Electronic Payments – Simplicity Creates Chaos
The emergence of electronic payments in B2B wholesale payments was promised to be the panacea for the traditional pains of cash application. After all, electronic payment data doesn’t need to be keyed, eliminating labor costs and mistakes associated with converting paper remittance data to electronic data.
In the last 20 years, the volume of electronic payments has grown, but not to its expected volume. Current estimates indicate that only 30 percent of all payments are electronic, leaving many receivables professionals confused.
Why the slow adoption rate?
The reality: payers are going to pay how they want to. And often corporations will accept payments in any form, as long as they are getting paid.
In a traditional paper-based environment, it’s common for a transaction to contain a check and some form of remittance advice (a list of items to be paid). The data from this advice, once received in a mail room or at a bank lockbox, is matched to outstanding receivables in the AR system. This indicates which items to close out. Typically, electronic payments only travel with electronic remittances 10 percent of the time. The other 90 percent of e-payments are made with “decoupled remittances,” or remittances that arrive separately. So, before or after the e-payment is deposited, the payer will send an e-mail to a vendor containing the decoupled remittance advice, which often varies in file type (e.g. .docx, .xls, .PDF).
Even with different methods of payment receipt, the basic cash application principles still apply: the money is received; the open receivables are closed out. These fundamentals won’t change anytime soon.
Despite the expectation that electronic payment “standards” would streamline the cash application process, the opposite has occurred. The Corporate Trade Exchange format (CTX) and National Automated Clearing House Association ACH corporate payment format (CCD+) might be considered “standards”, but both of these formats require a bank fee for included remittance information. Payers have no incentive to use CTX and CCD+ since sending an email containing remittance information is a free alternative.
Thus, the “standard” seems to be “make it up as you go”. Unfortunately, the burden of matching these electronic payments to their decoupled remittances has fallen to cash application teams. This tedious endeavor adds significant cost to the process by additional staff to get the job done. Why would a company encourage its clients to use an electronic payment method with prohibitive costs?
To address this issue, automation technology bypasses the need for further “standards” by staying agnostic to payment type, ERP, and lockbox. As payers continue to send decoupled remittances, the system matches them to their appropriate payments, freeing up cash application staff to take on more important tasks.