Payments Insights. B2B epayments: The Continued Movement Towards Leaving the Check Behind

Transcription

1 Payments Insights B2B epayments: The Continued Movement Towards Leaving the Check Behind

2 Payments InsightS from a Payments Expert Contents 3 The Role of Vendor Enrollment in B2B epayments Adoption 4-5 virtual Card Programs 6-7 Payments Fraud Remains High 8 B2B Payments: Shifting Potential Liability 9 Insight into Payment Remittance Today more than ever, companies are looking for ways to reduce expenses and improve operations. For this reason, many corporations are now looking closely at their payments strategies. While there has been substantial growth in B2B electronic payments processing in recent years, there is still a long way to go in the journey to eradicate paper checks. Matthew Dragiff, vice president, product management, payment services, SunGard s AvantGard shares his insight on the trends in this changing environment. This ebook, a compilation of short articles authored by Mr. Dragiff, along with real-world case studies, explores this dynamic landscape and the innovations and advancements taking place. 10 Featured Webinar B2B epayments: How Zachry Holdings, Inc. Migrated Checks to ACH & Virtual Card About Matthew Dragiff Matthew Dragiff is the vice president, product management within SunGard s AvantGard payment services. In this role, Mr. Dragiff is responsible for setting the strategic product vision and mapping out the product delivery roadmap. He has been with SunGard for five years. Visit to subscribe to our payment services blog and to read case studies on best-in-class accounts payable departments.

3 The Role of Vendor Enrollment in B2B epayments AdoPTIon A/P departments are increasingly outsourcing payments execution including vendor enrollment to third-party service providers I attend many payments industry conferences and meet with many payments professionals, and I continually hear the same theme around vendor enrollment, also referred to as vendor enablement or vendor adoption. It is the single biggest hurdle for companies seeking to migrate from checks to electronic payments such as ACH or virtual card. Because most companies transact business with thousands of vendors, time and staff constraints often limit the rate at which vendors are invited to receive electronic payments. Historically, these initiatives were driven by a desire to reduce check payment costs. Increasingly, these initiatives are now driven by a desire to increase card spend in order to receive rebates generated by virtual card programs. For this reason, A/P departments are increasingly outsourcing payments execution to third-party service providers who not only execute on check, ACH, wire or card payments, but also manage vendor enrollment to help sign vendors up to receive electronic payments. These third-party service providers will manage an end-to-end enrollment campaign which involves reaching out to vendors, explaining the benefits, answering questions and assisting with enrollment. Outreach to vendors nearly always includes a combination of s, letters and phone calls. The most successful campaigns develop messaging that addresses frequently asked questions and describe how accepting electronic payments will benefit the vendor. These benefits might include earlier payment, more frequent payment, reduced risk of lost or stolen checks, prompt settlement, receipt of electronic remittance, or status as a preferred vendor enjoying a greater concentration of spend. Messaging can be further tailored with wording or presentation geared toward specific vendor segments. This might include mandates for vendors of commodity items, or a mention of typical industry practices. The tone of a campaign will vary by payer. Some payers are comfortable issuing a mandate, some have a specific dollar amount or percent enrollment goal that that they wish to achieve, and some adopt a light touch approach in order to maintain carefully nurtured relationships with their vendors. Most payers will review the sample messaging provided to them and customize it to their satisfaction as needed. A key component of the enrollment campaign is the analysis of the vendor master file and A/P spend. The goal of the analysis is to identify and prioritize the vendors to be targeted during the campaign. This analysis yields critical information that can answer questions including: What type of product or service is being purchased? Is the product or service unique or a commodity? Is the vendor one of many or the sole vendor? What are the types, sizes and frequencies of payments? Can this vendor accept a card payment today? Can vendors be segmented by size or industry? Have special terms been negotiated with the vendor? Is the vendor new or established? Experience has shown that vendor enrollment campaigns must be continual. Vendors who say no to accepting electronic payments today may very well say yes in 6 months. Chances are they have other customers who are also migrating to electronic payments and hearing the message from multiple customers will influence their decision. Changing business conditions may entice them to consider new payment options. A good rule of thumb is to automatically enroll your new vendors to receive electronic payments as part of the new vendor setup process. 3

4 Virtual Card Programs What are they exactly? Corporations remain under continuous pressure to reduce costs and improve operational efficiencies. One of the easiest ways to do this is by migrating payments from check to electronic. However, I am seeing more and more corporations taking the migration to electronic payments a step further by implementing virtual card programs which can turn their A/P departments from cost centers to revenue centers. The attractiveness of card program rebates have provided the motivation to use PCard and ghost cards in the A/P arena, albeit with mixed results. Providing a ghost card number to select vendors is one thing providing it to all of your vendors is another. Concerns over fraud, control, and reconciliation have led to the development of single use virtual cards. Virtual card numbers are just that virtual! Like ghost cards, there is no plastic involved. However, unlike ghost cards, virtual cards are unique card numbers that are tied back to a real card number. The real card number allows the issuer to control overall credit limits and perform billing. What makes virtual cards ideal for A/P applications is that they can be generated when needed (on a batch or real-time basis) and allow the payer to specify the maximum credit limit (to the penny) as well as when each card number expires. Most of the time they are single-use, meaning that once the full value of the virtual card has been charged, the card number is deactivated. Typically the cards have a short time-to-live, often expiring at the end of the month following the one in which they were issued. Virtual cards offer tremendous security and reconciliation advantages. As they are issued for a specific dollar amount, suppliers may not charge more than the limit on the card. For example, Supplier A sends an invoice to their customer for $2,000. A week later, the same supplier sends another invoice for $3,000. When the supplier receives the card number for the first payment, they might be tempted to process it for the $5,000 total. However, because the virtual card number was issued for $2,000, the $5,000 transaction would be declined. In addition, because it is single use, it may not be used for any more purchases once the $2,000 has been charged. Additionally, virtual cards may also be configured to allow multiple charges (up to the limit on the card). For example, a card with a $1, credit limit can be configured to allow only one charge for exactly $1, or for multiple charges totaling $1, The behavior of many suppliers has shown that they prefer to enter multiple charges, each associated with a single invoice, when receiving a single payment for multiple invoices. This improves their A/R reconciliation and improves the relationship between buyer and supplier. Reconciliation is vastly simplified with virtual cards because each payment is now associated with its own unique card number. Most virtual cards allow additional data elements to be passed to the issuer when the virtual card number is generated. Those additional card numbers often include data commonly seen in remittance details, such as invoice number, purchase order number, reference number, etc. The issuer can provide these additional data elements back to the payer in their statement, making automated reconciliation a reality. The suppliers and their associated merchant acquiring banks no longer need to pass this data back to the issuer. How corporations use them More and more corporations are seeing the benefits of migrating paper checks to electronic and now specifically to virtual card programs. Virtual card technology generates single-use unique card numbers with set credit limits based on the company s payment instructions. This approach safeguards each virtual card against unauthorized use and simplifies reconciliation. A company can earn rebates from check disbursements that are migrated to card payments based on a defined percentage of their total monthly spend. For example, a corporation with 5000 checks per month at a cost of $1.50 is spending $90,000 per year just to pay invoices by check. By migrating 25% of those 5000 checks with an average check value of $1100 to a virtual card program that has an average rebate of $13.75, a corporation can earn $206,256 year from the rebates turning the finance department into a revenue generator. Additionally, by migrating 50% of those 5000 checks to ACH at $.50 per payment, a corporation could save approximately $30,000 per year. One of the most significant barriers to migrating to a virtual card program however is vendor enrollment. Having a vendor enrollment strategy in place is key to the success of a virtual card program whether it is in-house or outsourced. Companies that I have worked with that have migrated to virtual card programs are often surprised at the adoption rate but often pleased as they begin to negate costs and earn revenue. I often get asked why would vendors accept card payments? Vendors are actually willing to accept card payments (not a majority, but enough to generate significant rebate revenue). Some are already accepting card payments from other customers. Some highly value the relationship that they have with specific customers and will accept card payments to maintain that business. Others may have enough margin built into their prices that they can absorb the merchant fees. Additionally, payers can incent their vendors to accept card payments, perhaps by offering different payment terms or by concentrating more of their spend with a vendor if that vendor will agree to accept card payments. 4 PaymentS Insights: B2B epayments

5 How do virtual card programs differ from ghost cards and pcards Virtual cards are just that virtual! They are unique card numbers that are tied back to a real card number. The real card number allows the issuer to control overall credit limits and perform billing. Virtual cards are ideal for A/P payments because they can be generated when needed (on a batch or real-time basis) and allow the payer to specify the maximum credit limit (to the penny) as well as when each card number expires. Virtual cards are easily processed by suppliers using their POS terminal or online merchant terminal. Authorization and settlement occur identically to other card types. Most of the time they are single-use, meaning that once the full value of the virtual card has been charged, the card number is deactivated. Typically the cards have a short time-to-live, often expiring at the end of the month following the one in which they were issued. These features make virtual cards inherently the most secure form of card payment. PCards are a form of company credit card issued to authorized employees who can then purchase goods and services within certain restrictive limits. Employees can make purchases that bypass a traditional purchasing procedure involving purchasing requisitions and purchase orders. PCard programs have made some inroads into A/P. The idea is to use the PCard to pay for purchases made via the traditional purchase order process. The payer avoids the work and expense associated with a check payment while capturing the rebate associated with PCard transactions. However, as an A/P solution for invoice payments, PCards have proven to be sub-optimal because of challenges with integration, automatic reconciliation, spend reporting, compliance and more. Without the proper restrictions, PCards provide a means for employees to circumvent established purchasing rules, making it difficult for the company to take advantage of bulk pricing deals with a small number of preferred suppliers. Additionally, purchases made with the PCards may need to be allocated across several departments, which then require a detailed and sometimes difficult reconciliation process to determine which purchases are to be charged to each department. This reconciliation is especially difficult if Level III data is not passed (Level III data is granular and detailed information about each purchase). Ghost cards are similar to virtual cards in that they do not involve plastic. They are simply account numbers linked to a high-limit charge account which an organization uses to conduct a high number of transactions. Sometimes these card numbers are provided to employees or departments so that purchases can be easily charged back to that department. Other times, the end-user organization will issue the number to a specific supplier or to all suppliers of a specific supplier type (e.g. office suppliers) for ongoing use. A ghost card resolves some of the issues associated with traditional purchasing cards. When spend analysis identifies that a large number of transactions are made with a particular vendor, a ghost card account number may be created to reduce invoices and improve purchasing efficiency. This ghost card may only be used for purchases from the specific vendor. This is often referred to as a vertical approach. Alternately, A/P departments may find that they are getting bogged down processing one category of expense such as travel, event planning, or office supplies. In these situations, a ghost card account number may be created with a restriction limiting its use to pre-determined Merchant Code Categories. This is somewhat similar to a traditional PCard but there is not a physical card and the account may be accessed by many employees. This is often referred to as a horizontal approach. Misuse of ghost cards can be further limited by the same controls available for PCards: charge limits, transaction limits, monthly limits, MCC limits and frequency of use limits. Additional flags may also be generated by ERP systems, such as when a transaction exceeds a predefined threshold. What is the optimal type of card program for an A/P department? Understanding how various card programs can best serve a corporation is the key to ensuring the best payment methods are utilized. The latest advances in payables technology now enable organizations to easily migrate traditional A/P payments, even those to strategic suppliers, to virtual card. The use of single use virtual cards as a payment solution for B2B invoice payments has a proven track record of success. Building on that success, the virtual card programs help companies leave the check behind, streamline their processes, continue to move toward hands-off straight-thru-processing, reduce costs, and benefit from new channels of revenue generation. 5

6 Payments Fraud Remains High The eighth annual AFP Payments Fraud and Control Survey report was released in March This valuable survey, underwritten by J.P.Morgan, provides information and trend analysis of payments fraud. The survey shows that, for the fifth consecutive year, two-thirds of the respondents were victims of actual or attempted fraud. Following are some of the highlights from the report that stood out to me and support the importance of migrating from checks to electronic payments. The entire report may be downloaded here. According to the report, large organizations were significantly more likely to have experienced payments fraud than were smaller ones. 81% of organizations with revenues over $1 billion were victims of payments fraud in 2011 compared with 55% of organizations with annual revenues under $1 billion. One could assume the reason is that more larger organizations have more outgoing payments and thus more payments subject to fraud. Criminals still target checks more than other types of payments 6 PaymentS Insights: B2B epayments

7 The report also states that 28% of survey respondents reported that incidents of fraud increased in 2011 compared with Checks remain the primary target, with 85% of affected organizations reporting that their checks had been targeted. The percentages of organizations affected by payments fraud via other payment methods were: ACH debit (23%) Corporate/commercial cards (20%) Consumer credit/debit cards (12%) ACH credits (5%) Wire Transfers (5%) On a more positive note, 74% of organizations that were victims of actual and/or attempted payments fraud in 2011 experienced no financial loss from payments fraud according to the report. It also states that among those organizations that did suffer a financial loss resulting from payments fraud in 2011, the typical loss was $19,200. Check Fraud Criminals still target checks more than other types of payments. According to the report, eighty-five percent of organizations that experienced attempted or actual payment fraud in 2011 were victims of check fraud. That is all the more reason to migrate to electronic payments. ACH Fraud ACH Fraud is not as common. According to the report, among organizations that were victims of attempted and/or actual ACH fraud in 2011, the typical organization was subject to four ACH fraud attempts during the year. Only 17 percent of organizations that were subject to at least one ACH fraud attempt in 2011 suffered a financial loss as a result. ACH fraud occurs typically because of non-timely account reconciliation or ACH return, lack of ACH debit blocks or filters, or lack of use of ACH positive pay. Card Fraud According to the report, eighty-seven percent of the respondents indicate that their organizations use corporate/ commercial cards for business-to-business (B2B) payments. Payments fraud does occur with card payments and the highest amount of card payment fraud (75%) occurred with purchasing cards. The percentage breakdown of respondents who experienced payments fraud with various cards include: Purchasing cards 75% T&E cards 38% One card combining many uses 26% Ghost or virtual cards 23% Fleet Cards 15% Airline travel cards (UATP) 2% The report also states that typically, the card payment fraud that was reported was committed by an outside party (65%). Only 16% reported that the fraud was committed by a known third-party such as a vendor, professional services provider or business trading partner. However, a significant amount of such fraud was committed by an organization s own employees (38% or respondents). In summary, checks continue to be widely used and abused, and fraud by check payments remains the overwhelming threat faced by companies. Corporates recognize this and many organizations are simply moving away from checks. They recognize that most of the float has been squeezed out of the check clearing process, making it more cost effective to focus on other benefits from electronic payments liquidity visibility, greater automation and cost savings, revenue from rebates as well as the fraud control benefits. Companies like to use ACH because the processing cost is typically less than that for checks and wires and is also much easier to control via debit filters, debit blocks, and dedicated accounts. Card networks are more secure than checks, but card fraud attempts vary depending on the type of card program. The use of virtual cards, with the characteristics of single use, exact dollar amount and short time-to-live does provide a secure alternative for B2B payments. 7

8 B2B Payments There are a lot of things that keep chief security executives up at night including disasters, theft of intellectual property, budgets, compliance, training and securing mobile devices. Added to this list is a growing awareness of the financial Shifting Shifting Potential Potential Liability Liability B2BPayments: Shifting Potential Liability liability associated with a data breach. There have been well-known reputable businesses who have suffered largescale data security breaches, some of which have been well publicized but most of which have received little or no publicity. But they are all victims of the ever-increasing volume of attacks directed at corporate systems. The April 2012 Update to the Navigant Information Security & Data Breach Report documents this trend, comparing some startling statistics between Q and Q4 2011: There was an 88% increase in the number of records breached from quarter-to-quarter (Q3: 1.02 million records vs. Q4: 1.93 million records). 50% of hacking incidents targeted corporate entities in Q3, while 67% targeted corporate entities in Q4. The average number of records breached per incident increased 71% from quarter-to-quarter (Q3: 18,253 vs. Q4: 31,069). The same report analyzes the causes of data breaches and the results show that risks abound internally as well as externally: Theft (40%) Hacking (23%) Loss (8%) Public Access or Distribution (23%) Unauthorized Access/Use (3%) Improper Disposal (2%) As the B2B payments industry has been slowly migrating away from check payments to electronic payments, many businesses have gathered banking information about their suppliers. This is usually the supplier s bank account and routing numbers which are needed for processing electronic payments via ACH or wire. But the very data that enables efficiencies and lowers cost in payment processing now creates a potential financial liability should the A/P system come under attack and suffer a data breach. In the past year, we have talked to a number of companies who are attracted to outsourced payment execution in part because they would no longer need to maintain such banking information in their systems. Shifting the responsibility of securing data to a vendor who has deep expertise in securing financial systems is a very attractive proposition. Interestingly enough, we also see suppliers who will readily accept invoice payments via a virtual credit card in part because that payment method does not require them to share their banking information. 8 PaymentS Insights: B2B epayments

9 Insight Into Payment Remittance The shift from paper to electronic delivery of both payments and associated remittance has been inexorable but slow. The Aite Group recently conducted a survey that analyzed remittance practices, benchmarks and perspectives of US and International corporations. The findings confirmed some commonly held views but also provided some surprising insights into practitioner s preferences. The study was based on 240 U.S.-based companies, 280 companies based outside of the U.S., and a total of 25 financial institutions and other industry participants (e.g., third-party processors, vendors, and industry utilities) Some of the less surprising findings were: Checks still rule, 70% of B2B payments are still made via check. The lack of structured data and application of standards makes custom coding the norm to improve straight-thru-processing (stp) rates. Midsize and small businesses lack the IT staff to develop automated solutions. Society still worries about exposing bank account numbers to trading partners. Small businesses comprise the highest percentage of business customers and suppliers for U.S. based companies. 34% of receivables respondents are less than US $10 million in revenue and 40% of payables respondents are less than that same threshold. Some of the more surprising findings were: Almost 59% of payers at U.S.-based companies allow other companies to initiate direct debits to their companies accounts, while only 27% of companies based outside of the US allow direct debits to their accounts. Generally it is the payer who determines how remittance information is exchanged with suppliers. Suppliers are not in a position of strength when it comes to dictating formats. For both Receivables and Payables respondents, both within and outside of the U.S., having the remittance information when the payment is received is the most important consideration, more so than receiving the information in a structured format or being able to auto-post the information without operation intervention. Of U.S. remittance volumes by channel, only 10% are sent with the payment in an industrystandard format. 56% of remittances must be re-keyed into A/R systems! The most preferred way of receiving remittance information, regardless of business size, is ! is considered easy and convenient, quick and timely and provides adequate levels of detail. The most preferred way of sending remittance information is mail (for small and medium businesses (< $10M and $10M-$500M in revenues respectively) and for large businesses (> $500M in revenues). The shift from paper to electronic delivery of both payments and associated remittance has been inexorable but slow. The results of the survey show clearly that the most popular and prevalent form of remittance delivery has the following characteristics: it s ubiquitous, it s familiar, it s easy to use, it s reliable, it s based on a worldwide standard, and it is perceived as free. As the financial services industry, software vendors and standards groups continue to support efforts to enable straight through processing, it will be important to keep these characteristics in mind. 9

10 Featured Webinar B2B epayments: How Zachry Holdings, Inc. Migrated Checks to ACH & Virtual Card Click here to see Zachry Holding Inc. migrated 31% of its payments to electronic and reduced its payments processing costs by 100%. Electronic payments have been on the rise for a number of years, allowing companies to explore various payment options beyond basic paper checks. However, with an estimated cost of $1.51 per paper check, companies are still spending thousands of dollars each and every month on paper checking processing. In contrast, an average rebate on a virtual card transaction is estimated at about $ These numbers clearly show how migrating from paper check to virtual card can transform Accounts Payable from a cost to a revenue center. Watch this recorded webinar to hear how Zachry Holding Inc. migrated 31% of its payments to electronic and reduced its payments processing costs by 100%. Additionally hear how migrating checks to virtual card has helped them earn on average $8k per month in rebates. You will also hear results from a recent SunGard Study on B2B epayments. 10 PaymentS Insights: B2B epayments

11 For more information: visit: Read Matthew Dragiff s payments blog: SunGard. Trademark information: SunGard, the SunGard logo and Avantgard are trademarks or registered trademarks of SunGard Data Systems Inc. or its subsidiaries in the U.S. and other countries. All other trade names are trademarks or registered trademarks of their respective holders.