The Topsy-Turvy World of EIPP: Embraced by Payables Functions
The premise for electronic invoice presentment and payment (EIPP) is that it benefits suppliers and improves their receivables processes. By removing paper from their processes, suppliers save paper and handling costs, including mailing expenses. It is easier and more efficient for purchasers to pay electronic invoices via electronic payments, which leads to quicker receipt of payments and easier posting to internal accounting systems.
While this premise is theoretically true, the reality is that accounts payables (A/P) organisations are the ones demanding EIPP. Receiving invoices in electronic formats or converting paper invoices to digital files automates payables processing. Digital files result in fewer misplaced invoices, more timely payments that reduce late fees, and fewer exception items. Data regarding payments behavior with specific trading parties is more easily gathered, informing buyers’ trading terms negotiations with their suppliers. For example, suppliers are more willing to lower pricing if the buyer makes payments earlier. Applying all of these factors to A/P can help companies dramatically reduce their overall processing costs.
Although A/P organisations encourage their suppliers to invoice electronically, paper invoices remain. Companies can install software solutions to electronify paper invoices that they receive. However, technology is advancing quickly, making it difficult for companies to stay on the cutting edge with in-house operations.
Outsourcing of A/P processing is the new frontier. It is an excellent way for companies to reduce costs, improve controls and provide management with detailed, accurate and timely reporting.
By providing these outsourcing services, banks and vendors reach into the payables side of companies with whom they formerly had little or no contact. They now interact with procurement managers and accounts payables managers. Companies provide their payables file electronically to their outsourcer and direct their trading partners to send invoices to the outsourcer’s facilities. The outsourcer converts paper invoices to electronic format, accepts electronic invoices, and compares both against the payables file. The outsourcer communicates matched purchase orders and invoices to the A/P system at the company. The paying company initiates the payment or schedules it for a specific date. Unmatched items are extracted by the outsourcer, and routed to the company for research and resolution.
As with any outsourcing initiative, the best results come from re-engineering internal processes to take full advantage of the outsourcer’s capabilities. A/P outsourcing provides a connection between that functional area and its trading counterparties’ invoicing and receivables areas. By automating these processes, companies achieve more than cost savings, although reduced costs are a strong motivator. Sarbanes-Oxley (SOX) is a regulatory driver towards outsourcing these non-core processes as well. In particular, SOX requires significantly greater internal controls and reporting from corporations. The re-engineering and information technology required to comply with SOX encourages corporations to consider outsourcing even if they would not do so before its passage.
Companies that outsource A/P realise considerable savings of between 25% and 50% of in-house processing expenses. Even more critical is the accelerated actionable information available online to the outsourcing clients, their suppliers (if allowed by the buyers), and financing banks or companies. Companies improve trading partner relationships, negotiate better trading terms, ensure management compliance with regulatory reporting requirements and improve overall cash management through this shared data. Banks and their vendor partners develop stronger relationships and build new revenue opportunities. Opportunistic banks leverage the visibility into the activities between trading partners to develop additional products and services that can differentiate their offerings.
Perhaps even more exciting is the opportunity for buyers to facilitate trade financing for their suppliers at improved interest rates. The evolving trend is for buyers to demand ‘open account’ trading with their suppliers. In effect, the buyer will pay the seller upon receipt of the goods or services. The supplier is taking all of the risks regarding the deal and must find funding for raw materials, in-process manufacturing and transporting of their goods. In most of these relationships, the buyer is a large, credit-worthy company and the seller is smaller with a lower credit rating. By interfacing with the buyer’s payments systems, non-existent in the past, the buyer’s bank knows the approved date and amount of payment to a given seller. Information truly means opportunity: The buyer’s bank can offer the seller a loan on more favorable terms than even the seller’s bank due to the assurance of payment of specific invoices by the buyer.
Banks are integrating card payments for those companies adopting EIPP. An important reason for offering EIPP is to speed payment receipts and paper check payments are suboptimal in that regard. Electronic payment methods such as automated clearing house (ACH) and wire payments require sharing of banking account information, which buyers tend to resist. The introduction of procurement cards (also known as purchasing cards or p-cards) to this process keeps the payment in electronic format and removes the need to share, or store, sensitive banking information.
A competitive differentiator for banks is the provision of aggregated payments services in support of business’s A/P functions. As one of those payment mechanisms, banks promote the use of p-cards for strategic purchases – those purchases, negotiated with established trading partners, that are integral to the provision of the business’s core products and services. Banks gain more revenue as strategic purchases tend to be high-value purchases.
Incorporation of p-cards into the procure-to-pay cycle expands this approach. The normal process of sourcing suppliers and placing and receiving orders remains. Banks add a card payment file to the payment options of a check, ACH or wire transfer file to execute the payment based on the company’s payment rules.
P-card functionality provides automated straight-through processing from purchase through settlement to internal accounting system posting, which results in significant cost savings for businesses. Additionally, accurate and timely updating of internal accounting systems improves cash forecasting and strengthens working capital management, two key functions of corporate treasurers.
P-card acceptance is a much tougher sell on the supplier side. The introduction of card payments is disruptive to the pre-arranged shipping and payment terms between buyers and suppliers. As an example, if the supplier has provided discounts on pricing for a given buyer based on the expectation of good funds within 30 days and the buyer decides to ‘pay’ on the 30th day with a p-card, good funds are delayed by another two-to-three days. The larger the purchase values, the more significant the impact of a few days delay in payment receipt.
Interchange charges, a percentage of the value of each payment, compensate card issuers for credit evaluations and assumption of risk. As values of purchases rise, suppliers (merchants) become less willing to pay the interchange for the large amounts. An option exists for certification of suppliers for large-ticket interchange rates, scaled back rates from the standard interchange percentages. Many suppliers are unaware of this option or still view the lowered interchange as prohibitive.
In order to promote card acceptance for larger-value purchases, demonstrating the business case to the supplier side is necessary. Card issuers, networks and processors are gathering data and attempting to find the right mix of benefits and cost allocation to encourage supplier acceptance. They are meeting with moderate success, but mostly for modest increases in purchase values.
A/P outsourcing is one of those rare approaches that benefits both sides of the trading-partner relationship. Further, banks and vendors are building stronger relationships with their client base by offering such services. Adoption will grow as the benefits become more renowned.
While the introduction of p-cards to strategic purchasing has its limitations, its adoption will continue. The key industry players need to identify benefits for both purchasers and sellers comparable to their experience with outsourcing accounts payables. When there is a fair balance in value, banks will achieve success with aggregating all forms of payments. By doing so, businesses can leverage the unique attributes of the various payments methods in a streamlined and automated fashion, truly transforming A/P processing.