As a follow-up to the December 2013 research brief on the topic of “Mandating Electronic Payments to U.S. Suppliers”, this article takes a closer look at one of the process steps companies often follow when setting up a supplier for electronic payments.  While no longer required, many companies create an Automated Clearing House (ACH) pre-notification transaction (a pre-note) using a nominal dollar amount to test the setup prior to activating electronic payments. 

Years ago, pre-notification transactions were necessary; however, today there isn’t any ACH rule to require companies to validate bank account and routing information.  There is also a common misconception that the receiving financial institution is required to inspect the pre-note to verify that the account name matches with the name record associated with the account, when in fact the only requirement is to verify that the routing number is valid and that the account number appears to be valid based on the numbers length, format, and, in some cases, the presence of a mathematical check digit in the number.

A Peeriosity member recently used iPolling^TM to find out how prevalent the practice of using a test transaction was, in hopes of learning from others about practices that could simplify their path towards a greater volume of electronic payments for their U.S.-based operations.  

Specifically, the iPolling question asked companies if they conducted testing using a nominal dollar amount (for example, $.01 or $.10) to create a live transaction to ensure account information is accurate.  Interestingly, the results suggest that only one out of three companies conduct such a test for their suppliers, with the remaining companies either using other methods to verify the information or deciding not to take steps to verify the data prior to creating a live transaction.

Here are the details:

Because iPolling^TM allows respondents to make additional comments to clarify their responses, once Peeriosity members review the summary of a poll, it is always a good idea to take a close look at member comments.  (Note that Peeriosity members can also see the names of other respondents with the ability to contact other members individually to discuss solution options).

Here are some of the additional comments from companies that selected the response to indicate that they complete a nominal currency test for all suppliers:

• The time involved in setting everything up is the biggest obstacle to converting from check to electronic funds transfer.  To get the greatest benefit as soon as possible, we take a focused approach where we first cover our top volume suppliers.
• We conduct a $.01 test transaction for all suppliers enrolled in ACH.
• Currently, 92% of our Trade Payables dollar volume is paid via EFT. We conduct a “penny” test on every account prior to going live with an initial EFT transition or any time that banking information is updated.

Here are some of the additional comments from companies that selected the response to indicate that they complete a nominal currency test for some suppliers:

• In the U.S., we implemented the prenote process, which uses zero dollar verification.  SAP has a program to facilitate zero-dollar verifications, and the process works very well. Prenotes are specific to the U.S. ACH system. In other regions, when we want to do a mass validation, we have performed the penny test. We have found that the non-U.S. EFT penny test process does not catch all inaccurate accounts. Some beneficiary banks do not validate both the company name and the associated account number, and we are currently investigating to understand why the company name is not also validated.
• We are currently evaluating a third-party company called Nochex (an online payment service provider that primarily supports small and medium-sized businesses) which can assist in launching a campaign to convert suppliers from manual checks to EFT/ACH.  In addition, they provide supplier validation and will conduct the prenote testing.

Here are some of the additional comments from companies that selected the response to indicate that they use other verification methods, and do not use nominal currency test transactions:

• We complete a 100% review for the data entry of account details.
• We originally did penny testing for every vendor but found it challenging and time-consuming. Now we request either 1) The bank account information directly from the bank or 2) A voided check so that we can verify the account information. The biggest hurdle we have for converting vendors is the vendors themselves. We have a number of vendors that refuse to convert from paper checks to electronic payments.
• We have each supplier complete an electronic funds transfer (EFT) agreement form and submit a voided check. We have had success in not completing a penny test with suppliers that request one.  Two years ago, we worked with Treasury and Procurement to develop a mandate for electronic payments with a very strict process for exceptions to drive higher compliance.  While globally percentages are higher, we are pleased to have achieved an over 80% electronic payment rate in North America.
• We offer different payment terms based on the payment methods. When suppliers sign up for ACH payments they are able to receive their money more quickly.
• The supplier provides the bank account information. We only conduct a penny test when we are implementing a new payment file format by selecting a couple of vendors to test the file structure for accuracy.

Finally, here are some of the additional comments from companies that selected the response to indicate that they do not complete any verification steps:

• We have the supplier complete an EFT setup form and provide a copy of a voided check that we can review to ensure accuracy.
• Treasury would like for us to verify any new EFT payments; however, Purchasing vendor setups are accurate over 95% of the time so we don’t feel this additional step is necessary. We only experience problems in areas that are not covered by Purchasing where there are a higher number of private parties (not corporations) to pay.
• We have the vendor complete an EFT payment form.
• Cooperation between AP Shared Services and Procurement, with approval from Senior Management, has been the biggest contributor to success with increasing electronic payments. We find that most suppliers prefer to receive payment electronically, and we have experienced very little pushback from suppliers. We are considering making EFT mandatory for all new supplier setups An are looking at establishing a process to have all new vendors set up on EFT.
• We have experienced no issues with ramping up the suppliers for electronic payment and have over 90% of our suppliers paid by EFT.
• The biggest contributor to increasing electronic payments has been our own internal Shared Service Center management. Fewer paper checks mean lower operating costs – so there is a built-in financial incentive to enroll suppliers for electronic payments. We do have buy-in from Treasury, Purchasing, and Senior Management; however, internal cost savings is the most significant driver.

What is your current penetration rate for electronic payments to U.S.-based suppliers? Does your company actively validate supplier banking information before creating a live payment transaction?  What can you learn from your peers to make your current process better?

Who are your peers and how are you collaborating with them?

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 “iPolling^TM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility of all respondents and their comments. Using Peeriosity’s integrated e-mail system, Peer Mail^TM, members can easily communicate at any time with others who participate in iPolling.