"Electronic utopia" might sound like the name of an alternative rock band, but in the world of accounts payable and receivable, it's the state many treasurers dream of attaining once they have eliminated paper from their processes and are moving both data and funds entirely electronically. "The biggest drive that we're focusing on right now is moving from the paper to the electronic realm," says Michael Cross, director of marketing with Mellon Working Capital Solutions, Mellon Financial Corp., in Pittsburgh. "Customers see the electronic realm as nirvana."
Treasury executives are looking forward to straight-through processing, seamlessly linked systems, more vendor discounts and reduced exception processing. "Electronification is the path to payments prosperity," says Craig T. Vaream, vice president and ACH product executive with JPMorgan Chase in New York City.
Many companies appear to be moving along that path. Results of a September 2006 survey of finance executives by PayStream Advisors Inc. in Charlotte, N.C., show that 47 percent of respondents are using imaging and document management applications in their procure-to-pay processes. Of these, 46 percent use imaging and document management with approval workflow applications to accelerate invoice-processing time.
One company that has made significant progress in transitioning from paper to electronic payments is BellSouth Corp., an Atlanta-based telecommunications company. Each month, the company processes between 12 and 13 million payments, says Melissa Bernardino, manager of remittance planning and analysis. Over the past several years, she and her colleagues have re-engineered many of BellSouth's payment processes and added electronic check to the other online payment options: credit or debit card and a bill-payment service. Adding electronic-check capabilities, called the biller-direct model, required entirely reworking BellSouth's online payment system. That's because electronic checks flow through the Automatic Clearing House (ACH) network, while credit-card payments travel through the credit-card networks.
Electronic-check payments save the company money because they don't incur interchange fees (the portion of each credit-card transaction that the financial institution issuing the card retains to cover its cost of processing). To encourage customers to choose this option, Bernardino and her colleagues placed it at the top of the list of online payment options.
The BellSouth team's work has paid off. When they started the project, 75 percent of payments arrived by traditional mail, 15 percent came in over the counter, and only 10 percent were made electronically. Today, 30 percent of customers pay electronically, 10 percent hand-deliver their remittances, and 60 percent mail their payments.
During the same period, credit and debit payments have remained flat, while the volume of e-checks has grown. That shift has resulted in tangible time and dollar savings, Bernardino says. Although the volume of electronic payments overall has grown, the company's interchange fees have remained flat. In addition, exception-processing costs have dropped because it's easier to research e-check payments than credit- or debit-card payments.
A number of companies navigate the paper-to-electronic transition by outsourcing some payment functions. A case in point is Waltham, Mass.-based Mac-Gray Corp., which provides commercial laundry equipment for such locations as apartments and college dormitories. Kristine E. Stone, Mac-Gray's director of commissions and payables, says that the company issues between 15,000 and 20,000 checks monthly to apartment owners and university administrators, who earn a commission each time a tenant or student uses a machine. The business used to print the checks internally, but in June of 2006, it handed this task over to Payformance Corp. of Jacksonville, Fla. Each month, Stone and her colleagues send a payment-information file to Payformance, where the checks are printed. "It saves staff time and wear and tear on the equipment," says Stone. In addition, Payformance can more efficiently handle tasks such as verifying addresses and bulk-mailing checks.
By working with Payformance, Mac-Gray can also offer its customers direct check deposit and online payment information. Developing this capability internally would have consumed more staff time than would have been cost-effective, Stone adds. "Developing direct-deposit software is not a core competency."
One significant driver behind the interest in electronic payment processing is employees' desire to reduce the number of remittances that require special processing and to streamline the handling of exceptions. "The biggest pain point for clients is exception items," says Cross.
In 2005, Vectren Corp. of Evansville, Ind., began working with its lockbox provider to reduce the number of exceptions forwarded to the accounts-payable department, says Kathy Oxby, the energy company's supervisor of receivables management. Vectren currently receives just over 1 million payments each month, of which about 620,000 come through the lockbox. To eliminate some of the exceptions, the company instructed its lockbox provider to work with the larger online bill-payment services that process about 40,000 Vectren payments each month. Although many consumers don't realize it, most of the processors actually send paper checks.
The lockbox provider asked the bill payers' IT departments to submit payments electronically. This reduces the amount of exception processing required because the lockbox provider can compare the electronic file from the bill payer to the file of accounts that Vectren sends it each week. When the lockbox provider encounters an incorrect payment, it places the information in a database, where the system can refer to it in the future.
Currently, about 33,000 of the payments coming from bill-payment services arrive electronically, up from zero about 18 months ago. As a result, the number of payments requiring exception processing has dropped by about 30 percent. In addition, both Vectren and the bill-payment companies save money by sending an electronic, rather than a paper, file to the lockbox. Oxby estimates that the company's lockbox expenses have declined by about 5 percent over the past year.
Although companies have made progress in the transition from paper to electronic payment processing, they must overcome several obstacles before making most payments electronically. "We are smack dab in the middle of the transition," says Cross.
One obstacle that has hindered growth in electronic payments has been the lack of remittance details to accompany the transferred funds. "In the business-to-business market, the use of paper invoices and checks is still hanging on," says Michael Herd, spokesperson for NACHA -- The Electronics Payment Association, based in Herndon, Va. "It's the information that's driving that, not that payment." The goal has been to find an effective way to move money and information at the same time.
Currently, no single standard for transmitting remittance details exists within the ACH batch payment system, says Henry Ijams, managing director with PayStream Advisors, so few companies provide this information. As a result, an employee on the supplier end often has to manually research each payment to determine which invoices it covers. Rather than spend money and time doing this, many suppliers require their customers to pay by check.
However, several solution providers are working to resolve this issue. Xign Corp.'s settlement network processed $28 billion in payments last year, says George Fan, vice president of marketing and general manager, supplier services, with the Pleasanton, Calif.-based company. About 40,000 suppliers are part of the Xign network. Customers pay these firms using a purchasing card or an ACH transaction. In both cases, Xign's software allows remittance information to accompany the payments so vendors know which invoices a particular payment covers. What's more, suppliers can log on to the network to check the status of their payments and find out when customers are scheduled to pay their bills.
For the customer companies, Xign transmits payment instructions to the banks, letting them know when the company wants to remit payment for a particular invoice. Because purchases are approved and funds are transferred electronically, the time it takes to process payments is reduced, enabling many companies to capture more vendor discounts.
GE Money - Corporate Payment Services, which is an Xign partner, offers a dynamic payment network. The functions are very similar to that offered by Xign, with a few additional capabilities, says Matthew Anderson, strategic initiatives leader at the Salt Lake City-based company. For example, suppliers can receive notification by e-mail when a payment has been made. In addition, customers can use the virtual payment function. This function is similar to a purchasing card transaction, except that only an account number, and not the card itself, is used. Purchasers can exert control over transactions by, for example, setting a dollar limit on any transactions conducted with the account number.
Another challenge in the transition to electronic payments is that some of the standards needed to link different systems are still being developed. For example, there's a misperception that implementation of the ISO 20022 standard, which will be used to connect ERP systems from vendors such as Oracle and SAP to the major banks, is just around the corner, says Eric Campbell, chief technology officer with Bottomline Technologies in Portsmouth, N.H. He predicts that it will take seven to 10 years before most banks can implement ISO 20022. "The systems at the banks that will have to change are mission-critical, and they change infrequently." What's more, the ISO 20022 standard itself still is in flux and could change, he adds.
Another standard gaining ground is the universal payment identification code, or UPIC, according to Ijams. Unlike the bank-account information used today, which changes when a company switches financial institutions, the UPIC would stay with the company. Ijams says that the UPIC is similar to the International Bank Account Number, or IBAN, used by European companies. Because many EU payments are made electronically, EU Regulation 2560 promoted the use of IBANs as early as 2001. However, for the UPIC to really have value, more companies need to adopt it. In order for that to happen, banks need to build their capability to work with UPICs.
One more challenge to greater use of electronic payment processing has been the lack of a single communication standard between companies and their banks. Until now, most banks have maintained their own proprietary mode of communication, forcing companies to install a different system for each bank they work with. That is slowly changing. In January, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) announced the commercial availability of its enhanced SWIFT For Corporates bank-access model. Called Standardized CORporate Environment (SCORE), the program offers message standards companies can use to communicate with participating SWIFT financial institutions.
Finally, because many companies in the United States have become extremely efficient at processing checks, they've often found it hard to justify the investment needed to handle more payments electronically. BellSouth, for instance, has been a leader in electronic payment processing. However, management has decided, at least for now, not to make the investment required to convert the paper checks coming to the lockbox into electronic data streams. "We have an internally managed lockbox, and it's very low-cost," Bernardino says. "We weren't able to project the savings some companies could."
Legislation Facilitates Move to Electronic Payment ProcessingSeveral new pieces of legislation will facilitate the move to electronic payment processing. One is back-office conversion, or BOC. Effective March 2007, BOC will allow retailers and other businesses to convert checks to electronic data streams. "This allows retailers to move to the process of electronifying their payment process," says Stephanie Schmitt, vice president, commercial product management, with U.S. Bank in Minneapolis. Schmitt predicts that larger retailers that operate multiple checkout lanes will be the first to embrace the applications because they have the most to gain. Another legislative change on the horizon is the Single Euro Payments Area, or SEPA. This regulation, which goes into effect in 2008, will eliminate the European Union's (EU) disparate pricing structures, which add cost and complexity to the payment process. Currently, each nation has its own payment structures, says Alan Koenigsberg, product executive, European cash management, with JPMorgan Chase Treasury Services in London. For example, file formats vary among countries. "SEPA will help drive consistency across the eurozone, with one file format for direct debits and one for credit transfers," Koenigsberg says. To be able to process payments in each EU nation's unique clearing system, many large companies must now work with at least one bank in each country. But as SEPA takes hold, treasurers may decide to consolidate these accounts, Koenigsberg says. |