Accounts payable departments have realized that they need to stop paying suppliers with paper checks and move to electronic payments. While there's intention to head in this direction, most U.S. companies estimate that they are still making about 50 percent of their payments by check. Why is progress so slow?
Electronic payments as we’ve known them for the past few decades are only partially electronic. The payment moves electronically, but there’s still a lot of manual effort on the front end to get the payment ready to go and on the back end to resolve questions and errors.
In moving some payments to card and some to ACH, AP departments have reduced a sliver of costs and inefficiencies, while at the same time introducing new ones. Banks have historically offered each payment method as a separate, standalone program, so now instead of one process, AP is juggling three separate processes, each with limited visibility, traceability, and reconciliation information. There’s still a lot of back and forth, and manual effort.
The irony is that as expensive and inefficient as paper checks are, at least there's only one process for AP to manage. From a process standpoint, making all payments by check would probably be more efficient. Trying to transition to electronic payments with bank offerings has left AP straddling the paper world and the electronic world, endlessly struggling not to let anything fall through the cracks.
Fintechs are redefining electronic payments by making it possible to make card, ACH, check and even cross-border payments within a single process. It requires nothing more to initiate than the standard reports of the company’s accounting system. Once payment is sent, it’s guaranteed to arrive with no further effort on AP’s part.
Even though these fintech supplier payment solutions appear on the surface to be the same as the bank solutions we’ve had for decades, they differ in some very important ways that give AP much greater efficiency, visibility, and control.
Fintech payment solutions are similar to bank solutions in that they ride on same payment rails. What do I mean by rails? In the world of payments, ‘rails’ refers to the network that transports packets of encoded payment information. All banks use NACHA’s standard for trading ACH files as their rail system. Mastercard, Visa, and Amex each have their own rails. All "payment cars" ride these rails in the U.S., and both banks and fintechs use them.
There is no global set of rails, so international payments are a lengthy, complicated process carried out by correspondent banks in each country. Side note: One of the reasons there’s so much interest in distributed ledger technology, also called blockchain, is because it could eventually enable an entirely new rail system that could be faster, cheaper, and global.
The difference between bank payment solutions and fintech payment solutions is in the cars that ride on these rails. Fintechs are building new rail cars that have much more functionality and better service.
It’s the difference between putting your payments in rumbly old rail cars with bench seats and windows that jam, where you have to hoist your own luggage and bring your own picnic, versus putting them aboard a sleek, modern rail car with air conditioning, wifi, a porter, and gourmet food delivered to your reclining seat.
For example, if you want to send ACH payments through your bank, you need to have each supplier’s current bank account number, routing number, and remittance address along with the amount of payment in a file to the bank. Your file has to be formatted in a particular way and can’t have any errors in it, or the payment won’t go through. Banks also do next to nothing to help AP with one of the biggest burdens facing payments—collecting and maintaining supplier information.
Some banks will accept all payment types (ACH, card, and check) in one file, but that’s not really a single process. You still have to have to compile the file knowing what type of payment your supplier accepts and ultimately the payment goes across three different sets of rails, creating three different processes to manage on the back end. If there's something that goes wrong with a payment, it's hard to reconcile, because neither AP nor anybody at the bank can see across all those payment types in one place.
Cross-border payments through a bank require a fourth, entirely separate process that sits outside the accounting system. You have to hand-key the information in your bank portal and then manually key it back into your accounting system.
There is zero visibility from the moment the payment is sent until you get confirmation of receipt. If something goes wrong, you may not know for days or even weeks later that the payment never arrived. Organizations report that although cross-border payments only account for 20 percent of their payments, managing the process takes up to 80 percent of AP's time.
Until recently, banks have had a stronghold on payments. The problem is that they haven’t provided any service or updated technology to customers riding these rails. This is why most organizations have only realized a marginal benefit from making electronic payments. Bank electronic payments are just a basic rail system with yesterday’s rail cars.
Why haven’t banks invested in better rail cars, or offered services to make the old ones easier to use? Banks are distribution channels, not technology companies. They typically don’t own or build the solutions they sell. Different companies have, over time, provided them with solutions for their customers—everything from check printing to today’s mobile apps. Once a solution gets some traction in the marketplace, banks are willing to add it to their sales strategy, but they don’t own it, so they can't change it or improve it.
Furthermore, when you sign up for a bank payment solution, you might be buying ACH payments from one division of the bank, card payments from another, and check payment processing from yet another. You might even be buying them from three different banks.
Financial technology companies are looking at this disconnected process and using cloud technology and APIs—combined with good old-fashioned customer service—to bring all payments together in one streamlined, electronic process with supplier enablement services on the front end and payment support on the back end.
APIs are what make it possible for applications to connect with each other, share data, and take certain actions on one another’s behalf. In the on-premise world, where everyone’s applications were located in an on-site server room, it was hard to connect systems. Using the cloud, it's easy to use APIs to connect to virtually any system that's already in place in the enterprise.
For example, scanning has been around for at least 20 years. AP workflow has been around for at least 10 years. If you already have those systems in place, you can make an API call and plug in and extract information really simply with little to no development.
Fintechs are also using technology and people to provide all of the services around supplier payments. They collect, house, and maintain all of the information required to pay suppliers so AP doesn’t have to. They constantly update the information to ensure the payment goes to the correct spot and that payment is made by the most efficient and cost-effective means.
Using different APIs, fintechs bring together the payment rails, the cross-border wire process, and the supplier data in one place. It’s all served up in single interface, in a way that makes sense for someone who’s working through an accounts payable process.
It's one process for all payments—ACH, card, cross-border, and check. There’s no need to assemble specific and detailed payment files. The information can be captured and used within the interface from whichever payment file the accounting system creates. All that must be done by AP is to review the payments file and select "pay".
They can view all payments as they move through the system, all the way to settlement. If they need to track something down, it’s right at their fingertips. And if anything goes wrong, the payment solution provider's customer support team handles follow up. Delivery of the payment is guaranteed.
Until now, the irony of electronic payments has been that if customers had just stayed on paper, they would have been more efficient because it was one process (paper) instead of several. Now it is becoming clear that to scale, to comply with regulation, to become efficient, and move at the pace of the industry —electronic payments are essential. Electronic payments have undergone a reinvention by fintech. They aren't the separate payment programs and cumbersome processes banks have offered in the past.
With today’s technology, AP no longer needs to know or care how the payment gets made. They only need to know who they want to pay and how much, and then can pay it from a single interface. Efficiency, visibility, traceability, accountability, and data: that’s what electronic payments means today. It’s time to park those rumbly old cars in the rail yard, and put your payments on the fintech bullet train.