Moving to E-payments

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Journal of Payments Strategy & Systems Volume 4 Number 1

Moving to e-payments: Best practices for US middle market companies Part II — Collections Linda Coven

Received (in revised form): 1st December December,, 2009 Silicon Valley Bank, 3003 Tasman Drive, Santa Clara, CA 95054, USA. Tel: +1 408 6547308; e-mail: [email protected]

Linda Coven ,

Head of Online Banking Solutions

gramme. She is active in the California Humane

Channel Management, is responsible for devel-

Society and an avid supporter of the Leukemia

oping and maintaining SVBeConnect, Silicon

and Lymphoma Society’s ‘Light the Night’ pro-

Valley Bank’s primary online banking platform.

gramme.

SVBeConnect is a system customised for SVB’s unique client base — technology and life sci-

BSTRACT A BSTRACT

ence companies, private equity firms and the

This is the second in a two-part series on moving to electronic payments. The first (published in Journal of Pa Payments yments Strategy & Systems,, Vol. 3, No. 1) covered the issue from Systems the perspective of the payer. This paper is directed to the receiver of the payments. When tasked with optimising liquidity and minimising associated risks (such as liquidity shortfalls), for example, example, the length of time time it takes to collect an organisation’s receivables, has significant impact — especially in the current economic environment. If a company is primarily collecting payments by cheque, it is almost certainly paying more than if it could move these payments to an electronic alternative. Monetary savings, reduced administration, greater trans parency,, compliance and data aggregation are parency just a few of the proven advantages that result from a shift to electronic payment formats formats.. Payment methods may vary by industry and company size, but all companies should consider plans to migrate to electronic payments payments..

premium wine industry industry.. Linda has more than 25 years’ experience in all aspects aspects of cash manage ment and has held key product management and sales management positions with leading financial institutions and treasury management innovators, including Wells Fargo Bank and BankBoston (Fleet). Before joining SVB, Ms Coven was a founding member of Clareon and Xign, two technology start-ups which developed developed network-base d electroni c payment

models.

Linda currently serves on the American Bankers Association ’s

(ABA)

Payments

Systems

Committee, which acts as the ABA’ ABA’s s primary liai son with the Federal Reserve banks and Federal Reserve boards regarding payments system issues, corporate and r etail banking operations, and relevant Federal Reserve products and serv ices. She has been a frequent speaker at industry forums and was named the ‘Voice of Financial EDI’ by NACHA in 1999. She has pub lished articles on electronic electronic commerce and electronic payments. Ms Coven received her BS Journal of Payments Payments Strategy & Systems Vol. 4 No. 1, 2010, pp. 60–66 Publications, s,  Henry Stewart Publication 1750–1806

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from Western Michigan University and is a graduate of the University of Southern California School of Management Executive MBA pro-

Keywords: ACH, electronic collections, remittance, remitt ance, wire transf transfer er,, busines business s credit card


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INTRODUCTION

The first paper focused on best practices for companies moving from paper cheque disbursements to electronic alternatives, particularly automated clearing house (ACH) and credit card. This paper focuses on opportunities to improve the collection process by embracing electronic payment options as well as improving the efficiencies of a lockbox operation through imaging and automation. The ‘Metavante Payment Progress Index 2008’ sums up the situation: Despite ambitions to make a notable shift to e-payments between 2006 and 2008, corporations made only an incremental shift from 39% to 41% of total transactions, which was significantly below the goal of 55% set in 2006. The overall conclusion is that corporations are not overly concerned about their payment practices.1

alternative. Monetary savings, reduced administration, greater transparency, compliance and data aggregation are just a few of the proven advantages which result from a shift to electronic payment formats. Payment methods may vary by industry and company size, but all companies should consider plans to migrate to electronic payments. On the collection side, it means the company is no doubt using at least one lockbox location, if not several, to capture and process these cheque payments. While mail times, processing times and clearing have improved the availability of these funds for an organisation, the uncertainty of these flows remains a challenge. In addition, the processing of the remittance information can be costly and time consuming, even with the advantages of lockbox features such as imaging and data capture.

INERTIA PREVENTS COMPANIES

Corporations should carefully evaluate whether transitioning to e-payments is right for them. This paper looks at the collection side of the equation and provides some best practices for taking advantage of new technologies for imaging cheques as well as using electronic payments, including ACH and acceptance of credit cards for collection of payments from customers.

COLLECTING CHEQUES IS COSTLY FOR TR EASURY DEPARTMENTS

When tasked with optimising liquidity and minimising associated risks (such as liquidity shortfalls, for example), the length of time it takes to collect an organisation’s receivables has a significant impact — especially in the current economic environment. If a company is collecting payments primarily by cheque, it is almost certainly paying more than if it could move these payments to an electronic

FROM REAPING BENEFITS OF E-PAYMENTS

The overriding reason given by companies for continuing to use cheques is the remittance information. This is certainly a valid challenge, but there are ways to address the problem today, with more coming in the near future. Another reason often cited is the float value for the cheques. This is becoming far less of a factor, as cheque clearing is moving rapidly to take advantage of ‘Check 21’ with the vast majority of cheques being cleared electronically by image or conversion to ACH. The Federal Reserve predicts that, within two years, they will have gone from 48 cheque processing sites around the country to two, and nearly all items will be ‘local’. A more difficult challenge may simply be lack of resources at the company to tackle the project. Most treasury departments and related service areas such as accounts receivable are significantly

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Moving to e-payments

understaffed, and projects for these areas do not often get priority for additional resources, including IT. While a case can certainly be made to justify the move to electronic payments, it is not always a simple return on investment (ROI) model that is needed. The need is far more strategic, and the rewards when combined with additional automation of accounts receivable may be far more compelling.

WHAT STEPS CAN BE TAKEN TO MOVE TO ELECTRONIC COLLECTIONS?

The first step is to take an inventory of the collections received today and categorise them:

tion flows by maintaining as many payments as possible within the single remittance stream for updating the receivables and will most likely provide better availability of the funds by reducing mail and processing float. If a firm does not have a lockbox or simply wants to improve the capture and deposit of these ‘stranded items’ into the bank, the best approach is remote deposit capture (RDC). With the use of a small desktop scanner and a simple web application, these cheques can be scanned to capture the images, and the images can simply be transmitted directly to the bank for rapid availability. This system takes advantage of the ‘Check 21’ legislation, allowing the clearing of cheques as images, reducing the float and transportation costs and easily turning paper to electronic. Depositing items through RDC rather than sending via overnight courier to the lockbox for processing speeds up the receipt of funds.

cheques received in-house cheques received in lockbox(es) — cheques from companies (wholesale lockbox) — with attached remittance Cheques received in lockbox(es) — without attached remittance — cheques from consumers Cheques from companies (wholesale (retail/wholetail lockbox) lockbox) — with remittance stubs — without remittance stubs In the simplest scenario with lockboxes, — bill-pay cheque and list (one cheque the cheques are captured and cleared, and covering multiple consumer paythe remittance information is mailed or ments) couriered back to the company for post — individual bill-pay cheques (one ing to the receivables system. Today’s lockcheque for each individual consumer box services offer so much more that can payment) help companies to move to electronic colrecurring charges lections. Image capture is the first step, point of sale (POS). with both the clearing of cheques as images by the processor, and the capture Cheques received in-house and posting of the remittance images If customers are mailing cheques directly online for use by accounts receivable to post much more quickly, saving time and to a company’s offices or are dropping them off, there are two things to consider. storage costs of having to save and file The first is to analyse why they are paper remittance documents. Many comcoming directly and not going into the panies are choosing the ‘green approach’ lockbox, assuming the company has one. If by eliminating their daily remittance paper it has a lockbox, directing these clients to packages and opting to access images remit to the lockbox will improve colleconline and obtain an encrypted CD• •

• •

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ROM for longer-term historical storage of lockbox items. Taken a step further, the information resident in the remittance documents that the company uses to post and reconcile the collections to receivables can be captured and sent directly as a file into the posting system. Lockbox operators will follow instructions on what data to key in from each payment and remittance document to create the file sent to the company daily. The file is sent daily via direct transmission and is most commonly in a Lockbox BAI file format; customised formats can also be accommodated. Most companies choose to have the file sent during the night so that items post automatically to the receivables system when the staff are not in. Payments received without the required remittance information will be picked out by the posting system and should create an exceptions report for staff to handle the following morning. This makes the entire process for staff electronic, saving considerable time doing data entry. This is time which can be much better spent following up on exceptions and doing the critical work to reduce delinquencies and disputes. Cheques from consumers (retail/wholetail lockbox)

If consumers are mailing cheques to a lockbox with a remittance stub which the firm receives back as paper to post to the receivables system, the posting can be vastly improved by designing the document to include a remittance coupon to be read by an optical character recognition (OCR) scanner, and the information captured can be sent as a file for direct upload. A true retail lockbox processes only scannable documents, thus eliminating the need for manual keying in of information off the remittance document by lockbox operators. A wholetail lockbox (blend of wholesale and retail) can be used for those

consumer payments received with or without the scannable coupon. Whatever data is needed for posting to the system would be scanned or keyed and transmitted in the same file for upload. Another option for consumer payments sent in without the required remittance information, commonly known as ‘cheque only’ transactions, is to use a customer look-up service to obtain the information and reduce the number of manual exceptions that the team must process. A customer look-up service is quite simple: the customer invoice file is sent to the lockbox; when a cheque-only comes in, the lockbox operator checks the customer database for a match on two data points, usually the name and address on the cheque. When a match is found, the required remittance data are pulled from the database, and a substitute scannable coupon is created for the payment. It is then processed on the high-speed equipment, automatically capturing the remittance data from the OCR scanline and appending the remittance information to the daily lockbox transmission for automatic posting to the receivables system. A growing population of consumers are using bill-pay services to make their payments. If a firm is receiving payments from these online bill-pay systems, the payment can come in one of two forms: cheques and a list of consumers’ account numbers or individual bill-pay cheques with consumers’ account numbers on the memo line. Unfortunately, the list may or may not include the specific information needed to post the receivable effectively. It also creates a data entry challenge. The individual bill-pay cheques require the lockbox operators to identify and key the account number from the memo line, mis-keying the account number will cause these items to be exceptions as the file is posted. A better alternative, if there is the volume, is to contact the key bill-pay

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providers directly and supply them with the account information to allow them to accumulate the payment instructions and convert them to an ACH transaction: CIE and CTX are the most common NACHA formats to use. CIE transactions offer a one-to-one payment format, whereas CTX transactions offer one-to-many payments. CIE is commonly preferred by financial institutions and corporations for ease of reconciliation and return item handling. The two largest providers are Metavante and Fiserv/Checkfree. They each have websites with instructions on how to request ACH. Once a firm has made that change, instead of receiving a cheque and list or individual bill-pay cheques, it will receive an ACH with an addenda record which the bank can provide as a report in the online account reporting service or send to the firm as a file in Electronic Data Interchange (EDI) format. Some bill-pay providers can also send the remittance information directly to the firm electronically. Banks may also be able to do custom programming and provide the information in a consolidated file with the lockbox remittance data. Recurring charges

If a company is collecting from clients a recurring charge such as a subscription or membership fee, the most effective and economical way to make these collections is through the ACH. This same service, best known for Direct Deposit of Payroll, can be used to collect automatically from customers. In promoting this service with customers, a company can emphasise the easing of their burden of having to remember to write a cheque and ensure it is in by the due date. This service eliminates late fees and potential loss of ser vice. Once the customer agrees to use the service, the firm simply sets up a recurring ACH debit with its bank’s online ACH service. The ACH can then be triggered to

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debit the customer’s account and credit the firm’s account on the due date each month. This allows the company to update the receivables automatically and reduce late or uncollected payments. Alternatively, customers can be offered the option of putting the charge each month on their credit card. The process of enrolment is similar, with the same benefits to the customer, plus the additional benefits of allowing them to extend the terms, and possibly receive reward points. The merchant services provider can help the company to set up the recurring charges. Point of sale

If a business collects cheques for purchases at the POS, the most obvious opportunity for moving to electronics is to accept credit card payments. There are numerous studies indicating that when the ability is offered to use a credit card rather than write a cheque the consumer will spend more. The speed of the transaction is also improved, allowing the firm to handle more customers. If the business does receive cheques, the use of a scanner for RDC can still improve the availability of the funds and eliminate a trip to the bank. When using RDC, these cheques can either be scanned at the POS and transmitted as an image cheque file or converted to an ACH debit for consumer cheques and cleared as an ACH Point of Purchase (POP) transaction. Alternatively, a firm may choose to consolidate the cheques and scan and clear consumer cheques as the ACH Back Office Conversion (BOC) transaction.

HOW DOES A BUSINESS GET CUSTOMERS TO PAY ELECTRONICALLY?

The key is to make it easy for customers to pay without having to write a cheque. Pointing out alternative payment methods


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on the website and providing an easy way for customers to register to pay electronically has been a very successful tactic for companies. It is especially effective if alternatives such as direct debit and credit card can be offered. If the firm invoices/bills its customers, it can include a ‘stuffer’ which explains the benefits to them of changing to electronic payment and provides a mechanism to enrol easily. Many companies have used their lockbox remittance coupons to promote these alternative payment methods by putting a simple checkbox on the front of the coupon and space on the back of the coupon to indicate customers’ authorisation either to debit their bank accounts monthly or charge their credit cards regularly. As these remittance coupons come in, the machines detect the mark in the checkbox on the front and will sort these out to return to the company for further processing. Some financial institutions will take it a step further and generate a file of the ACH debit authorisations, which can be uploaded into their ACH system to process these recurring transactions. For credit card charges, financial institutions may either process the transactions for the firm or send a file that can be uploaded into the firm’s merchant services terminal for authorisation and settlement. Processing through a merchant services provider keeps reporting comprehensive for all credit card transactions processed, regardless of origination (lockbox coupon, POS, website, etc.). If the firm is sending invoices or bills in the mail, it should consider moving to electronic delivery and providing a mechanism within the receipt of the invoice or bill for the customer to provide a payment instruction of either a debit to their account through ACH or a credit card number. Resolving the remittance problem

One of the key reasons cited by companies for not moving to electronic payments is

the complexity of receipt of the remittance. There are a number of efforts under way to make this process simpler for the payer and the receiver. Some organisations have developed closed networks wherein the suppliers register their banking information and their remittance format requirements. The payers in these networks can then generate the payments to meet these specifications. Alternatively, the networks provide the translation of the remittance data sent by each of the payers into the required format for the supplier. If the company is a supplier to the large disbursing companies which have driven the adoption of these network models, chances are it has already registered with one or more of these networks. The receipt of the remittances may then be delivered through the networks interface, or may be sent as part of the payment instruction through the bank and delivered with remittances from other nonnetwork payers. One alternative to these closed networks being considered in the US is the idea of a directory sponsored by NACHA. In this directory model, a supplier would register their collection banking account information along with their remittance delivery requirements. Access to the directory is envisioned to be offered through member banks’ online cash management platforms and/or by the various financial systems, including QuickBooks, IP Commerce or Oracle. Those companies paying the firm would access the directory and upload into their payables systems the information needed to ensure they deliver the payment and remittance required. In some cases this information may be translated by their bank based on the directory information or by the collections bank. Ideally, such a network would also allow a firm to register its desire to be paid by credit card and/or wire transfer based on specific circumstances.

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In November 2010, the US Federal Reserve Bank and CHIPS will begin clearing a new wire format which will allow the inclusion of remittance information compatible with the ISO 20022 and ANSI 820 STP formats. The current wire format limits remittance data to 140 characters and is not structured. The receiver cannot easily automate the posting of the information to the accounts receivable system. In many cases, the payer has to forward the information separately by e-mail or fax. With the new format, the remittance detail can include up to 9,000 characters or information on approximately 30 invoices. These activities and others under way will make it much simpler to move to electronic collections.

NEXT STEPS

The case for converting to e-collections is one that makes sense to corporate leaders. Yet there is considerable inertia to overcome in order to get a commitment to implement. It may require a coordinated campaign on the part of treasury departments to bring the payments process into the 21st century. In the author’s experience, there are three key elements to a successful campaign: (i)

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Cost/benefit analysis. The cost of receiving cheques and paper remittances and the data entry of the remittance information to the accounts receivable system should be factored against the costs of adding electronification to in-house or lockbox capture. The analysis of accepting credit cards and the inherent interchange fees should be offset by the reduction in costs in posting the receivables. The analysis should be

thorough and objective. And remember, ROI is not the real story; it is the strategic benefits, which need to be described in a separate report. (ii) Strategic benefits report . Upfront monetary savings are just the beginning for companies transitioning to e-collections. Once implemented, companies reliably experience reduced administration, greater transparency of cash flows, an improved ability to document compliance and the many proven business benefits that come with data aggregation. Time taken for inquiry and payment resolution with trading partners will also be significantly reduced by moving to electronic collections, freeing staff to focus on more strategic activities. Credit disputes can be more readily addressed, with time to focus on exceptions rather than simply posting to the receivables. All these topics should be discussed as they apply specifically to each organisation. (iii) Best practices and vendor selection. Selection of the receivables system and the banks, lockbox providers and merchant services solutions will be driven in large part by their ability to work together to provide a cohesive, comprehensive transmission process to ensure efficient and effective postings and reconcilement. The treasury department’s case will be compelling because it will have performed the due diligence needed to make a successful transition to e-payments. REFERENCE

(1)

Association for Financial Professionals (2008) ‘Metavante Payment Progress Index 2008’, Association for Financial Professionals, Bethesda, MD, September.

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Moving to E-payments

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