consumer-to-consumer payments, “I think there are lots of applications for where a business needs to pay a consumer,” he said.
“Checks are going the way of the dinosaurs,” Sweeney said. “It just may take a few million more years.”
An Alias for Your Bank Account
When Pitt Ohio is due to be paid electronically, it gives customers its Universal Payment Identification Code (UPIC) instead of its bank account number. Robert Taylor, treasurer of the Pittsburgh-based trucking company, said he views the pseudo-bank account numbers as “a cheap insurance policy.”
“I just have an aversion to giving out account numbers to total strangers,” Taylor said. “The bad guys are always out there to catch you.
“To me, it’s just like having positive pay,” he added. “It’s another way to help prevent fraud.”
Pitt Ohio, with $387 million in 2012 revenue, has been using UPICs since 2004. Companies pay their banks what Taylor described as “a minor fee” to use a UPIC.
The Clearing House, a payment service provider that clears and settles ACH transactions and wires, hosts the database that links a company’s UPICs to its underlying bank accounts.
Transactions made via UPICs are limited to credits, so companies that give out UPIC numbers know that no one can debit their account, said Sharon Jablon, product specialist at the Clearing House. Nor can anyone use a UPIC to write a check. “So companies aren’t afraid to put that UPIC information that looks like a bank account routing number on their invoices or their websites,” she said.
“I don’t care who has our UPIC numbers,” Taylor confirmed. “They can’t do anything with them.”
UPICs also come in handy if a company wants to switch banks. “Your UPIC numbers go with you,” Taylor said. “It makes it easier. You don’t have to send any letters to your customers [saying] that you changed banks.
“The banks don’t like that,” he added. “But as a customer, it’s a great asset.”
Jablon cited demand for UPIC numbers from government agencies, which are required to rebid their banking relationships periodically. “With thousands of payments coming in, that is a huge headache,” she said. “Knowing they can transfer their UPIC, that helps them in terms of time and effort.”
UPICs have been around since 2002, but Jablon said it took a while for interest to pick up. “Over the last two to three years, there has been dramatic growth,” she said. “I think it’s a combination of the interest among corporates in having secure bank accounts and the increase in corporates wanting to receive electronic payments. Many of them are wary of getting started because they don’t want to give out their bank account information.”
There are now 26 banks that offer UPICs to their customers and more than 6,700 UPICs, Jablon said. Last year more 9 million transactions, worth $121 billion, were made using UPICs.
UPICs are available only through banks that use the Clearing House to settle their ACH transactions. The Federal Reserve, the other organization that clears ACH transactions, does not offer UPICs.
Read the March Special Report on Liquidity & Cash Management.
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