Bob Dylan was recently awarded the Nobel Prize in Literature for the vast body of work throughout his career. His songs captured the social unrest1 of a nation in transition. Today, the payments landscape in the United States is also undergoing a major metamorphosis. Decades old payment systems are showing their age and being challenged by new demands. A new generation is questioning why the old norms of payments are relevant.
Change is most noticeable in peer-to-peer (P2P) transactions where the old manual method of issuing payments by writing checks is quickly being replaced by home banking and smartphones.
Given the nature of commercial business-to-business (B2B) payments and the long established payment patterns between B2B trading partners, change has been slower, but is finally beginning to occur.
In October of 2016, Same Day ACH, an industry initiative to move payments faster, was responsible for 3.8 million transactions, totaling $4.98 billion with an average transaction amount of $1,303.2 Surprisingly, B2B payments made up 56.2 percent of the value of Same Day ACH payments in the initial month of operation. This is still a small number of transactions compared with the monthly average of two billion3 automated clearing house transactions.
In combination with the Federal Reserve Banks’ Faster Payments Task Force and FinTech offerings, however, the U.S. payment infrastructure will experience fundamental changes over the next few years.
Most of the emphasis on faster payments has focused on payment initiation, with the thought that initial faster payment volume will grow over time. The impact on receivables payments will become apparent as volumes grow, but the reaction time may be greatly reduced as suppliers rush to facilitate their buyer’s payment preferences. Buyers who use a faster payment method to realize trade discounts or for expedited shipments will expect suppliers to have reciprocal receivables processes that recognize receipt of payment and trigger other supply chain processes to service their needs.
Accounts Receivable managers know all too well that buyers dictate payment preferences.4 Businesses offer multiple payment methods to their customers to facilitate payment in order to maintain the sales relationship—at the cost of efficiency.
This is evident not only in the payment process but in the exchange of remittance details. With the increasing prevalence of buyer portals as well as buyers sending remittance details separate from the payment in the form of emails with spreadsheets, PDFs, etc., many accounts receivable processes may be under siege in the next few years as businesses are inundated with disjointed payments and remittances.
Astute businesses understand that this eventual reality will have an impact on days sales outstanding (DSO) and working capital; not to mention buyer (customer) relationships. With the average straight-through-processing (STP) rate for U.S. businesses in the fiftieth percentile5, can any business afford a further deterioration in service and financial performance?
There is a fundamental axiom of process change: don’t automate, obliterate6. Automating a bad process only makes it worse.
For most receivables operations managers, the question is, “When do you go forward with an investment request?” A partial solution has been the arbitrage of labor costs with business process outsourcing (BPO) and/or offshore processing. Although this is only a band-aid to a potentially growing problem, and it fails to address essential financial, process and service issues.
Ideally, a comprehensive receivables investment strategy includes three elements:
• Acceleration - Tools that improve STP, reduce costs and speed the posting of receivables to the general ledger.
• Collaboration - Resolving receivables issues requires the ability to share data across the enterprise; a single data base of all payments is essential. The ability to use case tools and workflow are real enablers.
• Visualization - Turning the transaction details into metrics and dashboards that assist in managing the business.
The return on investment for receivables automation can be substantial. The obvious reductions in receivables labor are clear as automation addresses the vexing issue of re-associating invoices and stranded payments to improve STP. The ROI is further enhanced when it is expanded to include improvements in customer service by establishing a single receivables data base, the “one-truth” for access across the enterprise. This is particularly beneficial when a business maintains multiple enterprise resource planning systems as the result of acquisitions.
Lastly, metrics transform accounts receivables into a manageable process to drive improvements in working capital by better understanding the underlying patterns of customer behavior and payment. In this manner, changes from new payment methods can be quantified and future investments better defined.
A commonly held misconception is that a comprehensive receivables strategy is required of solely large businesses. In two case studies, a small business was able to grow their business by gaining control of their receivables.
In the case of a middle market business, a new receivables strategy provided greater control and centralization as well as a reduction in borrowing costs.
Summary: The times are changing and the speed and methods of payments are about to usher in a new set of demands on receivables processing. While change can be daunting, it can also be an opportunity to revisit current and accepted receivable approaches to achieve improvements in working capital, operational efficiency and customer satisfaction.
Are you prepared for the changes that are coming? Download WAUSAU’s white paper, “How Integrated Receivables Overcomes the Four Biggest Challenges in Order-to-Cash,” to learn how gaining better visibility and control of your accounts receivables processing can speed funds availability, reduce costs and empower your executives to make more informed decisions.
Senior Vice President - Innovation
Wausau Financial Systems, a Deluxe company
2 NACHA, November 21, 2016 announcement
3 NACHA, April 14, 2016 announcement
6 Harvard Business Review article