We live and work in an increasingly digital economy. Indeed, for financial transactions, there is a clear movement away from traditional paper payments (i.e. cheque) to electronic payments that are enabled by new payments technology. A recent survey published by PayStream Advisors reports that approximately 80 percent of larger organizations expect to convert to electronic payments within the next three years. The business objective is to shift the traditional accounts payable department toward an invoice and payments management process that delivers strategic benefits and improved bottom-line results.
Key drivers of the conversion to electronic payments include: cost savings; simplified accounting reconciliations; stronger fraud controls; improved cash flow management and efficient funds utilization. In some cases, the prioritization of card-based payments also provides an opportunity to convert the accounts payable function into a profit centre via the creation of a revenue stream from card-based incentives. The trend towards paperless also reflects the growing number of suppliers requesting electronic payments and compliance with global payments standards such as ISO20022 for electronic data interchange between financial institutions. The following retailer case study provides some perspective.
Retailer Case Study
A large retailer wanted to eliminate the majority of its supplier cheque payments in favour of electronic card and automated clearing house (ACH) payments. Key objectives were to reduce costs, take advantage of payment discounts and/or favorable terms offered by suppliers (where applicable), and improve cash flow management and forecasting capabilities. The retailer considered the scope, schedule and cost for an electronic payments conversion project, including the use of internal staff resources and technology development requirements to collect, validate, and manage confidential supplier information. The retailer also sought proposals from its local bank and a number of third party supplier enablement vendors.
A supplier enablement vendor was selected to lead the conversion project. The vendor’s team of analysts first met with the retailer to better understand the type and frequency of supplier payments. They reviewed the retailer’s master vendor file to identify suppliers that were strong candidates for conversion to electronic payments and that were likely to provide the greatest financial benefit from conversion. This review also determined that the retailer did not have sufficient in-house resources, capabilities, or technology to manage the supplier conversion. Accordingly, to facilitate the enablement process, the vendor initiated a custom supplier education and outreach program over approximately six consecutive weeks that leveraged technology to aid the process. This engagement effort included email notifications, physical call centre support, online resources to address frequently asked questions from vendors, and a secure website for enrolment where the supplier could activate an electronic payment profile with relevant contact information, banking details, and remittance preferences.
After activation of each payment profile, the vendor then conducted a validation process to match the registered company with the retailer’s supplier list. The purpose of this validation step was to ensure that the individual who activated the payment profile was properly authorized to share financial information and that the information was the property of the supplier. In parallel, the vendor worked to configure the retailer’s legacy ERP system (SAP) to create secure electronic payment files in the appropriate format for processing by the retailer’s bank. Subsequently, each supplier’s banking information was tested to ensure that payments would be properly transacted once electronic payments were initiated.
The retailer’s accounts payable system was leveraged to generate a single payment file (in TXT, CSV or XML format) which was subsequently uploaded to an electronic payments platform via an automated Secure File Transfer Protocol (SFTP). Most standard enterprise resource management systems can be easily configured to enable this functionality. Payment files, including beneficiary and payment information, were periodically dropped into a secure folder and automatically uploaded for supplier validation and custom remittance pursuant to the criteria established in the supplier’s payment profile. Consolidated funding transactions were initiated via an Automated Clearing House (ACH) debit, which was subsequently used to reconcile against the retailer’s accounts payable sub-ledger. Where the payments were transacted in foreign currencies, a customized reconciliation file was generated to describe the exchange rate and funding amounts for each payment.
761% Return on Investment
The results are truly impressive. Approximately 50% of the retailer’s suppliers that were targeted for conversion were enabled for electronic payments in less than 90 days. From a transactional volume perspective, this resulted in the conversion of 75% of total supplier cheque payments to electronic payments. The retailer recouped the cost of the electronic payment conversion process in under three months and realized a 761% return on investment. Cost reductions were achieved through an 83% reduction in unit cost to initiate supplier payments, improved foreign exchange (forex) margins for international payments and reduction of payment processing and banking fees. The retailer also experienced increased control and visibility of cash flow. More importantly, this type of return on investment is not specific to the retail environment, with higher volumes of smaller transactions. Similar ROIs have also been achieved in large industrial and manufacturing operations.
Barriers to Adoption
Notwithstanding such impressive results, many companies continue to approach new payments technology with caution. A primary concern is the ability of existing financial systems to integrate with a new electronic payments platform to ensure accurate and secure payments. This is especially relevant where the organization’s, often antiquated, legacy Enterprise Resource Planning (ERP) system is already in the process of being upgraded or replaced. Combined with limited IT staff and funding constraints, it can be challenging to contemplate an additional technology overlay to enable electronic payments. In most cases however, even legacy systems can generate a simple payment file that can be used to automate the payments process in a manner that doesn’t cause significant disruption when that system is subsequently updated.
An associated concern, for both organizations and their suppliers, is data security. It is critical to ensure the protection of sensitive personal and financial information. For example, some suppliers are reluctant to provide confidential bank account information to enable electronic payments even though the same information is provided on paper cheques. The bottom line is that for a successful conversion from paper to electronic payments: (1) the organization must be satisfied that it has mitigated prospective risks associated with data security; and (2) the supplier must have provided its authorization to accept electronic payments. This requires trust from both parties that the payments technology system is proven to be robust and secure.
Further, it is not unusual for technology change to require a “re-engineering” of internal processes and workflows. For example, many organizations still employ traditional paper-based workflow processes for payments processing. It is not uncommon for signing officers in finance departments to require a physical copy of the invoice to be presented during the payment process for payment validation. In such cases, to enable a successful conversion to an electronic payments fulfilment platform, an associated change management project may be required to effect a transition from paper to an automated payments solution that includes invoice digitization and creation of web-based workflows. Typically, this will require integrated leadership from both finance and IT departments.
The adoption of new payments technology is the clear path forward for progressive organizations. The benefits far outweigh the risks. As the electronic payments standard ISO20022 is implemented across the globe, it will become easier to convince suppliers, business partners, and senior management to shift from paper to electronic payments. Key benefits include reduced costs, improved vendor relationships, improved cash flow visibility, and more efficient workflow processes. Evaluate the strength of your in-house capabilities and consider partnering with an external service provider to deliver a scalable solution that adheres to existing organizational workflow processes and policies while respecting any limitations of existing accounting systems. Outsourced technology providers should be able to offer a fully integrated and scalable payments technology platform, coupled with personalized advice and support to drive the vendor enablement process.
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