Most business owners and finance executives pay careful attention to when company bills are paid. For example, does a vendor offer a percentage discount for quick payment? Are the terms 30 days or 60 days? How do payments line up with revenues? These are all essential questions for smooth operations and to optimize working capital.
Increasingly, business owners are also focusing closely on how bills are paid. As on the consumer side — think of chip cards, PayPal, Apple Pay, and Facebook’s new method for paying friends — business payment technologies are evolving fast, creating new options for making and receiving business-to-business payments.
Business owners and accounts payable executives need to understand these new technologies because they have the potential to deliver significant financial benefits, including lower working capital needs and cost savings in payment processing.
From our vantage points in bank treasury services and cash management, we’d like to address some of the confusion about business payments, share some key trends, and explain further why business owners and managers should pay as much attention to the how as the when.
First, let’s start with a few key terms. The most important trends in business payments are occurring in the area of what’s referred to as credit cards in the consumer world. In business-to-business contexts, cards are more often referred to as “commercial cards” or “commercial card payments.”
Their use is increasing rapidly. A survey conducted by RPMG Research Corp. earlier this year of purchasing card payment administrators showed that average monthly purchases using payment cards has more than doubled from 2006 through last year. That’s consistent with our own observations, as we’ve seen triple-digit annual growth in payment card issuance among Wisconsin Bank & Trust business customers and among the other member banks that make up the Heartland Financial system.
These tremendous increases in payment card use are the result of several important factors, including:
Increasing levels of acceptance by vendors. The survey cited above found that a typical organization uses payment cards for 54 percent of “low value” purchases (under $2,500) and 34 percent of “moderate value” purchases ($2,501 to $10,000). As in the consumer world, business card payments are now commonplace. In fact, in the U.S. and Canada, payment card use has increased four times faster than overall gross domestic product since 2002. Use has particularly accelerated over the past five years. While it might at first seem counterintuitive that vendors would prefer card payments over paper check or ACH payments, vendors often do prefer card payments because these payments are guaranteed funds, arrive immediately, and reduce processing requirements.
Purchasing card integration with accounts payable software. Business card payments used to be mostly for ad hoc purchases; the classic example is an employee who needs a method of payment for travel. In the payments industry, these classic cards are called “purchasing cards.” Over time, their management has become more sophisticated, making them increasingly popular for businesses. Businesses can, for example, control the categories in which cardholders are allowed to make purchases, and data on purchases can be aggregated efficiently within accounts payable systems, making payment cards no longer an “extra” thing to track.
Even further accounts payable integration with e-payables or electronic accounts payables (EAP). While more insight into classic purchasing cards use is powerful, the even bigger revolution in card payments is formal integration into accounts payable software for purchases that don’t necessarily relate to a physical, plastic card. “E-payables” or “electronic accounts payables” (EAP) involves using randomly generated, one-time use 16-digit codes for single purchases. The purchases are therefore transacted over the card network, rather than by paper check or the ACH network for electronic transfers. Businesses often prefer to make payments over the card network because of security, disputability, longer payment terms, and the opportunity to receive discounts or earn rewards (not unlike rewards on consumer credit cards). Electronic accounts payable enable these benefits while staying entirely within the convenient context of a businesses’ accounts payable system — no fishing for a plastic card required.
Fraud protection. Card payments, including EAP as check-replacement technology, are fundamentally more secure than paying by check. Manual reconciling processes that have always been plagued by the potential for human errors are replaced by automated processes that still allow invoice matching and approval processes (again, benefits of integrating payment cards right into accounts payable systems). Also, most EAP solutions are cloud-based platforms that are more secure than most organizations can achieve for their own networks, while also enabling implementation without significant upfront investments in hardware and software. Transaction disputability — typically for up to 60 days — is another significant fraud protection aspect of card payments versus paper check or ACH.
In addition to these business-specific themes, there are also the general societal trends toward card payments as the most default means of payments. Remember when fast food restaurants started to accept credit card payments? That seemed like a big deal at the time, but no longer. For consumers, cards have become a go-to payment method for everything from hamburgers to furniture and even cars. For businesses, the same is happening now — and the trends are only accelerating.
The survey noted above found that, on average, businesses benefited from a 1.9% cost reduction when paying by card versus check. In our experience working with clients, we’ve seen again and again how significant those discounts can be to our clients’ bottom lines — especially when paired with additional benefits such as more time to pay (in some cases, up to 60 days).
In summary, how you pay — and how you receive payments — is of increasing importance for business owners and finance managers. It pays to be aware of the industry trends, customer expectations, and the fact that your longtime vendors, to whom you may still be writing checks out of habit, may already be accepting card payments. In our experience, as a rule of thumb, it’s usually smart to look to pay essentially all expenses of $2,500 and less with cards. Most vendors accept cards at that level, and the benefits to your business are likely to add up fast.
Steven Clark is treasury management banking officer and senior vice president at Wisconsin Bank & Trust, member FDIC. Wisconsin Bank & Trust is a member of the Heartland Financial USA Inc. family of banks, at which Greg Banks is vice president of Commercial Payment Solutions.