By Andrew Bartolini, Chief Research Officer, Ardent Partners
Inertia takes many forms in the enterprise. One of the most subtle is hidden in the idea of always having done a particular task a certain way. This is particularly true in the world of supplier (or B2B) payments where, particularly in the U.S. and Canada, paper checks have retained a significant percentage of vendor payments mainly because many enterprises have always paid their suppliers with checks and, more to the point, suppliers have never asked for anything else.
Times are changing, however, and new technologies have arisen in recent years to challenge the dominance of paper checks in North America and elsewhere. Accounts payable (AP) and finance teams have also started to pay closer attention to what methods they use to pay suppliers recently, which brings to light the financial and operational value that can be generated from the B2B payments process-in particular the value hidden in electronic payments (e-payments).
It is with this emerging business value of payments in mind that Ardent Partners recently published its annual examination of the B2B payments market – The State of B2B Payments 2015: Emerging Business Value – which, as it does each year, examines the B2B payment marketplace through a detailed investigation of the experience, performance, and perspectives, and intentions of more than 200 AP and finance leaders. The report also captures key performance benchmarks, analysis, and recommendations for AP/finance leaders looking to move their departments forward.
The Emerging Value in Electronic Payments
Paying suppliers with a paper check is, on average, labor and time intensive. Someone must print the check, verify the check, and then mail the check out in a stamped envelope. Once all that is done, the business must then rely on the postal system to deliver the check in a timely fashion. With a manual process, there is no way of knowing when (or if) the supplier received payment until it clears. Additionally, manual processes are more prone to human error. Think about how easy it is very easy to mistype a single digit on a check and miss the error before the check is sent. Additionally, when it relies upon a manual process payment process, an AP department is generally unable to communicate payment status to other departments for use in internal planning.
The value in e-payments lies in these very areas, which many organizations recognize as fully 63% of payments are made electronically, according to Ardent's 2015 study. Paying suppliers electronically allows for visibility into upcoming payments, which is data that other internal stakeholders can use for financial planning and cash management strategies. For example, knowing which supplier payments have been scheduled can help Treasury make more nuanced working capital decisions and craft a supplier payment strategy bolstered with data and analytics. On the procurement side, having visibility into supplier payments can help with supplier relationship management and payment terms can also be included as part of a contract negotiation.
E-payments also allow for greater precision and accuracy in paying suppliers. Because e-payments allow for precise scheduling of the payment, buyers no longer have to wonder when the supplier will receive the payment. Additionally, tight control over the payment amount and electronic cross-verification means that over- or under-paying an invoice is much less likely an occurrence than with a paper check. This does not mean underpayments or overpayments cannot happen, but rather that the electronic system can be set to "flag" these types of errors in order to act as a safeguard against them.
Why the Increased Adoption Now?
E-payments have always provided greater control over payment amounts and, in fact, the classic e-payment methods are not new technologies. Over the past 15 years, however, several developments in this market have created an environment where the business value of paying suppliers electronically is better understood. The reason for this is partly because more AP teams have removed some, if not all, paper from the front-end of the invoicing process. This has allowed AP and Finance leaders to place a greater focus on optimizing the tail-end of the workflow: supplier payments.
From a technology perspective, new e-payment solutions have arisen that are more aligned with how enterprises deploy and use software. Because these new solutions are more usable and accessible than what was available only a few years ago, more enterprises have the ability to pay their suppliers electronically than ever before.
On the capability side of the fence, new programs such as supply chain finance (SCF) and dynamic discounting have allowed for enterprises to craft more nuanced payment strategies. By its very nature, SCF allows for enterprises to pay suppliers early (through the use of third-party capital), while also giving themselves the option to pay invoices later. Dynamic discounting allows enterprises to capture early-payment discounts throughout the entire payment period, instead of only within the first 10 to 15 days, which can return capital to enterprise coffers while also allowing suppliers to receive money early.
Lastly, more enterprises have begun to understand that precise payment scheduling allows enterprises to make subtle choices on which suppliers should be paid when. Along with visibility into payments, this means that enterprises can more closely manage their days payable outstanding (DPO) by scheduling payments at a specific time instead of depending on the uncertainty of the "float" inherent in a paper check. These and other trends have, by and large, been the cause of the greater adoption of e-payments in the past few years.
The rise in e-payment adoption over the past several years has made clear that more enterprises understand the emerging business value of paying suppliers electronically. And this emerging value resulting from improved B2B payments has become too significant to ignore, especially considering the impact on reduced operational costs, improved working capital management, and overall visibility around financial liabilities.
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