Global Payments: Money on the Table
In a difficult global economy, the last thing treasury staff can afford to do is leave money on the table. If you’re interested in saving money – and who isn’t these days – you’d be wise to look at your global payments process.
Wire transfer has long been the default payment mechanism for international payments. Wires are tried and true, accepted by virtually every bank worldwide, very expensive for the company that sends them and, due to lifting fees often imposed by receiving banks, for the companies and individuals that receive them.
If one were to search for a silver lining in today’s challenging market environment, it might be that tough times force companies to become more resourceful, to explore different, less costly ways of doing things. When they look for lower-cost alternatives to facilitate cross-border trade, many companies are discovering the global automated clearinghouse (ACH).
The answer to that question is, not exactly. The ACH network is a US invention that exists only in the US and Canada. But similar clearing and settlement systems for electronic payments exist in developed countries around the world. So, it’s possible for a US bank to create a payments network that ties into the various in-country, low-dollar electronic payments systems and simulates ACH on a global scale. That is what Wells Fargo Bank has done.
Our customers can output a single payment file in NACHA format and send it to the bank, which then reformats each payment to the standards of the country where the payment will be made. For treasury staff, it looks and feels just like they are executing domestic ACH payments – the process is the same. As the single euro payments area (SEPA) is rolled out, it will become easier and ultimately cheaper to incorporate the euro zone into the global ACH network.
Global ACH services as currently offered by Wells Fargo are working for Michael F. Rocklin, treasury manager for The Active Network, Inc. based in San Diego. The Active Network is to participatory sports events (marathons, cycling races, charity walks, etc.) what Ticketmaster is to performance events. The Active Network provides online registration and collects entry fees from event participants on its web sites and later pays event sponsors “through the global ACH,” Rocklin says. He’s happy because, “it’s a lot cheaper than paying with wires and much more reliable than paper drafts. We keep customer data in our databases and, when payment is due, we just populate a template with the right amount and send the ACH payment.”
The Active Network adds another level of cost reduction coupled with risk mitigation by making global ACH payments from multi-currency accounts. The company collects and pays in the currency of the event site, whenever possible. “We have virtually no FX risk,” Rocklin says, “no worries about currency fluctuations other than for our reporting requirements, and we have no costs for currency trading or concerns about managing hedging programs.”
While this payments program has global reach, it’s all done through one bank, Wells Fargo, and completely accessible with one sign-on, Rocklin says. “We can manage global operations from right here in San Diego. We still are required to have some in-country accounts around the world, and we can see and manage our global balances through our multibank reporting service, but it’s great to be able to pay and collect using our multicurrency accounts, which we can control from headquarters, just like our domestic accounts. It’s quite simple.”
The Active Network currently covers 30 countries and is expanding into others. This simulated global ACH network doesn’t reach everywhere. “We’ve had races in Beirut and other places in the Middle East that we settled in US dollars,” Rocklin reports. But the Wells Fargo network he uses reaches nearly all of Europe and North America, India, Singapore, Hong Kong, Australia, and New Zealand, which covers the primary areas where The Active Network operates.
Except in the US and Canada, where some cheques are still mailed, The Active Network pays only through the global ACH network where that option is feasible. That strategy cured a big headache for the company. “We used to send foreign drafts and it was a disaster,” Rocklin says. “The drafts were stolen. Or they never arrived. Or if they arrived, the local bank didn’t know what they were and wouldn’t cash them. So we decided to stop sending checks and rely exclusively on electronic payments. It’s simpler, and we can control it better. It has dramatically reduced the problems we were having with sponsors not getting paid on time.”
When global ACH replaces checks, the headaches go away. When global ACH replaces wires, the cost savings are impressive. Companies that have switched from international wires to global ACH save as much at 90% of their costs of making payments. And because with global ACH there are no lifting fees, payment recipients are happier, too.
Global ACH has its limitations as well as its benefits. It works best when payment due dates are known in advance. Depending on the country, it can take from one day to five days for payments to settle. It also works best for payments that are recurring; you can set up payee information files and use them again and again. And it works best for payments that are cost-sensitive, which would include most vendor, payroll, contract, dividend and pension payments. You still may want to wire funds to close a multimillion-dollar, pound or euro real estate deal.
Global ACH also works best when remittance information doesn’t have to travel with the payment. It’s possible to simulate the payment features of the ACH on a global scale but not the remittance detail of a CTX.
The benefits of global ACH outweigh the limitations for ClickBank, which operates an online marketplace for the sale of electronic knowledge products such as unpublished book texts. That company takes about 25,000 orders a day at an average order price of US$40, and it makes 5,000-6,000 payments a month to the vendors and affiliates that provide the products sold over the ClickBank network. Dealing with such high payment volumes, controller Chris Myers was to learn he could migrate most of those payments to a global ACH solution.
Global is important because “our payments go to every continent except Antarctica,” he says. And electronic is important because the old system of trying to send a combination of paper cheques and electronic wires was expensive and inefficient. “We were using ACH domestically, but the majority of our providers outside the U.S. were getting paper cheques,” he reports. “Since 2007, ACH has become our primary method of paying globally.”
“When I started with the company in 2003, it was a five-day process to prepare all the payments,” Myers says. “Now that is down to two days.”
Depending on their bank’s offering, treasuries may have a choice of originating global ACH payments through direct origination (submitting a NACHA-formatted file to the bank), using a bank Internet site to initiate discrete payments, or using a bank payment consolidator service. Which method is best depends on the volume and nature of the payments and the technical infrastructure of the paying company.
“As a tech company, we don’t find it hard to write files to an ACH format,” Myers says, “so direct origination is hugely appealing to us. We’ve saved about six man-days per payment run, with two runs per month. That’s a lot of time saved, and it has given us a competitive advantage.” While paper cheques gave ClickBank more float, moving to ACH domestically has been “definitely cheaper,” and the move outside the US is “no more expensive,” according to Myers.
Currency issues were also important for Myers. “We tried converting outgoing wires to the payee’s currency, but they had to pay a currency conversion fee and didn’t like that,” he reports. “With global ACH, there is a conversion rate but no lifting fees.”
The limitations of global ACH don’t bother ClickBank. Because the company can schedule all of its payments two weeks in advance, settlement timing is no problem, and of course the vendors and affiliates get funds much sooner than they would from cheques traveling through inefficient postal systems, Myers notes. And while global ACH payments generally don’t carry remittance information in addenda records, Myers reports that hasn’t been an issue. “Our vendors and affiliates expect their payments. They can login to their accounts, see what their payments are going to be, and when they’re going to be sent,” he says.
ClickBank was a pilot participant when Wells Fargo expanded its global ACH coverage to India, Hong Kong, and Singapore. After a few glitches in formatting ACH files for the account numbers in Asian countries, “everything fell into line and now is working like the rest of our payments,” Myers says.
Sending cross-border payments through multiple in-country, low-value electronic payments systems is de rigueur to companies based in Europe. They’ve been doing it for decades. To North American-based companies, however, global ACH is relatively new and little known. As economic challenges drive these companies to explore the unknown, more and more of them will discover global ACH. And, as awareness grows, usage is expected to follow. Today’s treasuries aren’t inclined to leave money on the table.