Migrating from paper to electronic payments fits nicely with the need treasury managers have to manage working capital more effectively in today's slow-growth environment. Thus, recent research suggesting strong momentum for electronic business-to-business (B2B) payments comes as no surprise.
According to the 2010 Association for Financial Professionals (AFP) Electronic Payments Survey results, the typical organization now makes 57% of its B2B payments by check. That's down from 74% in 2007 and 81% in 2004, indicating that the migration to electronic payments is accelerating.
What's more, half of the survey respondents say their organizations are very likely to convert a majority of their B2B payments to major suppliers from checks to electronic payments in the next three years.
"The survey results reflect the significant benefits that most companies can realize through electronic payments," says Garth Kilburn, Treasury Management Sales Executive at First Tennessee Bank.
Advances in technology and an increased focus on business improvement are both major factors driving the growth of electronic B2B payments, according to the survey results.
From a technology perspective, Kilburn says the growing availability of modular financial accounting systems means it's no longer just large corporations that can afford to purchase the functionality to make and receive electronic payments. "Small and midsized companies don't have to make the tremendous initial investment this once required," he says.
Key e-payment benefits
Survey respondents cite cost savings (52%), improved cash forecasting (40%), and fraud control (37%) as the top benefits of electronic B2B payments.
Kilburn says companies making the move to electronic payments have traditionally been motivated by hard-dollar savings, such as eliminating costs related to check stock, postage, and check-related fees. What's different today, and likely influencing rising e-payment volumes, is that treasury managers are beginning to also appreciate the soft-dollar savings generated by electronic payments.
"An electronic payment process can eliminate much of the work flow around paper, resulting in fewer steps and the need for fewer people to execute the process," Kilburn says. "More treasury managers today understand that this business process improvement saves their companies money, too."
According to the survey, the top barrier to this strategy is "difficulty convincing suppliers to accept electronic payments," which was cited by 83% of respondents. Kilburn says this has often been an issue when buyers propose paying suppliers with a commercial card, since suppliers can be hesitant to pay card association interchange fees, which often amount to around 2% of the transaction.
However, Kilburn says more suppliers today are accepting that interchange fees can be offset by the value suppliers receive by getting paid much faster in card transactions. "If I am used to getting paid by check in 45 days by ABC Co., and now I'm getting paid electronically in 24 to 48 hours, that's a significant cash flow benefit."
Another major barrier, cited by 70% of respondents, is a "shortage of IT resources for implementation." But this too is becoming less of a problem due to technology advances, Kilburn says. "Much of the technology that banks and others offer today to support electronic payments includes 'plug and play' applications that don't require a high level of expertise," he says. "Between the support banks can provide and the new, simpler enterprise resource planning [ERP] platforms now available, the transition to electronic payments is a much easier one."
Readjusting working capital
Electronic payments can help buyers improve their working capital management, Kilburn notes. He cites one First Tennessee client, a sporting goods retailer, that recently migrated from a paper to a purchasing card process for accounts payable. The company has a seasonal business that peaks at year end. "The company is cash-rich around the holidays, but much of that cash is needed to pay off debts incurred in the third and fourth quarters," he says. "The card program gives the company one more tool to help manage its liquidity."
Work your wish list
Kilburn suggests that companies identify the payment types they would like to migrate to electronic processes, and share that wish list with First Tennessee. "Your Relationship Manager or Treasury Management Sales officer can review with you a variety of options for making that transition - including some alternatives you might not know about," Kilburn says.
For instance, First Tennessee plans to introduce a payables product in first quarter 2011 that will enable clients to electronically submit check-payment instructions to First Tennessee and save money and improve fraud controls by having the bank print and distribute the checks. "Because electronic payments are a safer form of payment and less susceptible to fraud, our check-print process may look like a step backward," Kilburn says. "But clients will still occasionally need to pay some recipients by paper check."
For more information, contact your Treasury Management Sales Officer or Relationship Manager.