Paper, plastic...or bit of both? Featured

8:00pm EDT April 23, 2006
Making a payment can be one of the most critical components of your entire procure-to-pay process and among the key drivers shaping the future of corporate cash management. Using the right mix of payment methods — checks, ACH, wire or commercial cards — can greatly improve the process and cost efficiencies of your payables process.

To gain a better understanding of how companies are optimizing their payables process, Smart Business recently spoke with Jeffrey Felser, senior vice president and product group manager for PNC’s Treasury Management Division.

What are the payment alternatives available to companies looking to streamline the procure-to-pay process?
Paper checks continue to be the core payment service, representing 80 percent of the $16+ trillion in business-to-business payments. However, the payments business is undergoing the largest transformation of its history, as migration from paper to electronic accelerates with businesses demanding more value, lower cost and simplicity. Aiding this transformation is technology, which is driving new forms of convenience and innovation with both ACH and purchasing cards growing in both volume and size of transactions being processed through these electronic alternatives.

How can an organization determine the optimum mix of payment options?
When thinking about how to make payment on your business-to-business transactions, we believe it makes sense to look at the economics of the various payment alternatives. The purchasing card, for example, 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 (12 cents average for ACH transaction, 39 cents per check processed, $7 for wire transfer) creates an opportunity to pursue an optimum payment mix and a winning proposition for the payer.

Knowing that you can’t move all of your payments to cards, we think 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 payments whenever needed.

What are some of the variables that come into play when deciding how to process a payment?
There is no one solution for payment processing because different purchases call for different payment types. However, 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 requirement 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 aspect.

Are more organizations opting for one method over another, and is there a clear winner among all payment types?
Though business-to-business payments continue to migrate to electronic channels, the pace is much slower than what is occurring among consumer payments. Organizations that take the opportunity to assess their current procure-to-pay process can benefit from focusing on the payment component of this financial supply chain.

As noted previously, there is no one type of payment that ideally fits for all purchases. However, the material differences in the economics of the various payment alternatives create the opportunity to pursue an optimum payment mix. The clear winner is the organization that takes the first step in evaluating its entire procure-to-process.

This 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 product group manager for PNC’s treasury management division. Reach him at (412) 762-9714.