Fast and slow: Optimizing business payments in a changing landscape
Every day, we make decisions that involve a tradeoff between instant and delayed gratification: The quickest way isn’t always the best way, but sometimes a shortcut can really pay off. The same is true for corporate treasurers and how they choose to make payments.
You may be familiar with some of these newer and forthcoming options that may increase payment speeds in your company:
- Same-day ACH: Allows for processing and settlement on the same day, via the ACH network.
- Real-time payments (Zelle and The Clearing House): Consumers and businesses will have solutions for sending and receiving funds in real time directly from their bank accounts.
- Global initiative from SWIFT: An emerging solution that allows cross-border payments and processing (same-day in local time zone).
These methods coexist in a product suite that includes slower, more common options such as checks, credit cards, and ACH. Knowing when to use a faster or slower option is a skill that astute corporate treasurers are always honing to perfection.Slow option dominates, for now
You may be surprised to learn that adoption of faster payment options has been a bit slow, according to some recent research. A 2016 AFP survey, for example, found that 51% of B2B payments in the U.S. are still made by check. That may be a case of staying with what’s comfortable, having little need for faster payments, or a reliance on the common notion that checks stretch working capital, due to float.
However, a payments system dominated by checks may result in plenty of delayed gratification for your business, when you factor in possible customer/vendor dissatisfaction or excessive paperwork and processing costs. Diversifying the mix of corporate payments may yield benefits, as one Bank of the West client discovered last year.
The company, a large food processor, had an approximate payments composition of 95% checks and 5% ACH/wire in 2012. After analyzing the costs of this mix, including printing, postage, and mailing of checks as well as stop pays and reissue costs, the company began converting paper checks to electronic options to improve efficiency. By the end of 2016, the payment ratio was 70% ACH/wire and 30% checks. When analysts compared the cost inefficiencies, they discovered a savings of nearly $36,000 in 2016 vs. 2012.Factors that may shape your payment optimization
Cost savings are a key driver for many corporate treasurers to explore optimizing their payment systems, but it’s not the only reason. Diversifying your payment mix may add benefits for security, supplier satisfaction, forecasting, and cross-border transactions, to name a few.
There is no one-size-fits-all solution when it comes to optimizing your payments. Here are some factors to consider as you customize an efficient mix for your payments:
- Ensure your strategic objectives are in line with your current payment practices.
- Determine if your business will see growth in cross-border payments.
- Take advantage of the available security measures for each payment type.
- Consider whether diversifying your array of payment types will lower your processing costs.
- Determine what partnerships (e.g., financial institutions, payment vendors) may help with your planning for and executing different payment types.
These factors may help you in improving ways to leverage multiple payment types to not just lower costs but also minimize tradeoffs for the business. And whether the results are faster or slower payments, you may find payment optimization is a benefit for your company’s bottom line.
For more, see this infographic on optimizing corporate payments.