Published: May 01, 2013
Over the past few years, there has been significant anticipation that the use of cheques in the United States would decline in favour of electronic payments. While there has undoubtedly been an increase in the use of electronic payments, the shift is gradual rather than seismic, particularly amongst smaller and medium-sized enterprises. One of the challenges is that it is not always easy to convince suppliers and customers of the benefits of migrating from cheques; secondly, the necessary infrastructure and settlement instructions are not always in place.
There are considerable benefits to migrating from cheques to electronic payments, however, not only in the United States, but globally. These include greater efficiency and control over the payments (and collections) process, but the most compelling advantage is often the cost reductions that can be achieved. According to the Aberdeen Group, best-in-class companies are averaging below $2.00 per transaction for payments processing, compared with over $50.00 at the other extreme. Consequently, the business justification for conversion to electronic payments can be compelling.
This has been the experience of Zachry Industrial, Inc. (Zachry). Over recent years, Zachry has centralised and outsourced its payments processing to SunGard, and moved away from cheques to more economical ACH and virtual cards. As a result, the company has eliminated payment processing costs and generates more than $100,000 per annum in card rebates.
The first step in Zachry’s payments optimisation initiative was to automate cheque printing using SunGard AvantGard Secure32. At that time, the accounting function was highly decentralised, with payments being dispersed from remote locations. Decentralised payments processing can often result in disparate, manual processes and lack of consistent controls. Implementing a common cheque printing solution allowed Zachry to process cheques more quickly and to improve controls. Since then, however, there have been significant developments in the centralisation, automation and cost-efficiency of payments processing.
[[[PAGE]]]
The next step in Zachry’s payment initiative was to outsource payments processing to SunGard through AvantGard PayNetExchange, based on the company’s confidence and existing relationship with SunGard. Initially, this arrangement simply outsourced cheque printing. Subsequently, however, Zachry focused on moving away from cheque printing to electronic payments. Initially, the priority was on converting cheque payments to ACH. Using AvantGard PayNetExchange brought considerable benefits in supporting this conversion process. Firstly, as a fully web-based application, no additional infrastructure needed to be installed in-house. Similarly, as an outsourced service, no bank communication tools needed to be implemented. With a large vendor database, it would have been a major task to obtain vendor settlement instructions. Instead, Zachry could rely on a centralised vendor database, avoiding the need to set up or maintain settlement instructions. Furthermore, Zachry can send all payments, whether ACH, wires or cheques in a single file, which is then parsed or split automatically and routed to the relevant bank or cheque printing system. For vendors, not only do they receive more rapid payment, but PayNetExchange generates a remittance advice automatically to facilitate updates to their accounts receivable system.
While the focus for Zachry was on conversion to electronic payments, the need to print and mail cheques continued to exist. At the same time, the company sought to reduce the administration associated with cheque processing amongst accounts staff. By leveraging AvantGard PayNetExchange, cheque payments are included in the same file as electronic payments which SunGard then prints and mails to the respective suppliers.
Zachry achieved considerable success in converting vendor payments from cheque to ACH, but there were still further efficiencies to be made. The team therefore decided to implement a virtual card programme. This would allow them to further reduce costs, manage working capital more effectively, improve reconciliation and most notably, generate revenue from rebates. The virtual card programme is based on the use of virtual card technology which generates single-use unique card numbers with set credit limits based on the company’s payment instructions. This approach safeguards each virtual card against unauthorised use and simplifies reconciliation.
Thirty-one per cent of vendor payments are now made electronically, and this proportion continues to increase. The benefits of electronic payments, particularly using virtual cards, are now recognised across the company. For example, as vendor contracts come up for renewal or new contracts are agreed, Zachry’s procurement department ensures that ACH or card payments are the contracted payment methods, while in the past, cheque payments may have been required.
Vendor adoption has been a critical element in the success of the programme. SunGard provided Zachry with a comprehensive, custom-designed vendor enrolment programme, enabling the team to obtain and maintain the bank account details of their vendors and consent for the card programme. The campaigns included email, direct mail and calling campaigns as well as vendor enrolment information featured on the invoices. Zachry provided SunGard with a list of vendors to target for virtual card and ACH payments.
To receive payments electronically, vendors are provided with a link to register with SunGard via an online form. Zachry transmits payment files to SunGard via AvantGard PayNetExchange, and SunGard sends the electronic payment to the vendor’s bank account (in the case of ACH) or provides the card information via secure email or a secure vendor portal (in the case of virtual card payments). Vendors are notified that the payment has been made with an automated email alert. Remittance details are also available to vendors for download, facilitating more efficient reconciliation.
The benefits to Zachry of outsourcing payments processing and converting cheques to ACH and virtual card payments have been substantial, with further benefits anticipated in the future as vendor adoption continues to increase:
Reduced costs/ increased revenue
Since the autumn of 2011, vendor adoption has grown and therefore rebates have also increased, currently to more than $100,000 per annum.
Improved cash visibility
By centralising and outsourcing payments processing, Zachry now has a single, accurate view of the company’s daily cash position and can control the timing of funds dispersal, supporting more effective working capital management and more accurate cash flow forecasting.
Improved process efficiencies and vendor relationships
Payment automation and outsourcing has reduced the procure-to-pay cycle time from weeks to a few days, which has a positive impact on vendor relationships. The number of accounts payable queries has fallen dramatically, as vendors have direct online access to accurate information. With greater automation and fewer queries, employees can dedicate more time to value-added tasks as opposed to manual processing.
Improved security, control and risk mitigation
The risk of fraud, error or non-compliance with internal authorisation processes is far lower with electronic payments than manual cheques. Furthermore, eliminating manual input reduces the risk of error and the amount of accuracy checking that is required. In migrating to electronic payments, Zachry has been able to reduce the risk of cheque fraud and implement consistent, rigorous controls over payment processing.
Like many major corporations, Zachry has embraced the use of electronic payments, recognising the benefits they offer to the business compared with the use of cheques. Zachry has gone further than most, however, by leveraging the infrastructure and expertise of specialist provider SunGard, enhancing vendors’ experience of working with the company, and creating a new revenue stream through card rebates. Not only has the company derived immediate benefits, but the structures now in place provide significant flexibility and scalability to support future growth and leverage further efficiencies and rebate opportunities in the future.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
