Optimising Cheques and Balances
‘Outsourcing’ has for some time provided a convenient way for business managers to enhance their financial results and bundle processes. The decision-making around it, in essence, has followed this route: define what can be produced more cheaply elsewhere and make those providers part of your process chain. To that, add tight contracts, possibly define a second provider as a fall back and, unless absolutely necessary, avoid talking about it to your customers as they will likely never know. This recipe has been employed across numerous industries over the last decade. Some companies, however, have clawed back some of the processes originally outsourced, recognising that in the jumping on the bandwagon they have in fact farmed out parts of the value chain that were too strategic.
Today, it could be argued that the peak of the outsourcing hype has passed. Activities for which there is a clear business rationale have already been outsourced. For companies and financial institutions alike, any process that still remains in house is considered to be a core business. Is the future of outsourcing, therefore, grinding to a halt? Certainly not, for the simple reason that there is still significant expense tied to internal processes. This article looks at one such process, that of cheque issuance.
The need for companies to make payments is a given. These days, corporates and banks are linked electronically and much of what can be handled in an electronic or straight through processing manner already is. But a traditional payment method still exists that creates some fairly onerous and time-consuming procedures: the cheque.
Although still very popular – and not just in the US – issuing cheques is one of the most expensive ways to make a payment, despite the perception by many of the cheque being efficient. What makes cheque issuance expensive? It is the internal costs of the myriad of steps involved. The process starts with a vault, along with the four-eyes principle of handling and tracking the cheque stock; soft- and hardware to print the cheques; inserting cheques into envelopes; stamping or metering and finally dispatch. This is just the physical issuance. In addition, the issue data has to be stored in the accounts payable department when the cheque is produced. Down the line, this same cheque has to be reconciled against bank account statements when it has been presented and the liability is paid.
Consultants have traditionally used methods like the stop-watch to time each part of the process. Multiply this by the hourly wage of the involved employee and you soon arrive at the conclusion that a significant amount of capital is tied up in the cheque issuance procedure. So, how can organisations seek to reduce expenditure and increase efficiency? Should companies provide the cheque issue data to a reliable print shop and let them do the work? That indeed would seem to solve the issue as a fundamental part of the process is outsourced. However, this option represents the conventional approach and outsourcing has evolved a great deal. It is key to see the bigger picture – that the issued cheque is just a part of another process chain, and outsourcing cheque issuance alone means implementing a small change in a larger, more complex environment.
While the internal processes around cheque issuance can be outsourced relatively easily, complexity can occur once the cheque is issued. Ordinarily, the beneficiary will present the cheque to its bank, the cheque will clear and the clearing process involves negligible fees charged by the beneficiary’s bank: so far so good. But what happens if the beneficiary resides abroad, i.e. outside the country of the issuer (payer)? The cheque is sent to the beneficiary who deposits it at its bank. But, in this instance, the beneficiary’s bank is not embedded into the local cheque clearing system of the country from which the cheque is issued. The cheque will still clear but it will undergo a manual collection process because the format and the cheque’s country specific encoding do not allow the beneficiary bank to clear this item in an automated way. Hence, the beneficiary bank will charge higher fees, which reflect the manual labour attached to the collection process. The fee will likely be a multiple of the fee for a cheque that clears locally and, all at once, the external print shop as a stand alone solution falls short of cutting costs. To redress this issue, organisations need to take a holistic view of cheque processes – from issuance to clearance. Only then can the goal of saving costs, time and effort be truly realised.
To reduce the higher fees associated with manual clearing and enhance the process for sake of the beneficiary (and its bank) requires an issuer to print cheques in the local format of the country in which the beneficiary resides. In addition, the cheque must be payable at a local bank. It is here that large global banks have the edge. Through services such as Deutsche’s db-cheque, a variety of both local and international formats can be delivered, depending on the country of the beneficiary.
The next step involves solving the ‘don’t talk openly about outsourcing, the customer will never know’ attitude, as this has always been the crux of an organisation’s ‘make or buy’ decision. Banks providing modern-day cheque outsourcing solutions understand this issue and provide cheque remittance advices that can be fully customised to the customer’s requirements.
Contracting out the part of the accounts payable business is naturally sensitive for an organisation. It is only natural then that full control of the process is a prerequisite. Information that spans the entire life cycle of the cheque becomes crucial, as does providing customers with this information in an electronic format that can easily be downloaded into existing ER system. This data facilitates the tracing of presented cheques, which becomes an automated process.
The trend away from cheques payments towards electronic ACH (Automated Clearing House) payments will, and has to, continue. It is unlikely, though, that cheques will disappear entirely as they remain the accepted instrument for certain types of payment. Over time, given the projected increase in electronic payments, a company’s volume of cheques will decline and it will be evident that resources allocated to effecting and managing cheque payments will be better employed elsewhere.
In short, the fulfilment of the complex end-to-end requirements of a cheque outsourcing solution exceeds the capabilities of even the most sophisticated print shop. Moreover, only a small handful of banks, like Deutsche, have the global infrastructure, geographic reach, robust technology platforms, as well as the proven ability, to enable them to integrate one of the last labour intensive payment types into their cash management product range. And here’s where the additional benefits lie. The cheque, a payment method that usually requires multiple steps before it can be sent, turns out to be just about as simple as any other electronic payment. Provide the bank with the data, and let them do the rest. The original ‘make or buy’ decision turns out to be a ‘make it better’ conclusion.