A variety of electronic payment options for suppliers have been around for a number of years now, but a significant percentage of vendor payments are still made by paper check. This is especially true in North America, which tends to lag behind the rest of the world in this area.
Since the 1980s, when considering improvements to the Accounts Payable process, companies around the world successfully deployed solutions that evaluate Accounts Payable as one component of the Procure-to-Pay process. This yielded improved efficiencies between functional areas, and often eliminated the need for invoices entirely with pay-on-receipt processes. However, when it comes to making the payment, while the global norm is 100% electronic, for many in the United States, printing and mailing paper checks continues as a common method for how payments are processed.
On a recent Peeriosity Peercast, a retail, manufacturing, and media company with $5 billion in revenue, shared their experiences in providing more electronic payment options to their suppliers. Having significantly reduced the size of their Accounts Payable organization over the past number of years, efficiency in all aspects of their operation was of key importance, including the payment of suppliers. With over 400,000 invoices and 80,000 supplier payments made each year, even a small improvement in processing efficiency can result in significant savings for the company.
Utilizing a multi-pronged approach to providing electronic payment options, the first payment alternative discussed by the company was their One Card program. Accounts Payable partnered with Global Procurement (GP) to identify payment method guidelines, which they then incorporated into the Supplier Payment Policy. A key part of the rollout of the One Card program was the mass communication sent to Global Procurement and to all internal businesses, including subsidiaries, on the revised policy. Back-office audits were also set up in business expense to ensure guidelines were being followed. They then pulled reports to identify payments that could have gone to One Card and e-mailed internal employees directly about transitioning these suppliers to the One Card program. It has since taken a few years to see the real benefit of this transition, but they are now very happy with the results, including a significantly larger rebate from the card provider.
Having had a negative experience with their existing virtual payment provider, they decided to outsource the entire supplier payment process (Virtual payment, checks, ACH) with the exception of wire transfers, in 2018. They utilized a phased approach to outsourcing these payment methods and immediately, in January 2018, began a payment method campaign with their suppliers, in which only a few industry groups were not a part of this effort. At this point in time, the campaign is approximately 60% complete, with significant conversions from check to ACH and ACH to Virtual payment.
Some of the key learnings identified during this payment method transition include the following:
- Need to set up training sessions to help internal customers understand the process and the differences between payment methods.
- Multiple methods of communication were needed on the payment changes with internal customers. Although the payment process resides in AP, internal customers often have a close relationship with their suppliers.
- Don’t begin a campaign immediately after outsourcing. It is important to stabilize processes first before shifting payment methods.
iPollingTM Results Review
Recently, Peeriosity’s iPollingTM technology was used to better understand the performance of member companies in making electronic payments, and what approaches were used to increase the percentage of electronic payments made. While year to year progress has been made by member companies, only 30% of reporting companies have more than 80% of their U.S. payments made electronically, with 22% of the companies at less than 50%. Here are the details:
While the eventual benefit may be significant to both the company and the supplier, only 38% of companies have some type of mandate in place, with 50% of the companies reporting that they do not have any type of mandates to require electronic payments.
Here are a few of the comments from Peeriosity members related to this poll:
Manufacturing Member: Global suppliers are required to be paid electronically.
Consumer Products & Services Member: A mandate signed by Treasury, Procurement and Shared Services/GBS helped us break down internal barriers and change mindsets to really drive e-payments to where they are today: ~90% percent of payments and ~96% percent of invoices paid electronic.
Media & Entertainment Member: Since this change is very new and only applies to new suppliers, we haven’t seen any impact yet. For the handful of new suppliers on-boarded in the past couple of weeks, all of them have selected ACH as their preferred payment method, so we are hopeful this change will have a positive impact.
Healthcare, Pharmaceuticals, Biotech Member: We are mandating this for new supplies in North America and EMEA; not in Asia-Pacific or Japan.
Computers & Electronics Member: Many suppliers want to be paid by check so they can get a paper remittance detail. With electronic payment they have to rely on an email, which are difficult to maintain for suppliers who do not have generic AR mailboxes, or they have to log into our AP webpage, which requires a special login which is also hard to maintain for companies with high turnover.
Consumer Products & Services Member: We have been >90% for quite a long time, but demanding bank details at any creation of new vendors as far back as 10 years ago, since the cost of transfer is cheaper and easier to manage vs. checks. The US, unfortunately, was the only developed country where checks were still available, but has been decreased substantially in the last few years too. There are a few Asian countries where checks are required in which we still have no choice.
Healthcare, Pharmaceuticals, Biotech Member: We offer better payment terms for electronic payments.
Media & Entertainment Member: We recently began incentivizing suppliers to enroll in an electronic payment method by giving them better payment terms, like NET20 or NET30, versus receiving a check at NET60.
Non-Profit Member: While a mandate would solve the ‘problem’, when financial policies don’t require EFT settlements we have a continuing opportunity to contact and convert. This process is still difficult, starting with carving out the time to get vendor payment conversions actioned in a systematic way.
Consumer Products & Services: We are at around 72% ACH for US and the mandate is for vendors in the US. We are asking customers to be paid by ACH, but making exceptions as needed.
Even though the benefits of electronic payments can be significant for both the company and its suppliers, for U.S. related payments, challenges remain for reaching compliance rates for electronic payments of over 90% or more of payment transactions, with only 17% of companies indicating that they have achieved this milestone. The good news is that companies continue to make progress, in part by increasingly mandating compliance with suppliers, where possible, as well as providing a range of payment methods that benefit both the supplier and the company.
How much progress has your company made in transitioning suppliers to electronic payments? Would an increased focus in this area help to streamline your Accounts Payable operation?
Who are your peers and how are you collaborating with them?
“PeercastsTM” are private, professionally facilitated webcasts that feature leading member company experiences on specific topics as a catalyst for broader discussion. Access is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from attending or accessing discussion content. Members can see who is registered to attend in advance, with discussion recordings, supporting polls, and presentation materials online and available whenever convenient for the member. Using Peeriosity’s integrated email system, Peer MailTM, attendees can easily communicate at any time with other attending peers by selecting them from the list of registered attendees.
“iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer MailTM, members can easily communicate at any time with others who participated in iPollingTM.
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