Eeny, Meeny, Miny … NO!

Paying more suppliers electronically is likely near the top of your department’s to-do list for 2018.

Institute of Finance and Management (IOFM) reports electronic payments – not invoice processing automation – is the top automation priority of accounts payable professionals.

But efforts to pay more suppliers electronically will fall short of expectations unless businesses develop a strategy for making the most of the three most popular B2B payment methods:

  • Paper checks
  • Automated Clearing House (ACH) transactions
  • Virtual cards

“Payments optimization” is the term commonly used to describe this process.  Whatever you call it, choosing the right method for paying a supplier is not child’s play nor should it be left to chance.

Here is an overview of B2B payment methods to help you optimize your supplier payments:

Paper Checks

Paper checks were the payment instrument of choice for businesses for many years.

Paper checks are simple to setup and use, are accepted by 95 percent of suppliers (per IOFM), and don’t require buyers to enroll suppliers or to collect and manage sensitive banking information.

Suppliers only need a bank account to accept paper checks.

But paper checks are extremely expensive.

The National Automated Clearing House Association (NACHA) pegs the cost of issuing a paper check at $8.  But this cost is just the tip of the iceberg as it does not include the time staff spends stuffing checks into envelopes, the costs associated with check printers (ink, power, maintenance, etc.), stop-payment fees and any other expenses associated with lost checks, and fraud losses.

Buyers can pay suppliers electronically for a fraction of the cost of a paper check.

There are other downsides to paying suppliers with paper checks.

While paper checks can be setup in little time and with minimal effort, the long-term drawbacks are significant.  With paper checks, staff typically must enter payment information into their accounts payable system, changes to payee information must be manually maintained, paper checks are more likely than other payment instruments to be intercepted or fraudulently used, and paper checks offer no remittance data other than the check number and check amount for matching with invoices.

These are some of the reasons that paper checks are becoming the payment method of last resort.  Only use checks in those cases where a supplier refuses to accept electronic payments.

ACH transactions

ACH payments leverage an electronic network to facilitate payments between business and consumer bank accounts.  ACH payments are used for everything from supplier payments to payroll deposits.

Compared to paper checks, ACH transactions cost buyers considerably less, are less prone to error, reach suppliers more quickly, settle faster, provide better tracking from initiation to reconciliation, and require little manual effort once an ACH system has been setup.  End-to-end encryption and strong chain-of-custody make ACH transactions more secure than paper checks.  And federal regulations and banking rules provide buyers with protections for paying suppliers via ACH.

ACH transactions also provide the remittance data needed for automatically matching payments with open invoices.  This remittance data can include the customer account number, customer name, invoice number, purchase order number, invoice date, invoice gross amount, and amount paid.

Paying suppliers via ACH is not without its issues.  Chief among them are the upfront and ongoing costs of ACH.  Buyers typically must pay an initial setup fee with a bank or other entity that processes ACH payments, collect a payment setup form from each client that wants to be paid via ACH, and pay a median fee of $0.30 per ACH transaction.  Some suppliers are reluctant to provide buyers with the banking information required for ACH payments.  What’s more, paying suppliers via ACH eliminates the float provided by paper checks as ACH transactions typically reach a supplier within two days of being initiated.  In fact, buyers must ensure that the full amount of the transaction is available in their account once an ACH payment is initiated, to avoid potential overdraft charges.

Finally, most ACH payment programs do not offer cash-back rebates on spending.

ACH is best suited for suppliers receiving a large volume of payments from the same customer on a weekly or monthly basis, or for suppliers that have a large average transaction size ($50,000 or over).

Virtual Cards

Virtual cards (or v-cards) enable buyers to securely send a 16-digit one-time use card number to suppliers via e-mail that is processed like any other card transaction to pay for one or more invoices.

Many accounts payable leaders are drawn to virtual cards because of the opportunity to earn incremental revenue or rewards (transforming payables into a profit center).  Rebates are typically a monthly revenue share generated by virtual card use and varies based on how much was paid.

Fifty-five percent of businesses earn rebates on their annual card spend, AFP reports.

But virtual cards offer additional benefits, including lower costs to send than checks or ACH, easy integration with accounts payable processes without the need for an IT or ERP project, flexible payment timing and terms, broad transaction-level controls (e.g. to limit usage to a specific supplier, dollar value or time frame), and the ability to pass detailed remittance information to the supplier (including the invoice number, transaction amount, purchase order number, and customer number).  Additionally, virtual cards do not require buyers to collect or maintain sensitive banking information.

Virtual cards also provide buyers with the greatest float.  While suppliers receive immediate credit, payments made via a virtual card are not due until the end of the billing period (20 days on average).

And virtual cards can be delivered to a supplier faster than paper checks or ACH.

Convincing some suppliers to accept virtual cards – and accept the corresponding fees – is the top challenge buyers face.  However, many card solutions providers offer supplier enrollment services.

Look for suppliers that already cards, and those that represent a big part of spending.

Eeny, meeny, miny, moe works great for selecting who goes first in a game of tag.  But it’s a lousy way to determine which payments method is best suited for an individual supplier.