Electronic Payments and Card Solutions in 2015

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1 Electronic Payments and Card Solutions in 2015 Perceptions, Realities, and Strategies Featuring insights on... Trends in B2B Payment Methods Status of Commercial Cards Influential Factors for Organizations Payment Strategies A Payment Solution Provider Underwritten in part by

2 Contents Introduction 3 Payment Method Options and Current Usage 4 Check Challenges in Payment Management 5 Diversity and Prevalence of Commercial Cards 7 Factors Contributing to Payment Method Usage 10 Beneficial Commercial Card Policies 13 Strategizing Commercial Card Controls 16 Inworks 19 About PayStream Advisors 22 Contributing Analyst, Lynn Larson, CPCP, Recharged Education 23 2

3 Introduction For many years, organizations have used Accounts Payable and Purchase-to-Pay automation solutions to make great improvements in efficiency and cost control. However, the true game changer in automation software is the tool that ties many other financial processes together electronic payments (epayments). Organizations that take advantage of epayments are reducing the historically heavy usage of paper checks, controlling and reducing process costs, and increasing their bottom line. Although results from PayStream Advisors 2015 Electronic Payments Survey show a clear desire among many organizations to increase adoption of epayments, there are several obstacles keeping many from solution implementation. These include the belief that checks are superior to other payment methods, a lack of early payment discounts, and the underutilization of commercial cards and the necessary card controls. Education is critical to help organizations combat these adoption challenges and successfully diversify and improve their payments strategies. This report will help organizations improve their payment processes by providing insights into the status of epayments, including commercial cards. It explores the factors that influence organizations payment method usage, and it offers guidelines for overcoming common payment-related challenges. 3

4 Payment Method Options and Current Usage To determine the current state of electronic Business-to-Business (B2B) payments, PayStream Advisors surveyed over 100 individuals from a variety of industries and organization sizes. The results from this survey are the foundation for PayStream s further exploration into factors influencing payment method usage, payment management challenges, and the related goals. Checks have historically been the mainstay of accounts payable (AP) processes, especially in the United States. Despite well-known drawbacks in the areas of convenience and control, results show that many organizations are still using checks for the majority of their B2B payments, see Figure 1. Figure 1 Most Organizations Use Checks for at Least Half of B2B Payments 63% 82% Used for at least 50% of payments Used for at least 20% of payments What percentage of your supplier-related payments is processed using the following methods? 41% 21% 15% 21% 3% 4% Checks ACH Wires Cards Within these results, PayStream found that 43 percent of respondents organizations were heavy check users, or those that use checks for at least three-quarters of their payments. Only 24 percent of organizations use ACH and/or commercial cards for at least half of their payments. Fortunately, 80 percent of respondents are using ACH payments to some extent, and most have at least one commercial card program running. This shows that the framework for epayments adoption exists in many of today s organizations. 4

5 Check Challenges in Payment Management Among today s organizations, high processing costs are the greatest challenge in payment management, followed by late payments and missed discounts, see Figure 2. These challenges result mostly from manual payment management, and they do not differ between larger organizations (those with annual revenue greater than $250 million) and SMEs ($250 million or less). However, these issues are more prevalent among heavy check users than those with more diverse payment strategies. Figure 2 High processing costs 35% High Processing Costs Is the Top Payment Management Challenge Late payments 30% What are the biggest challenges your organization faces in the payment management process? Missed discounts Duplicate payments 20% 25% Lack of payment visibility 13% More than one payment method for some suppliers Employee confusion over correct payment method to use 12% 12% Loss from fraud 4% Even beyond processing costs, there are distinct differences in the company characteristics and business strategies of heavy check users compared to other respondents, see Table 1. For example, heavy check users are more likely to be smaller organizations that make fewer payments to suppliers annually, and nearly half of the heavy check users say many of their suppliers request checks. In addition, although heavy check users are more challenged by high payment processing costs than the other organizations, they are also less likely 5

6 to change their payment management strategies; the majority of heavy check users have not taken actions to decrease checks and increase epayments in the last two years. Organizations Payment Method Characteristics Heavy Check Users Remainder of Respondents Table 1 Heavy Check Users Possess Unique Characteristics Under $100 million in annual 64% 29% revenue Make less than 50,000 62% 31% payments to suppliers annually Have not addressed check 56% 17% usage in the past two years Favor paper checks 53% 17% Say that many of their 49% 15% suppliers specifically request check payments Currently have a p-card 47% 53% program Cite high processing costs 44% 27% among their greatest payment challenges Have taken actions to decrease checks in past two years 40% 81% Overall, these results show that even if organizations believe checks are effective payment methods, their current strategies inhibit cost reduction and more efficient processing. Heavy check users should consider expanding their payments methods in order to reduce processing costs and build better business practices. 6

7 Figure 3 Most Organizations Have One or More Commercial Card Programs Where does your organization stand with regard to the usage of commercial cards? Diversity and Prevalence of Commercial Cards Although checks remain the leader in B2B payment methods, many organizations employ a diverse mixture of additional payment types. Currently, more than three-quarters of organizations have one or more types of commercial card programs, see Figure 3. In addition, 86 percent of large organizations have one or more types of commercial cards, compared to 70 percent of small and medium enterprises (SMEs). 17% 5% 78% Currently have one or more commercial card programs Do not have a commercial card program and no plans to pursue Evaluating the implementation of a commercial card program Currently have one or more commerical card programs Large Enterprises 87% SMEs 70% Commercial cards is the umbrella term for payment cards used in B2B payments (as opposed to consumer cards). Commercial cards referenced in the survey include: 7

8 Corporate Cards Employees use these cards for business travel and entertainment (T&E) expenses. Fleet/Vehicle Cards Organizations implement this type of card to pay for fuel and vehicle maintenance. The cards allow for reporting and tracking by vehicle, providing controls specific to this expense category. Traditional Purchasing Cards Organizations provide purchasing cards (p-cards) to individual employees for the purchase of business goods and services. P-cards are ideal for purchases in which the traditional invoice approval prior to payment does not add value (e.g. low-dollar purchases). Some p-card programs are known as One Card programs when they also allow for T&E expenses, eliminating the need for an employee to carry two cards. Ghost Cards/Accounts Traditional ghost cards function like p-cards, with reusable account numbers and spend limits that refresh each month. One common scenario is providing a ghost account number to a supplier that retains the number and processes charges to it as employees make purchases. Single-Use Cards This is a common type of Virtual Accounts (VA), also called Virtual Card Accounts or epayables. After an organization approves a supplier s invoice(s), AP initiates the payment process. The supplier receives a one-time-use virtual card account number to process the charge. The spend limit is equal to the approved invoice(s) and does not refresh. Other Virtual Card Programs Like single-use cards, other Virtual Accounts programs center around an organization s approval of supplier invoices. One VA option is a straight-through payment where a supplier receives a direct payment through the card network or issuer instead of having to process a charge transaction. Overall, organizations tend to target Virtual Accounts for higher dollar purchases and/or complex purchases warranting invoice review prior to payment.»» Declining Balance Cards These cards have a set limit and expiration date that do not refresh. Organizations may use such cards for special projects with a set budget, such as meetings or events, for relocation expenses, for infrequent travelers who do not warrant a corporate travel card, and more. 8

9 Survey results show that traditional p-cards are the commercial card type used most by organizations, see Figure 4. Among respondents that noted the use of other cards but not p-cards, 89 percent use corporate travel cards, and thirty percent use ghost cards or some type of Virtual Account Cards. 63% 57% Figure 4 Traditional P-Cards Are the Most Popular Commercial Card Type 31% 20% Which of the following types of Commercial Card solutions does your organization currently use? Traditional purchasing cards/one cards Corporate travel cards Fleet/vehicle cards Ghost cards (reusable number) 11% Single-use or other virtual cards 1% Declining balance cards 9

10 Factors Contributing to Payment Method Usage Several factors contribute to an organization s mix of payment methods. These include internal perception shifts, self-imposed adoption drivers through policy changes, and closer adherence to supplier preferences. Internal Adoption Initiatives Nearly two-thirds of organizations have taken actions to influence payment method usage, such as decreasing check usage and increasing ACH, see Figure 5. Many organizations hope to extend payment terms to 60 or more days for checks, or attempt to mandate p-card usage for any purchase under a certain threshold. Others specify an electronic payment method within supplier contracts. Figure 5 Have tried to increase Have not addressed either way Organizations Have Taken Actions to Decrease Checks and Increase epayments In the past two years, has your organization taken actions to purposely increase or decrease usage of the following payment types? Have tried to decrease Checks 3% 34% 63% ACH 52% 46% 2% Wires 17% 66% 16% Cards 45% 46% 9% Payments Policies For about half of today s organizations, payment method usage is a matter of policy within their corporate infrastructure. In these cases, an organization specifies its preferences, such as when to use different payment methods, within a collective policy or similar directive. The more complex an organization/s payments strategy, the more important it becomes to document it and train employees. It could be 10

11 a stand-alone policy or one wrapped into another directive, such as a purchasing and payments policy. This helps eliminate any confusion and supports payment strategy success. Changing Perceptions on Alternative Payment Methods PayStream s survey presented 10 different attributes and asked respondents to select the payment method that best represents each one, see Figure 6. Checks ACH Wires Cards Figure 6 Respondents Perceive Checks as Best in Four Attributes Which payment method do you think best represents each attribute? Highest supplier acceptance Most complete remittance info Easiest to integrate with AP system Best for avoiding duplicate payments 60% 28% 4% 9% 55% 29% 9% 8% 53% 35% 7% 6% 41% 38% 11% 10% Best data accuracy 37% 38% 8% 17% Best for managing working capital 23% 33% 10% 35% Most convenient 19% 38% 5% 38% Best fraud protection 19% 37% 21% 23% Least costly 8% 57% 9% 27% Best for international payments 4% 11% 79% 7% Understandably, the most common attribute associated with checks was highest supplier acceptance. However, many respondents selected checks for several other attributes that are not truly applicable 11

12 to paper payment methods, such as most complete remittance info. Favorable views of checks certainly play a role in payment methods: 71 percent of those who favor checks work for organizations in the heavy check users group. These results show that organizations perceptions of the usefulness of a payment method greatly affect their usage of that method. Education on the flaws of checks and the benefits of electronic payment methods will lead to shifting perceptions and increased adoption. 12

13 Beneficial Commercial Card Policies Along with ACH payments, commercial cards provide organizations with an effective way to decrease reliance on paper checks and increase efficiency within Purchase-to-Pay (P2P) processes. Issuing cards to employees, incorporating ghost cards with an ecommerce application, and/or utilizing virtual cards (or another electronic payables solution) are ways in which organizations can customize card usage to best suit their needs. Commercial cards of all types offer many benefits. The survey listed eight typical benefits and asked respondents to select which ones their organizations have received. The top answer, chosen by 63 percent of respondents, is increased convenience for employees, see Figure 7. Figure 7 Most Organizations Have Achieved Increased Convenience with P-Cards Increased convenience for employees Lower processing costs 49% 63% What are the top benefits your organization has achieved from the use of commercial cards? Rebates and incentives from p-card issuers Reduction in Purchase-to- Pay cycle time 26% 43% Float/ability to increase days payable outstanding (DPO) 21% Improved compliance with contracts, purchasing policies, etc. Ability to negotiate better pricing with vendors Reduction in maverick spend 7% 6% 11% Although the benefits of commercial cards do not stop at convenience, survey results show that many organizations are not gaining the tools other possible advantages. Some benefits are at least partially the 13

14 automatic results of electronic payments adoption, but most depend on an organization strategically arranging their company policies around the epayment tools. Organizations must establish clear policies and procedures for card usage, mandate training for cardholders and managers, and consistently enforce the rules. Other key commercial card benefits include: Lower Processing Costs Almost half of respondents (49 percent) answered that they have achieved process savings from p-cards. These savings are ultimately the effects of eliminating steps in the P2P process. When organizations issue cards to employees, they can purchase items directly from suppliers, and there is no longer a need to push everything through Procurement for a purchase order (PO). However, in order to prevent maverick spend, an organization must apply specifications. For example, allow employees to only bypass approval for certain low-dollar items. Rebates and Incentives from Card Issuers Rewards like monetary rebates tend to receive the most attention because they are tangible and can be large up to hundreds of thousands of dollars. In some situations, such as when organizations card program is deemed too small by the issuer, they may not be offered monetary incentives at all. Even if rebates are offered, an organization might fail to earn a rebate if they cannot meet the minimums of the contracted rebate terms. Reduction in Purchase-to-Pay Cycle Time In addition to lower processing costs, eliminating steps in the p-card P2P process should result in quicker turnaround. For example, Accounts Payable can make one monthly payment to the card issuer instead of hundreds of payments most of which are small-dollar to many different suppliers. In addition, they can configure their system to send non-po invoices, such as those connected to utility bills, to go straight through to payment.»» Ability to Increase Days Payable Outstanding (DPO) The extent to which organizations increase their DPO depends on when transactions occur during the card cycle in relation to when they pay the card issuer. Instead of suppliers typical 30-day invoice payment terms, paying via card can extend the float beyond 30 days. Maximizing this benefit requires strategic management and the use of more controllable tools, like electronic payables (e.g., Virtual Card Accounts). 14

15 »» Improved Compliance with Contract, Purchasing Limits, and More Some electronic payment tools, such epayables, inherently limit risk in the payments process. This is because AP initiates them at the end of a traditional P2P process, and suppliers can only charge the amount approved by the buying organization. On the other hand, p-cards and other cards issued to employees require more control. To achieve the many benefits of commercial cards, it is critical to use effective card program management that supports growth while minimizing risk. The following section further outlines the benefits of commercial card controls. 15

16 Strategizing Commercial Card Controls When organizations were asked about the p-card controls they used, responses indicated that strategies vary across company sizes. Larger organizations typically use several different devices, while SMEs focus primarily on receipts requirements and spend limits to increase control, see Figure 8. Large Orgs SMEs Figure 8 Larger Organizations Have More P-card Controls Than SMEs Which of the following internal purchasing card controls does your organization utilize? Require receipts for purchases Spend limits Conduct compliance audits 37% 58% 79% 76% 74% 72% Dedicated commercial cards administrator 42% 64% Cardholder agreement that employee signs 34% 67% Merchant Category Code (MCC) blocking 21% 59% Mandated training Restricted preferred supplier lists 8% 13% 11% 44% Velocity limits 3% 21% 16

17 However, most organizations use a narrow range of control strategies overall; 75 percent of all respondents utilize five or fewer of the nine controls specified. The challenge with p-card controls is striking the right balance by not over- or under-controlling a program. Card Spend Limits The majority of respondents apply spend limits to cards, which can include a monthly/cycle limit and single transaction/purchase limit. For p-card programs among organizations, single transaction limits are conservative, see Figure 9. It is most common for the limit to be less than $1,000, yet 24 percent have limits of $5,000 or more, showing that p-cards are not just for low-dollar purchases. These higher spend limits were found in organizations of all sizes not just larger enterprises. Figure 9 44% P-Card Single Transaction Limits Remain Conservative What is your standard or most common purchasing card single transaction limit? 19% 14% 12% 10% Less than $1,000 $1,000 to $2,499 $10,000 or more $2,500 to $4,999 $5,000 to $9,999 PayStream s research has found that increasing commercial card spend limits encourages greater card usage. Many organizations use this strategy; about half of respondents noted they have increased card limits for the majority of cardholders in the past two years. In addition, policies pertaining to card usage and spend limits are two elements that drive the indirect spend percentage up or down. Survey results show that the higher the single transaction limit, the higher the percentage of indirect spend captured via cards. Among respondents who use commercial cards, a considerable 22 percent specified capturing at least half of their indirect spend via cards. 17

18 Growth Strategies Survey respondents were asked about possible strategies their organizations were using or planning to use to increase p-card usage. The most common tactics include expanding the allowable purchases and mandating usage accordingly, see Figure 10. These results indicate that organizations are ultimately working to broaden the usage of their p-cards and making them a more integral part of their payment management processes. Figure 10 Expand to more spend categories and/or suppliers 50% Top P-Card Growth Strategies Include Expanding Allowable Purchases and Mandating Usage Mandate usage for targeted purchases or suppliers Supplier outreach and education 33% 48% Which of the following strategies does your organization use or plan to use to increase p-card usage? Improve cardholder training Extend payment terms for other payment methods 19% 29% Increase spending limits 19% Reduce MCC restrictions /blocks 10% Organizations have many options that can increase rewards from their card usage, and a multi-faceted approach is likely to be more successful than any single action. As programs grow, organizations should also monitor the controls to ensure effectiveness. Partnering with the card issuer(s) and any related providers (e.g., technology provider) can help organizations reach their commercial card potential. 18

19 Inworks Inworks has been offering electronic payment solutions since 1995, and currently processes millions of payments each year. The Inworks solution eliminates most of the work in payment management for its clients, taking over the process as soon as users submit payment files. Inworks offerings are supplier-centric, providing 7 different electronic payment methods all in a single payment file. Inworks solution has no minimum spend requirements, and their supplier onboarding campaigns are continuous (i.e., quarter after quarter for the life of the engagement), ensuring a high supplier enrollment rate. Inworks also offers mobile-enabled portals to buyers and suppliers in which suppliers are able to update payment methods and preferences and see the status of payments, while buyers can check statuses on invoices, payments, and discounts. Inworks currently has over 60,000 suppliers in their payment network. Founded 1979 Headquarters Portland. OR Other Locations Detroit, MI and Auburn, AL Number of Employees 125 Number of Customers 40+ Number of End Users Tens of thousands Target Verticals Healthcare, Higher Education, Commercial Partners/Resellers Comdata, Bora Systems, IQ BackOffice, Priority Payment Systems Electronic Payment Functionality: Inworks solution is SaaS based, and its security features are PCI- and HIPAA-compliant. Inworks currently makes payments in the United States and Canada. Inworks offers functionality for Purchase Cards, Virtual Cards, Ghost-Cards, Push-Cards (BIP), Fleet, and Corporate/T&E cards. The purchasing card solution is available through a number of issuing partners, including Comdata. Inworks also supports and manages several types of virtual account cards, including single use (pull) cards, and BIP (push) cards through both the MasterCard and VISA networks. All transaction information is available on the client s portal. 19

20 Inworks Intelligent Pay platform supports dynamic discounting on a continuous basis or an invoice-by-invoice basis. Inworks offers a nocost analysis of clients payment terms and contract obligations, and provides a strategic plan to optimize DPO. Clients can use cards in combination with supply chain financing and dynamic discounting, all of which are managed within the payment platform. The Inworks system acts as cardholder and manager of its clients p-card programs, working to maximize electronic payments and AP-generated revenue while minimizing program management and credit risk. The Inworks p-card management suite includes card account management, dashboard reporting, and account issuing and termination for the cardholder. The p-card program manager typically has access to all cardholder capabilities, as well as the ability to track all transactions. Inworks controls transactions with overall credit limits and approved user and supplier settings. Inworks also offers verification of a DDA before transmission of p-card transactions. Inworks provides full ACH functionality, including ACH payments at term and early payments with supply chain financing and dynamic discounting. All forms of electronic remittance can be provided, including CTX and ANSI standard 820 files. Electronic Payment Workflow Inworks Strategic AP program offers a straightforward approach. Clients submit approved invoices to Inworks in an file that is generated either on a nightly basis or another recurring basis. Inworks pays supplier invoices via the supplier-specified form of electronic payment, and invoices are paid net of any discount agreed upon with the suppliers for early payment. Inworks offers an online payment portal, Inworks Access, to both buyers and suppliers, and provides real-time tracking of all invoices, payments, and outstanding liabilities. Inworks Intelligent Pay platform accepts native payment files from most AP systems. Posting transactions to AP, AR, and General Ledger system is done via a daily reconciliation file that is fed into the buyers AP system. The Inworks DirectPay solution provides the ability to push card payments directly to suppliers bank accounts, and includes the ability to provide Level 3 data with every payment. The solution can also consolidate payments to ensure large-ticket transactions, and it can use least-cost routing to ensure the absolute lowest transaction costs. 20

21 Inworks provides numerous electronic remittance formats to suppliers to help automate their AR processes, including CTX, ANSI standard 820 files, and more. Inworks provides reconciliation to the buyer via a daily file that details all settled payments. Inworks provides automatic payment functionality on specified invoices. The Intelligent Pay platform either accepts a payment file from the buyer when the buyer is ready to pay or automatically extracts invoices from the buyer s AP system as soon as the invoices are approved and entered, automatically paying each invoice at the agreed term date. Clients can reimburse Inworks via ACH for the full invoice amounts either at term or an agreed-upon future date typically 30 to 45 days from the original invoice date. When remitting payment to Inworks, clients can choose to order the ACH payment personally or have Inworks issue an ACH debit to a company account. As an additional option, clients can receive a payment-status return file integrated into their AP system. Each month, Inworks sends clients a rebate payment that represents their share of all revenues generated by interchange fees and early payment discounts. Reporting and Analytics Inworks Access provides a dashboard for tracking the payment status of all invoices, including all descriptive information, payment types, and current statuses of the payments. Full search and filter capabilities allow for the generation of detailed reports and liability information for forecasting. Inworks also provides a spend analysis and suppliersegmentation analysis at no cost. Implementation and Pricing: During solution implementation, Inworks provides extensive communication and collaboration strategies to ensure the solution is fully customized for its clients. Inworks assigns a dedicated relationship/account manager to each user organization, and ongoing training is available for the life of the engagement. The use and implementation of the Inworks electronic payment program is at no cost to clients. The program generates revenue for clients, and Inworks provides them with a percentage of all transaction fees generated by the solution s seven electronic payment types. 21

22 About PayStream Advisors PayStream Advisors is a technology research and consulting firm that improves the way companies plan, evaluate, and select emerging technologies to achieve their business objectives. PayStream Advisors assists clients in sorting through the growing complexities of IT applications related to business process automation with the goal of making objective, analytical, and actionable recommendations. Wherever business process automation technology is an issue, PayStream Advisors is there to help. For more information, call (704) or visit us on the web at 22

23 Contributing Analyst, Lynn Larson, CPCP, Recharged Education Ms. Larson, a 17-year purchasing card veteran, provided her expertise in the development of the survey, analysis of the results, and creation of the report. Her previous job roles include education manager for the NAPCP and p-card program manager for the Federal Reserve Bank of Minneapolis. In June 2007, she earned the Certified Purchasing Card Professional (CPCP) credential. Ms. Larson launched Recharged Education, LLC in January 2014 to provide commercial card training, consulting, and educational resources to both buying/end-user organizations and industry providers. To learn more, visit 23