This may come as news to accounts payable professionals: You need a payment strategy, and I don’t just mean getting rid of checks. Everybody's been trying to do that for a long time, with only moderate success. But, that’s not a complete strategy. It’s only a starting point.
You also have to think strategically about what you’re going to replace them with, and about setting yourself up to take advantage of future technology innovations tied to payments. New automated solutions are making it possible to think strategically about how you can get the most leverage from every payment you make.
Step one is to get off paper checks, and move as many suppliers to card payments as possible. As anyone who has tried to move from checks to electronic payments knows, the hardest part is supplier enablement. Many companies have started down the road toward paying more of their suppliers electronically, only to stop after enabling about 10 or 20% of their suppliers.
Why? They usually start by trying to move as many suppliers as possible off of checks onto ACH payments. The business case looks great on paper—ACH payments cost just a fraction of check payments, and most suppliers are happy to receive them, since there’s no merchant fee as there is with a card payment. It seems like a no brainer.
Then they get into an enablement campaign and realize how much work it is. You’ve got to contact all your suppliers and collect their banking and routing information. Some people run pre-notes, making a deposit of a penny or two, just to verify the banking information. Then you’re responsible for keeping that banking information up to date, and secure.
And that's just the beginning of it. With a check, attached to the check is the stub that tells you that supplier what you’re paying them for. With an ACH, sometimes there is CTX (corporate trade exchange) information, but it’s not required, so often times there is nothing. If that’s the case, now you've got a project where you've got to create some sort of template that is sent to the supplier each time they are paid. Otherwise, a bunch of suppliers are going to call you in two days and say, "Thanks for the money, but what the heck did you pay me for?"
After getting a few hundred suppliers set up this way, people realize, "We can't roll this out to 900 more suppliers. It's just too much work." Big companies will just hire a team to come in and run the campaign, but smaller enterprises usually don’t have that luxury.
So, they're still making 80 percent of their payments by check. They're stuck in this twilight zone knowing they could be doing better, but it’s out of reach.
If you knew how much work it was going to go into it, which a lot of people don’t unless they’ve talked to their peers who’ve done this, it would have been a lot more strategic to start with a card enablement campaign. At least that way you get something in return for that enablement effort—cash rebates.
People don’t start there because they assume that most suppliers won’t want to take a card payment because of the merchant fee. It’s true that many won’t, but some will because they find it more convenient and secure. It’s guaranteed next day funds, and the fee is just a cost of doing business. So, your first pass at enablement should be to find those companies that will readily agree to take payment by card. Once you set them up for ACH, it’s harder to negotiate something else with the supplier.
For example, some suppliers may agree to take a card payment in exchange for faster payment terms. If the supplier is a net borrower, then the speed of money is appealing. If they could get the invoice payment that they're waiting on from you today, then they don't have to take that loan at three or four percent and impact their credit. You may be able to find other bargaining chips as well.
By doing your card enablement campaign first, you can probably get rid of 15 percent of your checks. You don’t have to collect and secure banking information, and rebates pay you back for your pain. When you’ve exhausted all the suppliers that will take payment by card, then do your ACH campaign.
Financial technology companies are reinventing every aspect of business finance, starting with payments. Banks have long promised to automate supplier payments for their customers, but have fallen far short. Cloud payment automation companies are building networks of card and ACH enabled suppliers they can leverage across all of their clients, so individual companies no longer have to undertake a manual enablement effort. You can get to a much higher percentage of electronic payments—80% or more card and ACH by leveraging a network of pre-enabled suppliers.
With most of your payments automated, you can take your strategy to the next level with new automated trade finance and dynamic discounting solutions coming to market. Even invoice financing is making a comeback. Fintechs are digitizing these kinds of programs, making it possible for every party in the supply chain to track the movement of goods and execute negotiations and transactions in real time. That makes these options far more accessible than they have been in the past.
For example, it used to be common to see companies offer invoice discounts such as 2 net 10, meaning if you pay within 10 days, you get a 2 percent discount. Those kinds of programs weren’t very successful, because not many A/P departments can move that fast in a paper bound world. But, as procure-to-pay and payments become automated in the cloud, companies are starting to have the visibility and the speed in the invoicing and payment processes to leverage discounting strategically.
If you're still heavy into checks, you’re going to be a long way from being able to capitalize on these new technology solutions, and on even more electronic payment options coming down the pipe. Same day ACH will be fully implemented by March of 2018. Real time payments may soon become a reality. In a few more years, we may have a whole new set of payment rails enabled by blockchain technology.
That’s why it’s time to start thinking strategically about payments. Don't just think about it as paying bills, or shifting from paper to an electronic payment method. Think about it as an area where you can leverage technology to get increasing value.