Making a payment can be one of the
most critical components of a
company’s entire procure-to-pay process and selecting the right mix of payment methods — commercial card, ACH,
wire or check — can significantly improve
the efficiency and cost effectiveness of the
payables process and lead to measurable
financial benefits for an organization.
Smart Business spoke with Jeffrey
Felser, senior vice president and group
product manager for PNC’s Treasury
Management Division, to understand how
companies can determine the right mix of
payment methods for their business.
Paper? Electronic? Or a little bit of both?
Paper checks continue to be the core
payment service, representing over 80 percent of the $16 trillion-plus in business-to-business payments. However, the payments business is undergoing the largest
transformation in its history, as the migration from paper to electronic formats
accelerates with businesses demanding
more value, lower cost and simplicity.
How can an organization determine the optimum mix of payment options?
The purchasing card has the most interesting economic proposition as most banks
issuing the card are willing to provide revenue sharing based on the value of the transactions being processed through a purchasing card program. Comparing the ability to
generate income versus paying service fees
(see the chart below) creates an opportunity
to define an optimum payment mix and a
winning proposition for the payer.
Knowing you can’t move all of your payments to cards, it makes sense to always
think cards first, followed by ACH, then
checks, to capture payments that cannot be
migrated to an electronic method. Wire transfer will always have a specific role in executing timely and final payment whenever needed.
What’s the best way to
process a payment?
Different purchases call for different payment types so both qualitative and quantitative
analysis is required. On a qualitative basis, consider contract terms,
vendor relationships, current practices and
protocol, as well as the sensitivity or priority for
the receipt of goods or services. On the quantitative analysis side, the size, frequency and timing requirements of
the payment are considerations. Additionally,
the existing financial characteristics of the
transaction — such as cost of the payment
for both the buyer and seller — is an important consideration.
Can commercial cards be used for all payments?
The clear winner is the organization that
takes the first step in evaluating its entire
procure-to-pay process and develops a
strategy to optimize the payment mix. But
it does make sense to think cards first for a
number of reasons.
Purchasing cards are the fastest growing
payment tool in the marketplace. Card
acceptance has become more widespread,
and cards are used to purchase almost
everything a business needs — from specialized equipment to office supplies to
customer entertainment.
A company can make just one payment to
the bank each month to cover all of their card
transactions made with individual vendors
and can reduce soft costs by about $5 to $15
per invoice in accounts payable personnel
and monthly check-writing activity.
Cards also enable a company to enforce
their financial policies and procedures
automatically, helping to mitigate purchasing risk. For example, an organization can
authorize designations and dollar limits to
spending requests before the card transaction takes place.
To learn how to optimize your payment strategy with purchasing cards
check out PNC’s Middle Market Advisory
Series at www.pnc.com/go/payments.
This article was prepared for general
information purposes only and is not
intended as specific advice or recommendations. Any reliance upon this information
is solely and exclusively at your own risk.
JEFFREY FELSER is senior vice president and group product manager for Treasury Management at PNC Bank, National Association, a member of The PNC Financial Services Group, Inc. Reach him at (412) 762-9714 or [email protected].
