An ideal payments environment finds the proper balance
between two opposing forces – buyers and sellers; payables and receivables;
and paper and electronic. It is about the leverage one party has over the
other in the process, and the visibility all parties have into the transaction
details. It is also about finding the right combination of technology to
accomplish the task, while understanding the regulation around it and that
newer technology might replace it. Acknowledging the ongoing need for such
balance is an important first step toward creating more holistic solutions.
Payments Instead of Payment Transactions
Understanding what works and what doesn’t in the payments environment begins
with defining payments. A discussion on payments often focuses on payment
transactions, cheques, automated clearing house (ACH), wire, and/or card
transactions. Yet the process is more accurately defined by the entire buying
and selling relationship between the parties and those involved in
facilitating this process. For buyers, a simplified version of the buying
process can be broken down into three main steps, with corresponding steps on
the seller side of the transaction:
First, buyers generate
orders for sellers, and sellers receive those requests for goods or services.
Then, as sellers deliver goods or services, they remit invoices to buyers, where these invices are often matched against purchase orders and other information
including shipping receipts and purchase requisitions. Discrepancies in
documentation, pricing, terms or other details are identified and resolved
between the parties. Following this approval, the payment transaction and
associated remittance detail are initiated between buyer and seller.
For both, timing is an important element of this process. For buyers
optimising liquidity includes waiting as long as possible to make payment,
while for sellers collecting payment quickly is paramount.
What’s Not Working?
A focus on actions that
occur before and after payment transactions; steps that buyers and sellers
take to internally process payments; and communication between the parties
involved, reveals potential points of friction where the process slows down
or needs assistance to run smoothly. They are caused by a reliance on
paper-based processes, poor integration of steps within the process and the
need to support multiple standards to accomplish what is effectively the same
For example, surveys show that US-based companies still
require manual intervention to process and settle payments regardless of the
payment transaction type. In addition, lack of standardisation is found in the
potential to receive invoices through multiple channels (mail, email, fax,
electronic data interchange (EDI) and supplier portal), which increases the
challenge of seamlessly connecting invoice receipt to the approval and payment
workflow. The challenge exists for buyers of all sizes and is further
complicated by the range of invoice styles and layouts delivered by vendors.
The most popular and best understood method for delivering invoices and other
information continues to involve paper documents.
In addition to
the prevalence of paper in the process, the lack of visibility into all areas
of the buying process by buyers, sellers, their banks and their financial
services providers is another point of friction. Communication and dispute
resolution actions are often performed outside the buying process and rarely
include all parties involved. This process contributes to time delays,
mistakes and missed opportunities. The opportunity for financial services
providers to offer financing options to ease the friction in payment terms is
one example of how a disconnected process leads to missed efficiencies; a
further example can be found where a lack of connection between logistics and
payment transactions can lead to misapplied or poorly-timed payments for
goods or services in relation to the intended terms of trade.
Perspectives on Payments
face increased pressure to deliver efficiency gains and bottom line results.
This includes improving visibility into cash flows and information throughout
the buying process so they canquickly drill down to understand the real cost
of payments, as well as the ability to link such insights in the payments
process with finance, risk, and insurance. For many organisations, most
potential efficiencies and cost savings have already been squeezed out of
their legacy paper-based processes. Providing the insights that management
needs remains challenging where siloed steps in the buying process do not
deliver actionable information. Increasingly, these organisations are
exploring electronic options to replace paper-intensive processes and are
looking to couple those with electronic payment options to deliver essential
insights and efficiency gains. While these steps help deliver part of the
overall solution, they continue to lack true integration and connectivity
across the entire payment process.
Banks generally focus on
payment transactions as part of their cash management services offerings.
Increasingly, though, banks are reaching outside payment transactions with
capabilities to ease the delivery of payment instructions as well as related
remittance details. Solutions with names such as integrated payments, AP
automation, and payments automation help simplify payment issuance by
allowing companies to deliver combined payment files to banks as a single
transaction file, directly from an enterprise resource planning (ERP) system
or accounting package.
Similarly, services that combine
receivables transaction information allow companies to ingest receivables
details directly into their systems for simplified reconciliation and
matching to outstanding invoices. Banks also provide credit and liquidity
solutions, although these are largely unconnected to payments and are often
offered following specific triggers outside the buying process, such as a need
to sell receivables, provide pre-shipment financing, or help finance
warehoused materials. In fact, a recent Aite survey of 26 cash
management-providing banks found that their trade finance teams alone champion
the need for supply chain finance (SCF), compared with only 8% who report SCF
implementations are led by their cash management payments teams. This
highlights the divide remaining between payment processing and financing
within most financial services providers.
The priority of most
non-bank financial services providers, as it relates to the buying process,
remains addressing specific efficiency needs within one or more components of
the buying process, ahead of payment transactions. Such solutions, which help
automate the purchase-to-pay (P2P) steps of the buying process, often lack a
direct connection to the resulting payment transactions. Thus they rarely
offer a connection to financing to help solve the friction point related to
buyers looking to pay slowly while their vendors work to collect payment
quickly. Dynamic discounting solutions are emerging as a partial solution to
this challenge, but have not established a compelling-enough value
proposition for both buyers and sellers to truly resolve this friction point.
Additionally, where such solutions are in place, connection to payment
transactions and remittance detail delivery remains challenging.
The Winds of Change
To appreciate how
relationships between buyers and sellers have changed, consider the humble
beginnings of trade. Originally, if parties wanted to exchange goods or
services they identified items of equal value and exchanged them. Fast
forward to the concept then of exchanging goods or services for some other
form of value – namely currency. As forms of currency developed, the ability
to travel expanded the range of trading parties, and the trustworthiness of
both became considerations. Parties began to establish parameters under which
trade felt comfortable between new trading partners and using different
Relationships between buyers and sellers have grown
steadily further apart over time. Advancements in technology, travel,
logistics, and commerce pull in one direction, and the corresponding
evolution of payment channels and regulation pull in the other. Between those
opposing forces, both of which create space between buyers and sellers, the
‘winds of change’ help spur innovation and keep trading parties and their
service providers connected.
Technology advancements including
imaging and character recognition software, wireless, near field communication
(NFC), mobile, cloud-based and big data services open the door to more
widespread adoption of electronic payment options like commercial cards and
automated clearing house (ACH). Technology has also fostered the creation of
alternative payment options such as PayPal, Dwolla, or Square, and even
alternative currency upstarts such as BitCoin. As these developments help
solve friction points in trade, they are tempered by regulation and guidance
including Check 21, the Federal Financial Institutions Examination Council
(FFIEC), and Dodd-Frank.
Trends offer a compass to guide us
along the path of future innovation. For example, the increased development
of electronic purchase order and invoicing tools, the adoption of integrated
financing solutions such as commercial card, the expansion of non-payment
information capabilities of networks like SWIFT and ACH, all evidence that
the buying process is beginning to come together into a more cohesive system
for trade between all parties; one that considers aspects of trade beyond
Potential solutions to address points of friction have started to emerge.
Sharing information between buyers and sellers requires end-to-end payments
solutions that simplify communication and visibility between parties and
include all aspects of trade, from logistics to insurance and risk, to provide
a foundation for true collaboration.
Capabilities that facilitate
collaborative trade and resolve issues between parties will help bridge the
communication and information sharing gap and provide a paper-free process.
While elements of this exist today, true value will be realised once buyers,
sellers and service providers alike share information in order to resolve
disputes and ensure the smoothest trade possible. In addition, a direct
connection with payment transactions will provide a more complete offering,
allowing buyers and sellers to find the right balance of payment options to
best suit their collective needs.
Lastly, there is a need for
liquidity solutions to help ‘grease the wheels’ of trade between buyers and
sellers – again integrated into the process rather than offered as a service
triggered by an action outside the payments process. What’s more, financing
solutions should be leveraged to relieve the tension in the pay slow/collect
fast tug-of-war between parties, and considered in the initial agreement
terms. While we see the beginnings of this in the commercial card space, or
with simplistic discounting services primarily built around payment timing, we
are still at the early stages of more complete solutions.
corporations, future opportunity includes bringing together a spectrum of
representatives within the organisation to collectively prioritise such
connected services to provide efficiencies across the business. For financial
services providers, the challenge will be to drive towards offering more
complete and comprehensive solutions that address the points of friction
across the entire payments environment.
By acknowledging the
importance of balance, removing the points of friction, considering the
perspectives of participants, and understanding the winds of change, payments
nirvana may be more achievable than we might imagine.
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