Business-to-Business Procurement: Think P-Card First
Investments by businesses in recent years in supply chain management technology and processes have been in vogue. Sourcing, e-procurement, spend data analysis tools and other procurement strategies have generated significant returns on the investments. However, most supply chain management strategies stop short when the time comes to pay. With senior financial executives these days charged with identifying opportunities to squeeze even the smallest inefficiencies out of routine business processes, few have explored perhaps the final frontier in supply chain management – the payment. Rationalizing the buying organization’s approach to payment and settlement is a critical component of a solid supply chain management strategy and, like sourcing and e-procurement, can drive significant tangible value.
There is no single answer to the question, “How should I pay?” Rather, understanding the fundamental economics and information capability of each of the payment methods available to the buyer leads to a decision tree, or payment protocol. Applying this protocol consistently across your organization’s entire payment landscape can lead to an optimum mix of card, automated clearing house (ACH) and check disbursements.
When you look at the payables process in its simplest form of executing the payment, there are many variables that come into play when deciding how to process a payment:
In addition, your business may be more focused on improvement or increased efficiencies in terms of costs, control over the payment, float, information or operations. Considering all of these criteria, you can begin to evaluate the best payment vehicle for each purchase.
The days of the paper check could be numbered as the dominant payment type. Check 21, a law that became effective late in 2004, promotes the future electronic exchange of check images as part of the check clearing process in order to reduce the distance that paper checks must be physically transported. Many businesses previously benefited from the float or lapse in time between issuing the check and having the funds debited from their accounts. With this float time potentially reduced, businesses’ reliance on checks may also be declining. The reduction in this float benefit is expected to reduce business reliance on checks. Those still clinging to this payment type may find increasing costs charged by their financial institutions to process the paper.
In addition, the overall economics of payment types does not shine favorably on paper checks.
| Average Cost Per Transaction | Benefits | |
|---|---|---|
| Checks* | $1.06 | Universal payment method Provides solid paper trail Float |
| ACH | $0.12 | Inexpensive Ability to integrate data with known trading partners |
| Purchasing Card | $0 | No transaction fees Revenue share opportunity Reduced buying cycle time Reduced procurement expense Automates payment & reconciliation processes |
* Source: Visa USA Analysis, March 2001
It is of interest to note that the majority of all business-to-business payments are for small dollar amounts as noted above, but are transacted in the most expensive manner.
So are there advantages to the electronic payment types in addition to the lower hard dollar costs? On the ACH front, when ACH payments are combined with information or data within an electronic data interchange or EDI, there is significant value especially when used to process invoice and payment information with your strategic trade partners. Of course, ACH is relatively inexpensive when used on its own, but in essence you diminish your float benefit as ACH transactions typically settle within two days. Wire of course is costly, though it is the best payment tool to guarantee and to expedite a payment.
As a result, purchasing cards are one of the fastest growing payment tools in the marketplace. Card acceptance has become more widespread with this payment method now accepted for almost every business need – from office supplies and hardware to customer entertainment. Cards deliver benefits, including float – based on payment terms with the bank – and efficiency, with only one payment issued to the bank each month to cover all of the card transactions made with individual vendors.
Last, but not least, purchasing cards are one the few cash management tools that can generate income to the user of the service through a revenue share program. While your revenue potential is based on total card volume, the purchasing card offers an annual revenue stream to your business. In addition, the purchasing card also rids a business of other (soft) costs, such as invoice receipt and review and check generation processing – generally about $5 to $15 per invoice – accounts payable personnel, and ample monthly check writing activity. Your vendor relationships may also be strengthened through reduced invoicing and collection costs based on purchasing cards providing guaranteed payments that are settled within one to two days of purchase.
Based upon the economic benefits associated with electronic payments, a payments optimization strategy would position purchasing cards as the primary electronic payment mechanism followed by ACH and wire as secondary electronic payment mechanism and paper checks limited to situations where electronic alternatives are not viable.
Your choice of payment to settle a transaction can also be dictated by timing – at what point in the procurement process the settlement occurs. It seems reasonable to break out the payment process into two categories: point-of-purchase, when goods and services are ordered and received; or point of payment, meaning after a purchase order was issued, an invoice was received, a two- or three-way match occurs and accounts payable is ready to disburse payment.
At the point of purchase, when either a card or check is presented at the cash register, purchasing cards are the most viable alternative to maximize process efficiencies for you as the buying organization. Cards can be deployed as either distributed purchasing cards or virtual cards behind your e-procurement or online purchasing. In a distributed environment, employees are empowered through issuance of a card to make low dollar purchases as needed without going through what can be a costly purchase order and invoice process for a small dollar (less than $250) purchase. While cards have been around for nearly 10 years, many companies perceive a loss of control when using cards at this particular point of the sale. Why? It is reassuring to account for receipt of the goods before paying the bill.
So when we look at the corporate payment continuum in a different way, you see that high dollar/low volume payments are typically made via wire and ACH while a lot of low dollar payments are made on purchasing cards; and yet, the invoice and check process still is used for the majority of all payments. Why? Companies that use a purchasing card within the e-procurement process enjoy automation of their procure-to-pay process, featuring automated reconciliation, data integration and reporting. All of these benefits can be realized while at the same time ensuring that the rules as dictated by your e-purchasing system are being followed.
Payments can also be initiated at the point of payment where the paper check continues as the preferred payment vehicle. The check offers controls on the disbursement with a paper trail providing a safety net. The check also offers remote disbursement capabilities and can reduce fraud with the addition of a positive pay feature. At the point-of-payment, ACH, wire and purchasing cards are now just beginning to be deployed as a payment vehicle through use of new technologies entering the marketplace.
Another means of rounding out the payment process with an electronic card payment is through simple use of innovative purchasing card technology being deployed at the point of payment. Straight out of the A/P process, you may be able send your bank a file of payments to be initiated via purchasing card. The bank can take the payment file, load a single purchasing card with the value of the total payment, and send an electronic remittance advice to the vendor directing the vendor to charge the given card number for the purchase. Companies who have implemented this payment process have reduced processing costs as they are not sending checks to individual vendors while gaining float benefit and in some cases revenue share. They are simply receiving one bill from the bank once a month to cover the payments made throughout the month.
A complete overhaul of your payables may be in order with the goal to achieve an optimum mix of payment types. The paper check will not disappear. However, with the prospective rewards from purchasing card in process efficiencies through automation, serious consideration must be given to moving toward electronification of payments. Companies already using this philosophy around the globe are gaining more control over their procure-to-pay cycles, saving money and even generating revenue, while merchants are settling payments within two days. In this scenario, it’s a wonder why more corporations haven’t taken an assessment of their entire payables process. If your company doesn’t know where to begin, consult your trusted financial institution. And remember, think card first, ACH second! The irrefutable benefits to the buyer have left many businesses that are finally on board with purchasing cards wondering why they hadn’t done it sooner.