Despite the continued prevalence of cheques in the US market, a shift in attitude has undoubtedly occurred compared to five years ago. Three quarters of Fortune 1000 companies now have a strong interest in moving away from cheque printing. Their goal is to move to electronic payments (e-payments): in the US via the automated clearing house (ACH), internationally via SWIFT for wires; or through that particular country’s low value system. Companies are moving to e-payments for many reasons.
For one, e-payments are significantly cheaper. It can cost in the range of US$2-$8 to cut a cheque. This can be significantly higher once you add the ‘all-in’ cost of processing cheque payments. Secondly, e-payments are a more secure and more efficient way of delivering payments. A significant disadvantage with paper cheques is the absence of delivering electronically structured, rich remittance information with the payments. This means reconciliation must be done manually, a difficulty when one payment is being received for several hundred line items. Lastly, with today’s low interest rates, printing cheques can end up costing more than the interest gained in the traditional cheque float. This means now we are seeing even more corporations enrolling their vendors in programmes that allow them to be paid electronically.
Despite the obvious advantages of converting to e- payments, the market is still developing slowly and paper cheques are still the predominant form of payment in the US. Common challenges for corporates to move to e-payments include:
- Poor vendor databases that are full of outdated (or no) banking information and contact details.
- Overhead of managing different remittance requirements by vendors.
- The utilisation of accounts payable (A/P) departments to run conversion campaigns while expecting them to complete their daily tasks.
These internal campaigns tend see a dismal 10-15% conversion rate. Still, most companies have been cutting cheques since the founding of the company and ‘cheque runs’ are also tied into their A/P systems. Banks, which continue to have a vested interest in companies that cut cheques, have historically been slow to recommend a conversion programme and implement the necessary technology to easily facilitate the move to e-payments. As the global economy improves in 2010, however, the potential savings will continue to outweigh the hurdles associated with moving to e-payments.
A Developing Market Need
As the market develops, banks and other payment providers are becoming more aggressive in offering outsourced programmes to help companies move away from cheques. Five years ago, there were very few independent companies and even fewer banks offering paper to electronic conversion and vendor management services. Today, the choice for corporations looking to make the switch is much wider. Outsourced programmes vary hugely in sophistication, but the overall goal is the same – to contact their client’s vendors in order to collect banking and other contact information. For the more sophisticated programmes there is also an added value in gathering remittance delivery preferences. Delivery formats can be tailored to cater to a large corporation, requiring formatted electronic remittance, or to a small company that needs the information by fax or email.
For example, a company can implement a cheque conversion programme with a specialist payment provider, which offers a fully outsourced programme that guarantees a minimum 70% conversion rate. Furthermore, this now allows A/P to have a fully updated vendor database with banking details and other master data that will be collected during the enrolment process.
This new technology, coupled with the explosive growth of the internet and online communities, is quickly moving to an area where vendors have the ability to manage and update their banking details seamlessly through a secure online platform that is tied to a sophisticated workflow and approval engine.
If you are a large manufacturer who has utilised an enterprise resource planning (ERP) system such as SAP or Oracle, these programmes will allow you to make payments to your vendors electronically and simultaneously send the remittance related to those payments electronically so they can import it directly into their accounts receivable (A/R) system. A company using Quick Books or a similar, less sophisticated accounting system, can also benefit from straight-through processing (STP). With the new breed of providers, payment file interfaces are now flexible, in that they can integrate with any application with minimal IT resources involved.
These payment innovations now allow corporates, specifically in the US, a more compelling argument to move their vendors to electronic ACH payments for the savings, security and automated reconciliation.
Despite the long-term benefits of paper to electronic conversion, companies, particularly mid-sized corporations, are still wary of altering their current processes in these economic times. They are accustomed to cutting cheques and worry that the A/P function will not be sufficient to deal with the changes. A major consideration used to be the IT development involved with sending payment files to their bank and the data to their vendors, however this hurdle has been removed with software-as-a-service (SaaS) platforms and flexible file formats that allow payment files to be fully integrated into ERP and treasury management systems with minimal development on the corporate side.
ACH implementation depends on the size of the company, the condition of its database and the number of cheques that are distributed. Historically, most US corporations’ A/P systems weren’t designed to hold electronic information or contact details in this way, which is why vendors are offering these solutions. A company with a considerable number of vendors, domestic and international, will have a medium-sized initial investment to ‘convert’ the vendors to e-payments; however, the return on that investment (ROI) is large and the initial investment is likely to be recouped within six months, depending on the amount of work outsourced.
The move to e-payments has partly been driven by a strong focus on cost control and heightened interest in innovative technology over the past couple of years. Unlike cheques, which clear at unpredictable times, e-payments allow for much greater visibility and control by allowing corporations to know their daily cash position. They can, therefore, manage their funds all the way up to the time they deliver the file using their investment tools, instead of having to keep a certain amount of cash in a pay-from account, because they don’t know when these cheques are going to clear.
The US has always been far behind other countries when it comes to e-payments. The goal to advance the 350-year-old paper cheque-to-electronic payment is moving forward. The UK is putting initiatives in place to eliminate paper cheques by 2018. However, very few companies deliver their payments via cheque, as they take advantage of either the wire system or the local low-value bank network.
The cost of cutting a cheque typically covers the cost of the stamp, envelope and the actually cheque stock. A US company cutting 5,000 cheques a month at US$2 will pay US$10,000 or over US$120,000 per annum. Moving to e-payments, via least-cost routing (using ACH, BACS or CADPAD), will yield massive savings. Delivering payments via ACH in the US costs 5-15 cents. This move will help US corporations compete on a global scale.
Moving to e-payments also offers regulatory and security benefits for many corporates. Once the corporate has approved the identity of the vendor enrolled in the programme, the potential for fraud is dramatically reduced. Furthermore, these vendor payments are now run through the appropriate security and compliance cheques such as the Office of Foreign Assets Control (OFAC) for international payments. The immediacy of the payment allows it to be immediately tracked – unlike in cheque payment, where problems with the payment might not be immediately apparent. At the vendor end, many of the new platforms allows both corporate and vendor to be notified when the payment is received, allowing for a much cleaner transaction and process than is possible with cheques.
The paper-to-electronic conversion process continues to gain pace, aided by payment innovation in outsourcing programme, savings and efficiency potential, and the growing number of participants on both the corporate side and the vendor side ready to make the switch. Once corporations make the decision to change, the availability of programme tailored to their needs should ensure that the process is as painless as possible.
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