Published: January 01, 2000
A resurgent economy promises increased purchasing activity and new suppliers entering the marketplace. Both developments add to the benefits — and urgency — of buyers moving to electronic payables solutions.
A growing economy magnifies the value a company can gain by adopting electronic payables tools. Expansion leads to more purchasing and more payment activity, so the benefits of migrating to a more efficient payment mechanism multiply. New suppliers emerge in a strengthening economy, and it behoves buyers to introduce efficient payment practices from the start when initiating new supplier relationships.
For buyers, one electronic payables alternative, commercial card payments, offers a range of clear advantages related to efficiency, control and cash flow. On the other hand, suppliers traditionally bear additional costs to accept cards, and the benefits of migrating to card payments aren’t always as apparent to them.
This can be challenging for buyers, who must find ways to collaborate successfully with suppliers on card payments and balance out the benefits, and in doing so strengthen their trade relationships.
Often, cost savings come at the top of a long list of reasons that organisations transition to electronic payments. In addition to a reduction in hard costs associated with paper cheques - fees, processing and postage are the less obvious soft savings. Making payments through the Automated Clearing House (ACH) network or with a commercial card can allow a growing company to redeploy staff and hold the line on accounts payable staff additions. Additionally, since suppliers can receive electronic payments much faster, they may be willing to offer discounts.
Companies today are investing heavily in working capital solutions and moving to electronic payments makes sense as a strategy as it supports the underlying visibility of working capital.
A strengthening economy also leads to increased global trading activity. In such an environment, travel-and-entertainment payment volume rises, along with global business-to-business trade. And a commercial card is an excellent tool for facilitating the resulting global payments.
Commercial cards have become many buyers’ electronic payables tool of choice
Indeed, commercial cards have become many buyers’ electronic payables tool of choice. A card programme can enable buyers to streamline business operations, enhance internal controls and improve cash flow — and they have the potential to earn rebates based on their spend volume.
Alternatively, suppliers generally don’t view card acceptance as an easy decision for their business. When approached by buyers about accepting card payments, the first thing suppliers often consider is the cost of acceptance, which is based upon standard interchange rates set by the networks.
What is often difficult for suppliers to recognise and give equal weight to are some difficult-to-quantify savings, timing and other benefits associated with accepting card payments, benefits they aren’t receiving today as part of the traditional process of invoicing and accepting paper cheques.
Persuading suppliers to look beyond the cost of acceptance and recognise the potential benefits of card payments can be a challenge. An important first step is working with buyers on which suppliers to approach for collaboration on cards.
An effective strategy in this regard is supplier segmentation. It’s important for buyers to identify their strategic suppliers, the relationships they value and rely on the most.
Criteria to identify strategic suppliers will certainly vary by organisation. But a buyer might, for instance, evaluate its suppliers and note that 15% of them represent 60% of the company’s ‘buy’, and designate this group as the ‘strategic suppliers’.
Supplier segmentation typically involves identifying three supplier groups: strategic suppliers, non-strategic suppliers (one-time purchases with no repetitive, ongoing relationship) and those that fall somewhere in the middle. Once all suppliers have been categorised in this fashion, a buyer can determine the approach it will take with each group on an issue like card acceptance.
An emerging tool for buyers looking to collaborate with their most valued suppliers on card payments is strategic pricing. Both Visa® and MasterCard® have high-value or large ticket interchange programmes through which acquirers can register suppliers to receive a reduced cost of acceptance on certain large purchases.
Furthermore, emerging new strategic pricing programmes from the major card networks allow buyers and suppliers to create agreements establishing reduced cost of acceptance rates. These programmes should offer greater flexibility in buyer-supplier collaboration.
For instance, a strategic supplier might resist accepting card payments at a merchant discount rate of 200 basis points, but negotiations might reveal that the supplier would accept cards from the buyer if the merchant discount rate was 75 basis points. These new programmes will allow the buyer and supplier to create a bilateral arrangement establishing a mutually acceptable cost/benefit analysis for acceptance.[[[PAGE]]]
Education is another important part of the strategy that buyers should use to collaborate with suppliers on card acceptance. Often, suppliers are so focused on the network fees associated with cost of acceptance that they don’t see some rather compelling benefits of card acceptance. Buyers need to ensure they are discussing these benefits with their suppliers.
For example, in addition to eliminating many costs associated with accepting cheques, card acceptance can automate delivery of remittance information to suppliers and generate savings associated with related straight-through processing. Card payments also offer a distinct advantage over cheques in that they usually settle the next business day.
Helping suppliers quantify the value of benefits like these can aid collaboration. Ultimately, the buyer wants to illustrate to strategic suppliers that with the cost of acceptance for large-dollar transactions coming down, combined with the value of both 100% reconciliation of payments and next-day settlement, the benefits of taking card payments can outweigh the costs. The bottom-line educational message: Card acceptance can be a winning proposition for suppliers, too.
Another alternative that buyers can bring to the table when collaborating with suppliers on card acceptance is the concept of buyer-initiated payments. In most traditional card payment models, suppliers invoice their buyers, who communicate payment instructions for each invoice to the supplier. The supplier keys the buyer’s payment instructions into its system and determines settlement timing. Thus, ultimately, it’s the supplier that initiates payment.
A model that’s emerging allows buyers to initiate the transactions. Suppliers give up the control they have in the traditional model but gain a number of advantages. Buyer-initiated payments can potentially reduce suppliers’ manual effort, reconcilement issues and costs. This model is another way to ensure straight-through processing and ease some of the supplier’s operational burden around card acceptance.
Look to your financial institution for help in supporting your efforts to work with suppliers on card payments. Banks can play a vital role in providing the services, solutions, technology and support around card payments. Ideally, the bank’s role is to enhance and facilitate the buyer-supplier relationship by providing better reconciliation and controls, and offering incremental data.
Banks should aim to support both sides of the relationship, and it’s important to identify a provider with experience and expertise in marketing to suppliers. In order to facilitate the process, best in class providers offer services designed to identify, engage and onboard suppliers — on behalf of their client. Marketing campaigns should include such activities as online education and enrollment sites for suppliers along with e-mail, letters or phone calls to suppliers to introduce your new electronic payables programme to suppliers.
In addition, as part of a provider’s enrollment strategy, it should be able to assist suppliers with cost-benefit analyses. The bank should be able to help suppliers analyse not only cost of acceptance, but also help them calculate the often substantial savings they can realise by reducing paper cheque processing, achieving greater straight-through processing of remittance information, and reducing time spent on reconcilement.
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