Consumers have flocked to new payment methods in recent years. But companies have been slow to move from paper checks to electronic payment methods, particularly for business-to-business transactions, despite the benefits that e-payments can provide.
And a survey conducted earlier this year by the Association for Financial Professionals (AFP) suggests even that slow pace of adoption of electronic payments for B2B transactions may be stalling.
At the 412 companies the AFP surveyed, an average of 51% of payments were still being made with checks. That’s basically unchanged from the 50% of payments made by check in the AFP’s last survey, in 2013, and it represents an interruption in the steady adoption of electronic payments shown in a series of previous AFP surveys, as checks went from 81% of payments in 2004 to 74% in 2007, to 67% in 2010 and 50% in 2013.
But bankers and payments experts say they continue to see many companies in the process of moving away from checks.
They cite a number of reasons to be positive about e-payments. In addition to the cost savings and efficiencies possible with e-payments, growing concern about fraud convinces some companies to pay electronically.
Moreover, the case for e-payments is being reinforced by the growing interest in supply chain finance, which gives buyers something to package with e-payments to persuade suppliers to accept them. There’s also a great deal of work being done right now on how to provide faster payments, and that could end up encouraging electronification.
Ambrish Bansal, director and head of market management at Citi Treasury and Trade Solutions in North America, cited fraud as a driver.
“North America, especially the U.S., is an increasing target for fraudsters and scamsters,” Bansal said. “You see that while the check volume has declined, check fraud has actually increased.
“That becomes a driver for conversion to electronic payments, and conversion in a way to make it much more robust and secure than what corporates can do in their own system,” he said. “Fraudsters are becoming smart as well and starting to target some of the low-hanging fruit in the digital space.”
Bansal noted that earlier efforts to move to ACH payments didn’t always make sense from the suppliers’ perspective. In addition to the technology changes that suppliers had to make to accept e-payments, they often had to pay to join e-invoicing solutions, he said.
Now companies are taking a holistic approach, in which they look at payment strategies along with their liquidity and working capital efforts, and that is making e-payments more attractive from both the buyer’s and seller’s perspective, Bansal said.
I think any corporate that has not yet
embarked on a paper-to-electronic
migration in this age needs
to develop a strategy.
—Scott Mills, Fifth Third Bank
The link to supply chain finance can benefit suppliers by providing them with faster access to their payments, and the prospect of earlier payment can play a key role in convincing them to accept e-payments.
“As buyers are launching these financing projects, which essentially inject early liquidity into their supply chain and provide cheap financing for suppliers, there’s a lot more motivation for a supplier to accept a form of electronic payment,” Bansal said. “The cost associated with that change is minimal and one-time, really, compared to the benefit they would gain from accepting the financing solution.”
Buyers can also benefit, Bansal said, noting that making payments used to be a cost center. “But as you couple making payments with solutions like commercial cards, supply chain finance, dynamic discounting, etc., what happens is the cost center becomes a profit center,” he said.
Payments to Major Suppliers
The AFP report on payments wasn’t all bad news. Magnus Carlsson, manager of treasury and payments for AFP, said that while overall check usage for B2B transactions inched up among the companies surveyed, the portion of payments that the companies made to their major suppliers using checks declined a bit to 41%, down from 43% in 2013.
“There you see the check trend is still going down, to a little bit smaller degree but the trend is still there,” Carlsson said.
The companies that AFP surveyed made 34% of payments to their major suppliers with ACH credits, up from 31% in 2013, and 13% with wire transfers, down from 16% in 2013.
Carlsson suggested that the slowdown in companies’ adoption of electronic payment methods for B2B payments in general, versus the slight additional improvement in electronifying their payments to their major suppliers, may reflect ongoing uncertainty.
“The economy’s not rolling at full speed, so I think corporates are worrying about making too many changes that cost money,” he said. “They focus the money they have on where it would make an impact, and that’s the major business partners. They do still make an effort to get those electronified.”
Nancy Atkinson, a senior analyst at research firm Aite Group, said companies might have been distracted by the focus over the last year or so on faster payments. “Or maybe they’ve already addressed all the low-hanging fruit” and are finding it harder to convince the remaining suppliers to use e-payments, she said.
Ro Susalla, lead of the supplier optimization team at Fifth Third Bank, said she sees companies whose check issuance remains steady even as they shift a portion of their checks to card payments.
“But the number of checks would have gone up if they hadn’t had this alternative payment method,” Susalla said. “What this allows the company to do is grow without growing their [check] payments—it offers them an alternate payment method—that’s our classic experience.”
She also noted some resistance among suppliers to accepting card payments because of the fee that suppliers must pay. “Particularly in healthcare, we’ve seen several large vendors back off,” Susalla said.
Barriers to E-payments
Many of the companies surveyed by AFP cite the same factors as barriers to making more payments electronically: the difficulty in convincing their customers to pay them electronically, which was cited by 78%, and the difficulty they have convincing their suppliers to accept e-payments, cited by 76%.
One problem with persuading companies in the United States to sign on to using ACH payments is a general apprehension about sharing bank account numbers and bank routing information.
The industry has come up with a couple of remedies for that problem. The Clearing House, an organization that clears and settles ACH payments, offers Universal Payment Identification Codes, or UPICs. Companies can sign up for a UPIC number and provide that to customers instead of their bank account number, and a Clearing House database links payments made to a UPIC number to the company’s actual bank account.
“UPICs is a great solution,” said Aite Group’s Atkinson, but she noted that not all banks offer it. “I don’t think it’s been very heavily utilized,” she said.
Kathleen Dwyer, principal product manager at ACI Worldwide, a provider of electronic banking and payment solutions, predicted that in coming years, it will become general practice for suppliers to give buyers a personal identification number, or PIN, rather than their bank account number.
“You don’t have to give your account information; you can give some other type of ID,” she said. “On supplier networks, they have those set up.”
Looking at the same problem from a slightly different angle, a group is putting together a B2B Directory, which will be a secure database containing companies’ bank information, so that buyers who needed another company’s information to make a payment would have a way to get it.
Another big barrier from companies’ perspective is accessing the IT resources they need to implement e-payments, which was cited by 76% of companies surveyed.
“The biggest holdup usually is shelf space on an IT project list,” said Scott Mills, payments solution manager at Fifth Third Bank. “What it comes down to is the buyer’s ability to make the adjustment in their ERP system to create the data file format they need to get the information out.”
Dwyer also cited IT constraints. “The challenge that a lot of corporates have is that they don’t have the in-house knowledge to convert to an electronic version,” she said. “You need to understand what the rules are, you need to understand the formatting. And a lot of corporates have older systems. If they haven’t upgraded them, they don’t necessarily have the ability to support all the necessary e-payment functionality.”
But Dwyer sees the widespread adoption of ISO standards paving the way for electronic payments. “It becomes much more fathomable for a corporation because there’s one definition—there may be many versions, but there are similarities. From 10 years ago to today, we’re at least coming to a point where there is a commonality between the payment systems.”
Hanse Orga, a financial software company based in Germany, has been working to improve the payments experience for its customers.
Martin Postweiler, director of solutions strategies for payments and digitization for Hanse Orga Group, said the goal is to allow treasury teams to monitor all of the company’s payments, both ingoing and outgoing. For outgoing payments, Hanse Orga has a solution that, like the majority of its products, works within SAP ERP systems and is totally integrated into the SAP system and programming.
“What we do is we collect all the payment files from all the connected ERP systems,” including non-SAP systems, Postweiler said. “Depending on what kind of setup the customer has, we convert them to a meta format and then optimize them according to certain criteria in order to send the best possible format to the banks.”
Once the payments have been executed, Hanse Orga takes the bank’s acknowledgement and pushes that into the company’s system. When the company gets its account statement the next day, it can reconcile that information to its cash forecast, working within its ERP.
“We’re combining outgoing and ingoing flows and enabling treasuries to monitor their companywide cash flows centrally and enhance their cash and liquidity forecast,” Postweiler said.
Hanse Orga is also working to alleviate the effort involved in on-boarding new customers or current customers that have switched banks.
We’re combining outgoing and ingoing flows
and enabling treasuries to monitor
their companywide cash flows centrally
and enhance their cash and liquidity forecast.
—Martin Postweiler, Hanse Orga
Currently, “every customer has to set up a format for each bank in each country, and those formats frequently differ,” Postweiler said. Despite efforts to establish a standard format for each country, “there are often still different flavors for each bank,” he said, noting that the diversity in part reflects banks’ often heterogeneous and sometimes old back-end software systems.
Even within the U.S., there are issues, he said. Companies may use only ACH and wire payments, “but you have so many different specifics that banks require that you have to make sure this information is in the payment file.
“That’s why payments are so complex, and why so many treasury departments have difficulties establishing an efficient solution,” Postweiler said. “It’s a pain; you have to go into every bank specification for every country, which still does not guarantee a smooth testing of these formats.”
Earlier this year, Hanse Orga rolled out the HO Global Format Integrator, which it developed with Deutsche Bank. Customers that use Deutsche Bank can access on-boarding packages for different countries and different types of payments.
“We do all the testing and setup for the format, and test files back and forth and make sure they are correct,” Postweiler said. “If that is done, we can tell our customers: ‘This is our blueprint. If you send it in this format, the bank will process it under normal circumstances.’”
Hanse Orga has been contacted by other banks to provide the same service for their customers, he added.
Another approach to e-payments is to participate in a network that facilitates payments, and in some cases remittance information as well.
Fifth Third Bank last year began offering Bottomline Technologies’ Paymode-X payment network to the bank’s corporate customers. Paymode-X lets buyers pay their suppliers via ACH and at the same time provide them with remittance information.
“I think any corporate that has not yet embarked on a paper-to-electronic migration in this age needs to develop a strategy,” said Fifth Third’s Mills. “Paymode and other electronic networks are creating an opportunity for those buyers to electronify their accounts payable.”
Mills described Paymode-X as a middle ground between “the high cost of card acceptance and the expense and effort associated with paper.
“Suppliers are embracing it because ultimately it’s a way for them to get paid faster, and it’s a way for them to get their posting data in a more automated format,” he added.
Fifth Third customers that use Paymode-X provide a data file that includes payment information and invoice details, and Paymode uses that information to create an ACH credit that it sends to the supplier’s bank. Meanwhile, the information that the buyer provided that’s associated with the payment, such as invoice number, goes into Paymode’s network.
Suppliers can get the remittance information in an email or go onto Paymode’s website to get it, Mills said. “Or more sophisticated suppliers can get an electronic transmission from Paymode that they can ingest directly into their ERP system.”
He said buyers look to Paymode-X to realize efficiency gains and deal with the risk of fraud. “Paymode does a nice job of mitigating potential fraud in that they tokenize the supplier’s bank account and routing information,” Mills said. When a supplier enrolls with Paymode-X, it provides that information so that it can be paid, but Paymode doesn’t disclose that to the buyer or the buyer’s bank, instead providing them with a tokenized Paymode ID.
Buyers also gain financially. Just as companies that pay with cards get a rebate, buyers that use Paymode-X receive a dividend. “The buyer garners a dividend, much like a rebate, for the transactions that flow through the network,” Mills said, adding that that dividend is less than a credit card rebate.
Paymode-X also charges suppliers a network fee. Mills said that fee is lower than the standard interchange fee suppliers are charged when they accept a credit card payment. This lower fee allows buyers to further expand the number of their suppliers willing to accept electronic payments.
While there’s a cost for suppliers to use the system, Mills pointed to the benefits. For starters, shifting from paper to electronic payments means a supplier gets an improvement of three to five days in days sales outstanding (DSOs) just by eliminating the mail float, he said.
Suppliers that are in a position to use the automated data transmission can realize additional benefits. “That’s part of the value proposition for paying the network fee, that they’re able to get an electronic feed from Paymode that’s coded to their ERP input specifications to facilitate straight-through cash posting,” Mills said. “It helps eliminate lockbox fees, and it reduces back-office support fees and exception support processes in the back office.”
Of course, companies could reach out to their suppliers themselves and arrange to pay them via ACH without using Paymode, but Mills said that involves a lot of back-office work, including persuading suppliers to be paid electronically and keeping their bank account information up to date.
Moreover, he said, holding onto all that bank account information for suppliers poses a risk for the buyer. “The data breach risk is real, and for an organization that has a substantial in-house ACH payment program, housing supplier banking information is putting their organization at risk by maintaining sensitive information on their platforms.”
Citi offers clients Citi Payment Exchange, which gives companies access to ACH, card, and check payments.
Anubhav Shrivastava, director and North America head of the supplier finance business for Citi’s Treasury and Trade Services, pointed to supplier enrollment as a key challenge for companies seeking to move to electronic payments and said using a payment network can ease that process.
“One of the hindrances historically was how do you reach out to 5,000, 10,000 suppliers quickly,” Shrivastava said.
Once a company decides to move to e-payments, “we act as the catalyst and reach out to the suppliers and use a technology platform to enable the self-registration for the supplier to come on board,” he said. “The solution we have allows the suppliers to come in and provide their own bank account information, which is immediately checked, and the supplier gets enrolled within a couple of days. That’s a major shift when we think about moving from checks. We are rolling out similar capabilities for our products that require supplier acquisition.”
Citi’s Bansal envisions a future in which all payment networks are interconnected and said the use of software interfaces called application programming interfaces, or APIs, could enable that.
“The whole notion of a network of networks, of interoperability between networks, can be accomplished using APIs,” Bansal said. “If I had a crystal ball, one of the things I would like to see in the crystal ball is the different supplier networks connected to each other and operating seamlessly. The time is now, given increased use of APIs, for that to happen.”
Speeding up Payments
Over the last year, much of the focus in the payments industry has been on speeding up payments. NACHA, which manages the ACH Network, recently rolled out same-day ACH payments, while The Clearing House is working on providing real-time ACH payments. And the Federal Reserve is pushing for faster payments through its Remittance Coalition, which it recently renamed the Business Payments Coalition.
Dwyer said same-day ACH—which became available, initially for ACH credits only, in September—is meeting with a warm welcome from corporates.
“We were kind of surprised when we heard some of the feedback from the banks about how many corporates were utilizing same-day ACH right from the start,” she said.
Dwyer suggested that that points to companies’ interest “in maybe not just being able to see a discount or take advantage of a positive cash flow for yourself and your corporation, but maybe there’s an interest in just always understanding where I am and what’s my position that day.”
From a corporate’s point of view, there’s not much involved in using same-day ACH. “The format didn’t change; that’s one of the great things about it,” Dwyer said. “The only difference is that a lot of corporates probably have a system they generate their files out of and they have to change the effective date of. Unfortunately, in our experience, a lot of them don’t know how to do that. But they can always do it manually.”
Of the companies surveyed by AFP, more than half (57 percent) said they plan to use same-day ACH to pay last-minute bills, while 38 percent said they would use it for emergency payroll.
Fifth Third’s Mills noted that same-day ACH will cost more, and argued it won’t immediately replace traditional ACH payments that settle next-day.
“I think it will be used predominately for emergency payroll situations and to correct payment errors,” he said, adding that it could also attract some payments that otherwise would have been sent via wire transfer. “It could in some small instances replace wire transfers that don’t warrant the immediacy and finality of a wire payment.”
You have to have invoice approval efficiency
in order to be able to deploy solutions
like supply chain finance.
—Anubhav Shrivastava, Citi
Jim Moran, vice president and treasurer at Dover Corp., a manufacturing company with $6.7 billion in revenue in 2015, said Dover has decided against using same-day ACH.
“Dover doesn’t have much of a need for same-day ACH since we don’t tend to make many same-day, small-dollar payments,” Moran said in an email. “Same-day ACH would also increase the possibility of overdrafts.
“We currently make a centralized borrowing decision each day to fund with [commercial paper] based on known and forecasted payments across several operating companies,” he explained. “If many of our decentralized operating companies made same-day ACH payments rather than scheduled/forecasted payments, it would be harder to make an accurate centralized daily funding decision.”
Even Faster Payments
The Clearing House, which processes ACH payments, is aiming for even speedier transactions, having announced in 2014 that it would build a real-time payment system, which it described at the time as a multiyear effort.
“It will be truly real-time settlement, not just same-day or within a few hours,” ACI’s Dwyer said. “What’s unique about it is that you have the ability to send additional reference with the payment, so it’s pretty powerful for a corporate and will really give them a lot of flexibility.”
Across the ocean, the European Central Bank has invited banks to help achieve an instant payments system that is scheduled to launch in 2018. Hanse Orga’s Postweiler said the system is designed to make it easier mainly for consumers to pay at the store or for online purchases.
Banks won’t be obliged to offer the system, at least in the beginning, he said, and so far their responses are mixed: “Some banks in the Eurozone are hesitant, some are pushing forward. The ECB, however, will most likely take other measures if the adoption rate is slow.”
From the perspective of corporates, Postweiler said, instant payments could pose challenges when it comes to transactions in which companies must immediately provide something, like an insurer for which the instant payment would trigger the start of a contract. He also cited implications for sanctions screening and for fraud, noting that if fraud occurred via instant payments, it would be “much more difficult to get the money back.”
Citi’s Bansal argued that the push for faster payments gives e-payments a boost by focusing attention on them.
“What that does is it brings e-payments into the spotlight,” he said. “The indirect result of all these different large-scale infrastructure initiatives is that corporates are increasingly talking about e-payments.”
Bansal expects that same-day ACH initially will be used mostly for urgent payments, but he said, “certainly it will influence and act as a catalyst for clients to start thinking about e-payments.”
As companies contemplate payment methods other than checks, banks are working with customers to help them figure out how to make the best use of those methods.
Susalla said that Fifth Third will work with companies to assess their goals for payments, the systems they have in place, and their payment approval process. The bank then analyzes the company’s vendor files to figure out how many of the payments that it makes could be converted to cards or to the Paymode-X network.
“The proliferation of different payment methods is driving a lot of interest from corporates to look at solutions that combine a number of payment methods under one solution umbrella,” said Bansal. “Clients are demanding the consolidation of payment methods that can address the needs across their entire supply chain.”
Bansal said Citi, as part of its Integrated Payables Solutions, works with clients on an end-to-end supply chain analysis and working capital analysis. “It looks at the client’s entire supply chain, and through a proprietary analysis, where we look at different data sources, we come back with the client in terms of which elements of the integrated solution would help the client and create an optimum mix of these payments.”
As buyers are launching these financing
projects, which essentially inject early
liquidity into their supply chain and
provide cheap financing for suppliers,
there’s a lot more motivation for a supplier
to accept a form of electronic payment.
—Ambrish Bansal, Citi
Citi’s Shrivastava said the Integrated Payables analysis is “a collaborative process, not a purely bank-driven solution,” and he pointed out that the components of payments and supply chain finance are inextricably linked.
“You have to have invoice approval efficiency in order to be able to deploy solutions like supply chain finance,” he said. “Supply chain finance doesn’t work for every supplier in your supply chain and doesn’t provide the same benefits, so you have to start thinking about dynamic discounting and commercial cards. They’re all interrelated and for complete efficiency, companies should consider deploying them all in a phased manner.”
Implementing electronic payments involves many different parts of a company, in part depending on the type of electronic payment used. The departments involved can range from treasury and accounts payable to accounting and procurement, and bankers say that to achieve a successful e-payments implementation, it’s important to get all of those parts of the organization on board.
Fifth Third’s Susalla said that when it comes to persuading suppliers to accept card payment, having a commitment from the company’s senior leaders makes for a more successful program.
“You’ve got all these different stakeholders,” she said. “There’s got to be the commitment from senior leadership that says, ‘We want to pay by card; our main motive is to pay by card.’”
Part of Citi’s approach is to overcome a siloed mentality, Shrivastava said. “We are trying to bring all the stakeholders into the room and say these are different projects, but they need to have the same starting point, so it’s a coordinated effort,” he said. “That’s the big shift we’re trying to make.
“It’s really the internal collaboration and alignment which we see drives success,” he added.
Citi’s Bansal emphasized the role of the treasury team, arguing that it’s “very, very important for treasury to be the binding thread and bring all the stakeholders to the table. They are the ones that act as a glue in bringing the different stakeholders to the table and making sure the common objectives are aligned.
“Where we have seen more success than not is where treasury has taken that strategic view and taken that leadership role to act as a facilitator,” he added.