The Rapidly Changing World of B2B Payments

It’s Time to make the Switch to Automation

Written By: Bill Bridgers


In a business world increasingly focused on Digital Transformation and accelerated speeds of business due to technology advancements, it’s surprising to find that approximately 50% of all business-to-business (B2B) payments are still made by mailing paper checks.  It seems that there are obvious benefits for both payers and payees to move to electronic payments, so why hasn’t everyone already changed? 

Surveys and payments industry data point to a simple explanation: paying vendors by check is just easy.  Though it results in a lack of efficiency and cost-effectiveness, a payer only needs to know two things to complete a check payment to a payee/vendor: the dollar amount, and an address. Until now, there hasn’t been a great deal of incentive for many companies to change their payment process.   

Reasons for resisting the move to electronic payments include: 

  • The accounts payable (AP) process is partially or completely manual inside may enterprises. Therefore, it’s difficult to realize the benefits of electronic payments without implementing AP automation.  
  • Moving to electronic payments requires a vendor to share bank routing information or to be able to process a credit/debit card transaction. 
  • Companies believe that there is benefit in delaying payments to take advantage of the “float”. By pushing out payments to suppliers to as much as three and four months, companies have more cash for any number of other uses. 
  • There is a skill gap in modernizing payments from paper to electronic. 

Despite these reasons for not changing the payments process, the benefits are outweighing the rationalizations for keeping the process the same.  The largest organization gain is in efficiency. A number of studies were conducted to understand the cost of paying with paper checks.  Typical costs, if fully accounted for, range from $3-5/transaction.  That’s not just the cost of printing and mailing, but also the staff time and overhead that goes into supporting the process.  And, it is not a process that is adding value to the enterprise.  If one looks at all the other potential benefits from going digital—it’s hard to keep pushing the decision to automate payments out into the future. 

Benefits of going digital: 

  • Payment visibility 
  • Payment optimization—the choice of the right type of payment for your company and vendors 
  • Immense decrease in manual errors 
  • Early-pay discounts and increased ROI 
  • Improved Vendor management and communication 

The challenge for many organizations is simply getting started and making the change. The good news? There are plenty of options. The bad news? It can be confusing and frustrating to decide which path to follow. Depending upon the size of the company, the volume of payments and the complexity of the process, some options will be better than others.  For most companies, attempting to automate the payment process with internal resources is not worth the hassle and expense.  There are service providers willing to handle the heavy lifting for a cost per transaction that will be hard to match with a homegrown solution. 

Companies with relatively small payment volumes, particularly if invoices are relatively simple, can take advantage of any number of solutions that are cloud-based solutions that tie to traditional accounting software packages such as Quickbooks, Xero or Netsuite.  These solutions make it possible to process invoices that are received electronically or to manually enter the invoice data easily.  Different payment methods can be chosen for different vendors. And, since the solutions are generally cloud-based, there are no integrations required and the process can be managed remotely. 

When invoice volumes go up and when complexity increases, the set of solutions worth considering changes significantly. Importantly, it’s critical to automate the internal AP process as much as possible before moving to electronic payments. Many of the challenges associated with payments, such as approvals, compliance and reconciliation, are best addressed in the internal AP process prior to invoice payment.  If the AP process is not automated, many of the efficiency benefits may not be realized. 

Assuming the AP process is highly automated, the next task is payment optimization.  Payment optimization means taking advantage of the different types of payment methods to optimize internal efficiency, reduce errors and provide smooth interaction with vendors. For companies still paying vendors primarily by check, it’s not realistic to quickly convert vendors to electronic payment.  Service providers or banks that offer Bill-Pay services must demonstrate a vendor enablement capability.  Vendor enablement means contacting a company’s vendors to determine which forms of payment are acceptable to them and gathering the necessary payment information to facilitate the transaction. For some vendors willing to provide bank routing information, the move from check to ACH is straightforward.  However, many vendors are reluctant to share bank information.  If a vendor prefers checks, make sure that the Bill Pay service provider has a “print & mail” offering.  Many vendors today will not handle paper checks.  That leaves responsibility for paper checks with the client and the result is a fragmented, generally cumbersome solution. 

An increasingly popular payment method is card payment. Both conventional corporate cards or virtual cards.  To use a card requires the vendor to be able to receive/process a card transaction.  The recipient vendor also receives a 2-3% discount on the invoice amount.  Many vendors are willing to accept that discount, particularly if it means faster payment.  Generally, companies use card payments for smaller vendors whom they pay infrequently (non-purchase order vendors).   

The real work in optimizing payments is vendor enablement and handling failed payments or transactions that require explanation.  Ninety percent of the effort in payments is handling the exceptions and/or the interface with vendors when they have questions.  Questions can result from short pays (payment less than the invoice amount for such things as returned items, incomplete or damaged orders), consolidation of multiple invoices without adequate explanation, etc. Any Bill-Pay service has to provide for messaging to resolve questions or disputes.  Some Bill Pay providers will provide full call center customer service capabilities, while others only redirect calls back to customers.  

As the field and technology continue to evolve, the next new development is likely to be in Real-time Payments (RTP).  Expect to see RTP (think of it as PayPal for B2B) emerge within the next few years. 

Finally, there are the tricky issues of compliance and reconciliation. When a payment transaction is completed and the confirmation is received, that information must be posted back to the client’s accounting system.  This is an audit requirement and must be done accurately. There must also be transparency into the entire payment process to comply with any number of regulatory requirements such as Know Your Customer, PCI, HIPAA, etc.  Any systems which store sensitive vendor information, especially bank information, must be in a completely secure environment and the service provider must demonstrate compliance with all industry standards. 

Managing and optimizing payments to vendors is becoming easier than ever thanks to the availability of solutions/services that can eliminate costly internal manual processes. The most important thing to remember for your company is to find and configure a solution that works best for your company processes.  Ask lots of questions and focus on what matters most to your organization in order to successfully automate your payments, processing and increase overall efficiency.  

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