to Electronic B2B Payments
The accounts payable function at most businesses costs too much, takes too long, generates too many exceptions, and provides inadequate visibility into critical financial information.
In fact, accounts payable earned a dubious trifecta in a recent IOFM survey of controllers: it topped the lists as the most time-consuming, laborious, and paper-intensive finance and administration function, ahead of activities such as accounts receivable, payroll, tax, and audit and reporting.
Worse, accounts payable received nearly twice as many votes from
controllers as the most time- and labor-intensive finance and administration function than the next highest-ranked function.
Efforts to improve accounts payable through invoice processing automation have largely been undermined by the quadruple-whammy of:
1. Tight capital budgets
2. A lack of IT resources to support automation initiatives
3. Concerns about the risks of project failure
4. Challenges integrating invoice processing solutions with downstream systems and processes such as an enterprise resource planning (ERP) platform
As a result, only one-quarter of businesses describe their accounts payable department as being “highly automated,” according to IOFM. Most
departments rely on sub-optimal manual processes that frequently have a negative impact on the core functions of a business:
• Financial supply chain efficiency and effectiveness
• Budgeting, forecasting and reporting
• Working capital management
• Spend management
• Compliance and control
• Fraud mitigation
But it doesn’t have to be this way.
More businesses are discovering that migrating from paper check disbursements to electronic payments solutions like card programs with virtual card numbers (VCNs) – a single-use account or dedicated card account – provides significant strategic benefits without the upfront capital expense, IT burden, risk, or systems integration issues of automating invoice processing.
The Strategic Importance of Accounts Payable
Accounts payable automation is on the agenda of more businesses. Improving processes and automating manual processes rank among the top accounts payable concerns for 41 percent and 33 percent, respectively, of businesses surveyed by IOFM.
Moreover, 63.5 percent of controllers say that accounts payable is a priority for improvement, reports IOFM. And controllers are willing to back up their plans with additional capital: the majority of controllers (60.2 percent) anticipate that accounts payable will receive additional investment for process improvement projects– the only finance and administration function that the majority of controllers expect will get receive more investment, IOFM noted.
This is no surprise when you consider that the majority of controllers surveyed by IOFM (58 percent) rate their accounts payable department as having “high value” and being a “critical component of their business.” Many businesses are attempting to address their concerns about the inefficiencies and manual processes in accounts payable by automating invoice processing.
But automating invoice processing is easier said than done for most businesses. IOFM research shows that businesses encounter a wide range of challenges in automating invoice processing:
• Lack of department resources to support automation projects
• Lack of a compelling business case
• Lack of an internal champion to push for automation
• Concerns about managing change
• Concerns about the lack of security and controls in automated solutions
• Competition among other projects internally
• Resistance from suppliers
• Lack of technology knowledge among employees
Migrating to VCNs enables businesses to drive efficiencies and eliminate manual processes in their accounts payable department, while avoiding the barriers that stymie many automation initiatives.
The Growth of Electronic Payments
More businesses are migrating to VCNs to achieve departmental and enterprise objectives.
The majority of businesses pay at least some of their invoices electronically. However, 95 percent of businesses still issue paper checks, IOFM’s 2015 Accounts Payable Technology Survey found.
In fact, 24 percent of businesses make over 75 percent of their payments via check. And 65 percent of businesses pay their suppliers “mainly with checks,” the Remittance Coalition finds. Even payments to major suppliers are made by paper check 43 percent of the time, the Federal Reserve reports.
But the tide is finally turning against paper checks and towards electronic payment methods such as VCNs.
Forty-seven percent of all payments are now made electronically, and the businesses are paying 46 percent of their suppliers electronically, IOFM’s 2016 AP Key Performance Indicators Study found.
IOFM reports that VCNs represent 5 percent of all payments to suppliers – a huge increase over just a few years ago when cards were primarily used to small-dollar purchases and travel and expense management.
The use of VCNs has grown a lot since 2013, when businesses made 71 percent of their payments via paper check, according to IOFM’s AP Department Benchmark and Analysis report. In fact, 65 percent of businesses surveyed by IOFM report that their volume of electronic payments has increased significantly or moderately between 2012 and 2015. For instance, accounts payable departments have replaced an average of 11 percent of their invoice volume with p-card transactions. Many businesses have transitioned between 30 percent and 40 percent of their payments to suppliers to VCN.
Moreover, 31 percent of businesses reported that the average size of their card payments increased between 2015 and 2012, while 33 percent of businesses reported growth in their average p-card rebate, IOFM’s 2015 Accounts Payable Technology Survey reported. These findings, in particular, demonstrate that more businesses are becoming comfortable with using cards more widely.
And electronic payments are gaining momentum. The Remittance Coalition found that 92 percent of businesses have a high or moderate level of interest in increasing the volume of payments that they make electronically. Plus, more than one-third of senior finance executives surveyed by IOFM in 2014 indicated that their business planned to deploy electronic payments within the next 12 months.
The Enterprise Benefits of Electronic Payments
VCNs offer a lot of operational advantages over paper checks. But IOFM’s research discovered that the five primary reasons that businesses are migrating to electronic payment methods such VCNs are the following benefits:
1. Reduced operational costs
2. Incremental revenue/lower cost of goods
3. Enhanced forecasting/transparency
4. Better working capital management
5. Increased security and control
These benefits support the strategic objectives of the C-suite, in particular.
Reduced Operational Costs
With revenue growth hard to come by, the C-Suite is looking for ways to improve profit margins.
Nearly half of the controllers surveyed by IOFM (41.2 percent) said that lowering accounts payable costs is a top priority. Similarly, improving processes and automating manual processes rank among the top accounts payable concerns for 41 percent and 33 percent, respectively, of businesses.
But 35 percent of CFOs want to decrease the costs associated with payments, in particular, Aberdeen Group reports. These CFOs undoubtedly recognize the cost inefficiencies associated with checks.
In fact, lower operational costs are the top reason businesses adopt electronic B2B payment methods such as VCN, IOFM’s 2015 Accounts Payable Technology Survey found.
For starters, a single payment file upload initiates payments to all of a buyer’s suppliers; instructions are parsed and payments are automatically remitted in all payment methods. This eliminates the need to log in to multiple banking systems, and the cost of printing and mailing paper checks. What’s more, integrating VCNs with the general ledger in a buyer’s ERP platform provides real-time payment reconciliation that eliminates the need for the costly manual keying of data or the decoding of banking messages. Similarly, VCNs can be tightly integrated with a buyer’s bank. And domestic and cross-border VCN payments are less expensive – as well as faster, more efficient, and less prone to fraud – than paper checks. Automating payment processes also reduces the chances of costly errors. For instance, with VCNs buyers upload a single file to their servers to initiate payment to all of their suppliers, regardless of where they are located, eliminating error-prone manual processes. Payment data also can be pushed automatically from a buyer’s ERP platform. Thirty-nine percent of businesses report that duplicate payments and over-payments represent more than 1 percent of their payments. Worse, 14 percent of businesses say that duplicate payments and over-payments account for 2 percent or more of their payments, according to IOFM’s 2016 AP Key Performance Indicators Study.
A rule of thumb is that a duplicate payment rate over 0.5 percent indicates weak controls, or that the master vendor file needs a good weeding out. Many VCN solutions provide tools for identifying duplicate payments and validating that payments match approved invoices.
The ease of implementing VCNs into an operation also keeps costs low. VCN programs can be seamlessly integrated with legacy systems such as an ERP without requiring material changes to existing accounts payable processes. Approved transactions are exported downstream, eliminating duplicate entry of invoice data and enabling automatic updates of invoice and payment information to the ERP system. This process helps reduce mistakes and instances of conflicting data. And the seamless integration of VCNs with the ERP system minimizes the need for initial and ongoing IT support and training, provides users with a familiar, easy to use operating environment, eliminates potential payment bottlenecks, and tightens security.
Similarly, unlike ACH transactions, VCNs offer a simple setup that only requires buyers to provide a card number. This makes cards ideal for one-time or recurring payments.
Incremental Revenue/Lower Cost of Goods
VCNs reduce the net cost of a buyer’s purchases.
With VCNs, buyers have the opportunity to earn incremental revenue or rewards based on spending with a card (a far cry from the fees charged to use ACH transactions). In some cases, the revenue or rewards earned by businesses have made their accounts payable department a profit center, or at least generate funds that can be used to invest further in innovation. Buyers also can pay invoices faster with a VCN than paper checks (typically the next day for VCNs, versus waiting for the next check run), ensuring timely payments, eliminating late-payment fees, and enhancing relationships with key suppliers. The faster payments enabled by VCNs, for example, help procurement ensure contract compliance. Manual check processes create bottlenecks that prevent payments from being made on time. Eighty-four percent of companies pay their suppliers late, according to MasterCard’s Creating Payment Energy report. In most cases, long approval cycle times, not a lack of funds, are to blame for late payments. All of this can be accomplished without negatively impacting the buyer’s float, as we will discuss later.
Timely payment with a VCN also can help:
• Reduce credit lines
• Enable more investment in the overall business
• Reduce resources spend on payment settlement
• Improve relationships with creditors and banks
of companies pay their suppliers late, according to MasterCard’s
Creating Payment Energy report.
84%
45%
All of these benefits can have a significant positive impact on a company’s cost of goods over time.
VCNs also provide greater control over enterprise spending. For instance, automating invoice payments eliminates the need for purchase orders (POs) by enabling managers to tie a VCN to a specific amount (down to the penny), or range of amounts, and designate the type of purchase for which the virtual card number is valid using merchant category classification (MCC) codes. This prevents a supplier from overcharging the VCN or using it for a purchase for which it is not intended.
Decision-makers also can manage spending from anywhere by using mobile capabilities for viewing and approving transactions and financial allocation codes, viewing card statements, approving and activating card accounts, and modifying card account information and velocity limits. Buyers may also benefit from lower costs as a result of the stronger supplier relationships that result from electronic payments initiatives. A 2015 survey by Gatepoint Research found that suppliers who are paid in their preferred method tend to want to work more closely with the buyer.
Enhanced Cash Forecasting/Transparency
VCNs are a fast and easy way to satisfy the C-suite’s demands for greater visibility into cash flow.
Improving visibility into cash flow and operational performance is the top finance and administration priority of nearly three-quarters (68.9 percent) of controllers, according to IOFM’s research.
Compared to two years ago, 58 percent of businesses say their demands for real-time visibility into accounts payable financial data is significantly higher or slightly higher, IOFM reported in 2015.
Visibility into payments is critical for:
• Reporting and auditing
• Cash flow analysis
• Liquidity management
• Spend management
• Contract compliance
• Supplier relations
Paper payments limit visibility in several ways: key data is not captured, data is hard to access, data is not readily available, systems are
fragmented, and decision-makers cannot access critical variables. Financial executives can use the reporting provided by VCNs to gain insights into enterprise spend, accounts payable cash flow, and accounts payable process metrics.
To make the right decisions with regard to investments, financing and budgeting, CFOs need full visibility into invoice payments, which research suggests is lacking. In fact, six out of 10 treasurers think that their cash flow forecast has either “significant” or “major” inaccuracies. When CFOs are unaware of their spend liabilities, they can overstate or understate cash flow, take needless risks, or become needlessly risk adverse. As a result, CFOs are unable to invest optimally or address strategic goals such as funding growth, paying down debts or financing mergers and acquisitions. It is no wonder that improving cash flow visibility is a top priority of 69 percent of controllers, IOFM finds.
Best-in-class organizations that achieve a comprehensive view into enterprise spend also report 36 percent higher levels of annual savings and 35 percent better contract
compliance rates than other groups in the market, according by Ardent Partners.
of controllers surveyed by IOFM identified the lack of visibility into invoices and payables information as the top challenge in their accounts payable department.
VCNs also enable financial executives to drill-down into payments data for specific business units and locations.
Additionally, VCN solutions automatically track approved and initiated payments and any rejects, with detailed payment and reconciliation reports integrated into the buyer’s ERP system. This end-to-end tracking enables more accurate accrual reporting, greater payment reporting integrity, and better visibility into spending based on the metrics most important to the business.
Buyers can determine what data is captured with each transaction. This comprehensive data from a VCN can be passed back to buyer through detailed reports and used for decision-making and future negotiations. For these reasons, 40 percent of organizations identified improving invoice-payment reporting and analytics as a top priority, according to Ardent Partners’ ePayables 2015: Higher Ground report.
The transparency provided by VCNs also extends to suppliers. VCN programs provide suppliers with reliable visibility into when electronic payments will arrive, as well as the rich remittance data required to simplify reconciliation and eliminate inquiries regarding invoice status.
Better Working Capital Management
VCNs help businesses manage their working capital.
This starts with the flexible payment timing and terms available with card programs. For instance, electronic payments enable businesses to capture of more early –payment discounts -- a top priority of accounts payable professionals surveyed by IOFM in 2015.
With early-payment discounts, buyers may offer payment terms on a sliding scale: the earlier the supplier selects to be paid, the bigger the discount. Once a buyer approves an invoice, the supplier is presented with options on when they want to receive payment. The sooner the payment, the bigger the discount the supplier must give; the longer the time until payment, the smaller the discount.
Eighty-percent of the businesses surveyed by IOFM in 2016 receive invoices that offer early-payment discounts. In fact, 5 percent of those surveyed said that more than 25 percent of the invoices their business receives offer discounts for early-payment, while 3 percent of businesses say between 16 percent and 25 percent of the invoices they receive offer early-payment discounts.
Businesses can reduce their supplier spend by up to 14 percent annually by capturing more early-payment discounts, according to MasterCard’s Creating Payment Energy report. Even the standard early-payment discount of 2 percent 10, Net 30 works out to a 36 percent return on capital. For large buyers, early-payment discounts can generate millions of dollars a
Compared to their peers, best-in-class accounts payable departments have over four times the rate of visibility into overall organizational cash flow, Aberdeen Group finds.
VCNs make it easier for buyers to take advantage of early-payment discounts. VCN transactions can be made much faster than check payments, increasing the chances a supplier will agree to a particular discount offer. Additionally, a unique VCN can be issued for each payment transaction. This ensures that the card data cannot be misused for anything else. The VCN creates a payables balance which the buyer then repays to their card issuing bank. Buyers receive full data on each early payment for cash management and reconciliation.
Suppliers benefit from improved working capital management through faster and more predictable payments (next day, in some cases), reduced Days Sales Outstanding (DSO), and less need for expensive and restrictive financing. Suppliers also enjoy greater visibility into their receivables. For these reasons, studies show 80 percent of suppliers would offer a discount in order to be paid early.
VCNs also help businesses optimize their Days Payables Outstanding (DPO).
Best-in-class companies have an average DPO rate of 22.3 days – a whopping 13.4 days better than the DPO rate of the bottom 70 percent of aggregate performance scorers polled by Aberdeen Group.
Sixty-one percent of businesses have extended DPO as a strategic lever to help manage cash flow, MasterCard’s Creating Payment Energy report found. Businesses have plenty of incentive to extend payment terms: Every day of DPO extension yields $25 million in cash for the Fortune 500.
Some businesses delay payments to suppliers as a way to extend DPO. But this approach stresses relationships with key suppliers and could result in volatile cash flow levels within the quarter.
Certain VCN programs provide buyers with a better strategy for extending DPO. In this scenario, the funding for the VCN program is provided by the buyer’s bank via the card. The supplier’s payment term stays the same. The payback period to the bank kicks in once the payment is initiated (30 days or 60 days). Hence, the buyer extends its DPO by that same period. The supplier is able to maintain their payment terms in exchange for a small card acceptance fee.
As another example, more finance departments are paying suppliers early using VCNs. In this scenario, buyers receive VCN rebates on top of the extended DPO and early-payment discount, while suppliers are paid early (possibly the next business day) in exchange for a fee to accept the payment.
controllers surveyed by IOFM reported that the inability to effectively maximize vendor discounts (17.6 percent) was their AP department’s biggest challenge.
Best-in-class companies have an average DPO rate of 22.3 days – a whopping 13.4 days better than the DPO rate of the bottom 70 percent of aggregate performance scorers polled by Aberdeen Group.
17%
D I S C O U N T
Greater Security and Control
VCNs enhance the safekeeping of sensitive information.
For starters, VCN programs are significantly more secure than paper checks. Paper checks remain the payment type most vulnerable to fraud, according to the 2015 Association for Financial Professionals (AFP) Payments Fraud and Control Survey. Fifty-seven percent of businesses surveyed by IOFM in 2015 stated that paper checks from the accounts payable team were the most vulnerable to fraud, with 14 percent identifying checks from third parties as the most vulnerable.
From the moment they are issued, checks create three opportunities for fraud:
1. Dishonest employees may issue checks without proper authorization
2. Crooks can alter checks or create counterfeit checks
3. Crooks can use the bank routing and account numbers on paper checks for nefarious purposes
What’s more, resolving check fraud is a manual, time-consuming process that requires buyers to issue stop-payments, reissue payments, close and reopen accounts, and order new checks.
It is for these reasons that 20 percent of senior finance executives identify the risk of payment-related fraud among their top accounts payable pressures, according to IOFM research.
Paper checks also make it challenging for businesses to maintain all payment data in compliance with the highest industry standards, and do it in a streamlined fashion. Conversely, the Payment Card Industry Data Security Standard (PCI DSS) outlines requirements for safeguarding sensitive data, improving control over the posting process and enabling detailed oversight and reporting.
Additionally, VCN programs offer hierarchical management and program setup to enable administrators to control security settings, system-level settings, roles and permissions/privileges, and business rules. Buyers can set VCN parameters such as an amount, location, date, type of merchant, and number of times a card can be used. Any purchases outside of the pre-set parameters are automatically declined. VCNs can be dedicated to a specific account and dynamically funded or used only once.
VCNs also can use encrypted or tokenized card information which reduces security and fraud risks. VCNs can be embedded into an electronic
procurement or electronic payables system, making the numbers inaccessible to staff, and, in turn, less likely to be stolen. Moreover, all or a portion of invoice payments can also be processed through card-less accounts for increased security.
This approach does not require suppliers to keep card numbers on file, eliminating PCI compliance issues. And using a VCN for payment does not require suppliers to share their sensitive bank account data.
The manual processes related to paper checks make it more difficult for businesses to comply with ever-changing tax laws and regulations, such as 1099 reporting, or risk significant fines or penalties.
Conclusion
Businesses have had enough of the inefficiencies and manual processes that plague accounts payable. But in many cases automating invoice processing costs too much, overwhelms limited IT resources, requires too much risk, and results in fragmented financial systems and processes. A best-in-class strategy is for businesses to migrate to electronic payments, and specifically VCNs, which deliver address five strategic objectives:
1. Reduced operational costs
2. Incremental revenue/lower cost of goods
3. Enhanced forecasting/transparency
4. Better working capital management
5. Increased security and control
Importantly, VCNs enable accounts payable departments to accomplish all of this with a small fraction of the cost and systems impact of invoice processing solutions.
Sponsor Perspective
MasterCard is pleased to sponsor this whitepaper, which discusses the benefits and challenges of optimizing your AP payment processes. Virtual card (VCN) technology provides the ultimate in transaction-level control for companies as a first step towards full AP automation.
With VCN capability, the accounts payable department can assign a unique 16-digit card number to each transaction, or to a single vendor. It can be used multiple times or only once—enabling AP departments to precisely identify transactions for a specific purpose or with a certain vendor. Since the VCN can be used only within the parameters of its approval— transaction amount, date, and vendor—there is built-in transaction security, control, and traceability to every purchase.
Today’s advanced card payment solutions allow financial executives to take advantage of greater payments accuracy, control, and cost savings, as well as improved security, transparency, and access to data for decision-making.
Mastercard has been an innovator in electronic payments having first launched VCNs in 2008 for commercial payments. Our patented In Control for Commercial Payments™ platform provides the greatest flexibility to help reduce fraud, ensure compliance with spending policies, improve supplier management and negotiation, and minimize processing time and labor.
MasterCard strives to use our technology every day and everywhere to make payments safe, simple and smart. We provide innovative solutions that help drive operational efficiencies and employee satisfaction. And all our products and services are built on unsurpassed merchant acceptance at over 40 million merchant locations worldwide.
About the Sponsor
Mastercard is a technology company in the global payments industry. We operate the world’s fastest payments processing network, connecting businesses, consumers, financial institutions, merchants, and governments in more than 210 countries and territories. Mastercard products and
solutions make everyday commerce activities easier, more secure and more efficient for everyone. We provide businesses with the tools, resources and programs organizations need to help track and manage expenses while also improving compliance and security.
About the AP & P2P Network
The AP & P2P Network is the leading provider of training, education and certification programs specifically for Accounts Payable, Procure-to-Pay, Global and Shared Services professionals as well as Controllers and their F&A teams. Membership to the AP & P2P Network (www.app2p.com) provides comprehensive tools and resources to financial operations professionals who manage or are deeply involved in the Accounts Payable and Procure-to-Pay process.
Focus areas include best practices for every AP & P2P function; AP & P2P metrics and benchmarking data; tax and regulatory compliance (e.g. 1099, 1042-S, W-9, W-8, Sales & Use Tax, Escheatment, VAT, Canadian Tax, Internal Controls); solutions to real-world problems challenging your department; AP & P2P automation case studies; member Q&A networking forums, Ask the Experts, calculators, and more than 300 downloadable, customizable AP & P2P policies, flowcharts, templates and internal control checklists.
A membership to the AP & P2P Network provides tangible ROI to any organization – saving your organization time, money and keeping you compliant.
Over 10,000 professionals have been certified as an Accredited Payables Specialist or Manager (available in English, Simple Chinese and Spanish), and Certified Professional Controller through the AP & P2P Network and its parent company, the Institute of Finance & Management. AP & P2P Network also hosts the Accounts Payable and Procure-to-Pay Conference and Expo (Spring and Fall), designed to facilitate education and peer networking. The AP & P2P Network is produced by the Institute of Finance and Management (IOFM), which is the leading organization providing training, education and certification programs specifically for professionals in Accounts Payable, Procure-to-Pay, Accounts Receivable and Orderto-Cash, as well as key tax and compliance resources for Global and Shared Services professionals, Controllers and their F&A teams. With a universe of over 100,000 financial operations professionals, IOFM is the trusted source of information in the rapidly evolving field of
