What I’ve learned working in sales for a bank and two financial tech companies is that when it comes to payments, there is a clear difference between fintechs and banks. Banks look at business payments as a product, while fintechs see them as a process to be optimized.
What does that really mean? Optimization is a term we throw around a lot, usually in regard to costs or processes. Costs are relatively easy to optimize, because they’re easy to see and measure. The business case is simple to make.
Making the case for process optimization is a lot harder, however, because the costs are hidden and hard to measure. And when we get really good at running a process, we no longer realize just how complicated that process really is. We’ve got something that’s working, so we keep doing it the same way. If we think about optimization at all, we look at pieces of the process and see if we can make them faster or cheaper. But then we often overlook new technology that can radically change or even eliminate part—or all—of the process.
A Serious Dent
For example, smart phones have radically changed and/or eliminated the use of alarm clocks, radios, landlines, paper calendars, cameras, feature phones, weather reports, and more. Those all still “work,” but why have all those different pieces and processes for each when you could have a smart phone?
Few people, if any, make the effort to figure out how much time and money they save by switching to a smart phone and having all that functionality in a single portable device. You’d have to add up the hard costs, break down each process into its component parts, and then assign a value to the time you spend on each. No one would do that, because by now just about everyone realizes that smart phones offer a faster, easier, more convenient way to do things. But that’s exactly what you have to do to make a case for changing a business process.
To make the case for optimizing the B2B payment process, you need to evaluate three key areas:
1. Transactional costs. This seems pretty straightforward: what does it cost to send an ACH or wire, or print and mail a check? This cost includes transaction fees, check stock, envelopes, stamps. But there can be additional fees for delivering standard or upgraded remittance information, Positive Pay, returned checks, and research on lost or erroneous ACH payments. Be sure to consider all of these when making your business case.
2. Rebates. This also seems straightforward: how much spend can you get on card, and what’s that likely to yield in rebates? But there are some nuances. First, not all rebates are the same—they vary in terms of rules and payout percentages. Some rebates don’t kick in until you hit a certain threshold, while others pay out monthly, annually, or semi-annually and you must figure in the time value of money as well. Others pay less if you don’t choose to pay your balance off daily or weekly. Then there are exceptions like Level 2 and 3 processing and large-ticket charges. I suggest looking back at previous years to see what you actually earned vs. what you remember from the sales pitch. They are often vastly different.
3. Operational efficiency. This is where you can get sucked down a rabbit hole. But it’s also where you can really transform your business. Let’s take a look at all the pieces of the payments process:
- Enabling suppliers for electronic payments. What does your go-to-market strategy look like? Is it phone calls, mailers? Does your AP team participate? Your procurement team? How many vendors accept card? ACH? Who collects, keys in, and updates the banking information? How is it secured?
- Creating payment files for transmission. How many different file types must IT work to create and test, and how often are you sending? How long does it take, and who does it? Is the approval built into the system? Or is it manual and paper-based?
- Collecting physical signatures on checks. How many people are involved? How much time do they spend? What is their hourly pay rate?
- Sending out remittance advice. Is it stuffed in envelopes and mailed? Emailed? Is it automatic or do you need to create, save to desktop, and manually send?
- Fielding phone calls asking about payments. How many calls do you get per 100 payments sent? What’s the average time to fulfill a request? Who’s involved, and what’s their pay rate?
- Tracking down and reissuing lost or erroneous payments. What’s your error rate per 100 payments sent? Who fixes errors, how long does it take on average, and what is their pay rate?
- Early payment discounts. How often are you able to take advantage of terms offered by suppliers? What is the lost revenue opportunity when the payment process causes you to miss out?
- Late payments. How many payments are late? How much are you paying in late fees? What is the effect on your discount and vendor relationship when payments are delayed?
- Updating supplier banking and payment information. According to Nvoicepay internal data, suppliers change their banking setup about every four years, meaning you’re updating 25 percent of suppliers annually. But in this day and age, you can’t just accept supplier updates at face value. You have to validate those requests to make sure it’s not fraud or phishing. Who handles that, how long does it take, and how much do they get paid? Do you have a liability policy for fraudulent payments? What has fraud cost your business historically?
- Escheatment and unswiped cards. This is the time spent following up on uncashed checks or unswiped card payments and reissuing them and/or reconciling them back into the accounting system.
How much does it all add up to? Very few organizations really know. There are benchmarking studies on the costs of writing checks, and of processing invoices. But no study I have seen recently considers the entire process, beginning with supplier enablement and ending with a reconciled payment
Processes and Sub-processes
Those detailed studies don’t exist because it’s difficult to discern how much time an AP team spends on all the required processes and sub-processes for completing a payment. Those task hours are often dispersed across the team and can be tough to measure.
In accounts receivable, for example, there are staff members who only do cash application. So if you make your cash application process 70 percent more efficient, and you have a headcount of 10, it's easy to say "Okay. I can assign a savings number to that and reallocate 6 or 7 people.” It’s pretty straightforward.
That's much more difficult to do on the AP side. For most companies, no role within AP focuses solely on handling errors, enablement, fielding phone calls, or escheatment. Team members need to be pulled from other duties to cover those tasks. I’ve even seen teams pull staff from the manufacturing floor to stuff envelopes during Friday check runs. It’s hard to adequately quantify the time that goes into all these components, let alone understand all of the costs that roll into the payment process. And why would you if you think your method works and there are no viable alternatives?
The Fintech A-ha
There is a better way. Over the past decade, fintechs have made steady progress in optimizing the B2B payments process. Payment automation providers can now offer a single interface for all payment types, eliminating the need for multiple payment files.
Some, like Nvoicepay, use cloud networks to handle supplier enablement and information management securely at scale, taking those tasks off of AP’s plate. We even service the payment on the back end, handling incoming calls and error resolution.
The combination of technology and services radically changes the process, eliminating some of AP’s most time-consuming and unproductive tasks, and freeing up staff time for higher value work.
And that’s the fintech difference. Slowly but surely, technology companies have surveyed the fragmented financial services landscape and figured out how to knit processes together to replace complex, repetitive, non-value-added manual activities with a few button clicks. To truly optimize business payments, you need to look beyond stamps and envelopes and consider the entire payment journey. Only then can you seize the massive optimization opportunity in front of you.
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