Transformation of the Collections Process
Today the collections process may be electronic or non-electronic, physical or virtual, local or global, but one thing doesn’t change – companies want to collect funds as quickly and inexpensively as possible and identify who is paying. What is changing, however, are the number of collections channels being employed as well as the strategies and rationales behind them.
Driving this change are the demands of corporations that want a full range of collections capabilities, as they seek to leverage fewer providers. Pulling at the other end of that rope, banks, which have traditionally been constrained by geographic footprints, have been busy expanding services, while establishing innovative partnerships in other regions. All this results in a changing collections landscape with a range of channels and technology providers – some new and some not so new. But all are looking at the process of moving collections and information in new ways.
Banks have always been an important channel for both business-to-business (B2B) and consumer-to-business (C2B) collections. In the B2B flows, collections can be indirect or direct. In the case of indirect flows, cash or cheques are being sent from company to company and the recipient of funds finally deposits them in a bank. The bank participates in the clearing of cheques rather than handling the collection itself.
Of course, banks also participate more directly in the collection process. And when they do, they play a vital role as information gatherer. For example, when the buyer of goods and services deposits its payment directly into the seller’s company account, the information that is captured at the teller level is crucial to the reconciliation process.
Banks have become a standard channel in the collection of recurring C2B payments, most notably utility and insurance bills. However, in the last few years, banks have tried to redirect most of these transactions through alternative electronic channels such as direct debit, automatic teller machines (ATMs), the internet or other physical collection points outside the bank branch.
The early 1990s saw the rise of the non-bank collection point in many countries. Post offices, supermarkets, convenience stores, petrol stations and lottery agents began jumping in to an area that, until then, was supposed to be the bank’s territory.
The reason for this shift lies in two fundamental trends:
These trends are still driving collections strategies today. In Brazil, for example, lottery agents handle more than 30 per cent of C2B collection flows. Special non-bank collection networks have been set up in Poland, Argentina, Hong Kong, the UK and more than 30 other countries around the world. Participation of the non-bank network is increasing year after year at the expense of bank flows.
For the consumer, it means more convenient places to pay. For retailers, it means a new revenue stream and more opportunities to grow sales.
Automatic Teller Machines (ATMs) or Cash Points allow customers to both withdraw cash and make deposits. Yet, based on the latest statistics, nine out of 10 people use these machines solely for withdrawals. Despite the best efforts of banks, the deposit function has not caught on.
Some banks developed machines specifically designed to collect cash. Usually called Automated Collection Machines (ACMs), designers of these machines have employed screen functionality and, in some cases, cash counting capability, to deliver a more intuitive and satisfactory experience for the payer.
Cyber-Collection Rears its Head
Internet collection sites for C2B flows are taking a variety of forms around the world. Large billers have tended to build their own sites. Once logged on, individuals can find the amount they owe – and in some cases an electronic invoice – and make payments with debit and credit cards.
In some countries, websites that aggregate information from a number of different billers have been launched. On these sites, individuals can view invoices from different companies simultaneously. Citigroup has already helped some clients launch sites of this type, such as one in Colombia offered through “Mis Pagos al Dia.”
In the last few years, there have been several attempts to consolidate invoices and payments on a single site. However, sites for B2B flows have not been successful due to the high level of customization required. With the agreement on new invoice standards and the addition of financing capabilities, these sites could have a better chance for acceptance in the not-too-distant future.
Collecting payments by mobile telephone is in its infancy, so it is difficult to draw any real conclusions about its prospects. However, early tests have shown some promise for the C2B flows. The tremendous success and high consumer penetration rates of mobile phones piqued the interest of banks and other technology companies in the practical applicability of this potentially powerful collection channel.
The concept is very simple. Individuals register their mobile number with the biller and authorize the biller to send them an invoice message. The payer simply replies by entering the word ‘Pay’, which then triggers a direct debit to the individual’s account or credit card.
So what forces are driving today’s trends in collections? At the end of the day, they are the forces that have driven changes in collection methods through the ages: the biller’s need for rapid payment together with a high level of information detail.
This need for speed has unleashed a tremendous growth in electronic transactions (incoming transfers, direct debits). The evolution of automated clearing houses now makes it possible for companies and banks to both debit and credit funds on the same day.
Even paper cheques are being cleared today with greater swiftness. In the past, different local clearings made the process cumbersome. Today, cheque truncation – converting paper cheques into files or substitute cheques – is facilitating the rapid clearing of cheques on a national scale in many countries.
While payment clearing speeds grow faster each year, the ability to deliver accurate information is still struggling to catch up. Despite improvements in technology, banks are still searching for ways to deliver consistent, detailed reporting for all collection transactions. At times details are not properly captured at the origin of the transaction, as is often the case when payers do not include adequate details when executing the payment. At other times internal bank processes themselves may abbreviate the references in ways that make them difficult to process at the collection end. But what may make the biggest difference for collections in the long run is the standardization of information across countries and channels.
Companies are starting to realize the importance of having both a high degree of control over, and a clear strategy for maximizing, the various collection channels available.
The need for speed will continue to drive the growth and pervasiveness of electronic collections channels. But an equally powerful need – the consumer preference for convenience – will also promote the expansion of physical channels and the rise of non-bank networks.
Still yet, the need for novel, clear and inventive thinking about ways to enhance reporting of transaction information will continue to make its presence felt. If banks and outsourced providers persist in sending files carrying different formats and content, then the reconciliation process will never be as efficient as it could be. And both bank and company overheads will continue to reflect that deficiency.
Banks and outsourced providers are in a race to gain the confidence of companies that, when all is said and done, are simply looking for fresh and innovative ideas on how to simplify the collections process.