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ACH: The Paperless Payment Solution for Today
It is not every day that organizations can cut the costs of a
key overhead activity to a mere fraction, and at the same
time achieve significant gains in its efficiency. Nevertheless,
that is exactly the opportunity that electronic payments
present to accounts payable departments today.
Historically, the payment process has been personnel and
resource-intensive, involving the use of expensive preprinted
forms, with production taking place in the IT department,
followed by several stages of post-process prior to mailing. Cost per payment has hovered around $2.00, and even
more when all background overhead is considered.
The arrival of MICR-laser check printing on blank security
check stock eliminated the need for printing, inventory and
handling of forms as well as virtually all of the postprocessing.
In most cases, it also shifted check production
scheduling and control to accounts payable. Costs usually
dropped by some 75 percent.
Electronic payments using the banking industry’s
Automated Clearing House network (ACH) reduce
disbursement costs even further, eliminating the need for
paper checks and introducing electronic distribution
procedures for advice of deposit (payroll) and remittance
advice (accounts payable) information. The transfer of funds
directly from the corporate account to the payee account
minimizes personnel requirements, accelerates distribution
and further enhances security.
MICR-laser check processing had already impacted the
check fraud liability problem significantly by reducing the risk
of form theft, check duplication and alteration. By dispensing
with paper documents, using fewer people, and reducing the
points of vulnerability, electronic payments provide still
greater protection for the corporate treasury.
PAYROLL LED THE WAY
Electronic payments have proven themselves in payroll,
where an estimated 71 percent of employees opt to be
paid by direct deposit and who express a 97 percent
satisfaction level. (Source: NACHA, the Electronic
Payments Association) All of this being true, why is it that
there is still resistance to the implementation of ACH
payment processes for accounts payable?
Inertia is certainly one reason -- the reluctance to change
something that already works. But there are other identifiable
factors as well. One is the reluctance of vendors to divulge
banking information to outside parties. Another is the need to
change the way a company communicates with its vendors.
Still another is confusion over just how to bring vendors on
board for the ACH payment process. These obstacles
persist, despite the fact that significant advantages result on
both ends of the transaction.
TIDE TURNING
There is a growing body of evidence that the tide is turning.
The Federal Reserve Bank reports that in 2000 there were a
total of 72.5 billion non-cash payments. The number rose to
81.2 billion in 2003, representing a compounded annual
growth rate of 3.8 percent. The figures include checks, credit
cards, ACH, offline debits, online debits and electronic
benefit transfers. (For this article we will focus only on the
trends in checks and ACH payments.)
In 2000, 41.9 billion checks were issued, compared with 36.7
billion in 2003, a compounded annual rate of decline of -4.3
percent. During the same period, ACH payments grew from
6.2 billion to 9.1 billion, a 13.4 percent compounded annual
growth rate. Significantly, while total payments continued to
increase, the ratio of checks to ACH payments continued to
favor ACH and the trend continues. According to current
NACHA reports, there were nearly 14 billion ACH
payments in 2005, an increase of 16.2 percent over 2004.
ROOM FOR GROWTH
Payments by ACH thus have more than doubled in only the
past five years, and the association projects an increase to
well over 15 billion in 2006. Nevertheless, ACH payments
still represent less than 17 percent of all non-cash payments,
assuming that the 3.8 percent compounded annual growth
rate holds.
The benefits that accrue from using ACH for the accounts
payable process suggest that organizations that continue
to delay, cost themselves money needlessly. But is it
realistic that companies will shift from checks to all-electronic
payment environments in a single jump?
Probably not. Fortunately, it is possible to implement highly
automated, blended payment processing solutions that
accommodate MICR-laser check processing and ACH
disbursements within the same payment run.
- Users can program vendor preferences for type of
payment and mode of advice/notification distribution
right into the payment run.
- The intelligent payment data stream diverts check
data to a MICR laser printer and routes electronic
payments to the ACH network.
- Checks go into the mail with the remittance advice
printed right along with the check.
- ACH payments go directly into payee accounts, with
notification of deposit delivered via automated email
or fax, or by posting to a secure website.
- The electronic notifications indicate when the
payment was issued, when the funds will arrive in
the respective bank account, and what invoices are
covered by the payment.
HOW TO SIGN UP VENDORS
Setting up ACH consists primarily of coordinating data flow
with the payee’s bank. Once that is accomplished, the
payment distribution process is automatic and seamless.
From there, it is a matter of getting vendors on board.
Often, companies attempt to do this by telephone and not
unusually, they encounter some resistance for the reasons
mentioned above. We suggest using a vendor self registration
process that allows vendors to control and
access their own information securely within the payer’s
software, and limiting access to that information to one or
two responsible individuals who are clearly identified and
who can access it only with payee permission. Self registration
can be executed remotely and automatically via
a secure, web-based application, usually initiated on a tiered
basis, with high-volume vendors in the first tier, medium in
the second, and so on.
SECURING THE TRANSACTIONS
Security is always a critical issue with any disbursement
system. It is even more critical when dealing with electronic
payments. A solid disbursement solution should include
advanced security features that cover both traditional issues
related to paper checks and the newer challenges that are
unique to electronic payments. A robust security setup
should establish multiple safeguard parameters such as
multi-level passwords and task separation as well as
include features for real-time monitoring of critical events
like ACH creation, check printing, and Positive Pay creation.
It should also allow key users to be notified via email when
any of these processes takes place as well as provide a
detailed listing/audits of all payments affected by the
process.
ACH is demonstrably the payment solution for our times,
benefiting all participants with greater economy, efficiency,
security and control: it represents one of those rare win-win
situations that keep businesses forging ahead. The key here
is to find the solution that can make the transition easy while
providing the right levels of automation, efficiency and
controls.
by Jim Scott and Sam Mikhail
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