Over the years, payments have evolved to include more than cash, coins, and checks. Now, consumers and businesses make purchases directly from their bank accounts with bill payment software, trusting digitization to send electronic payments safely and quickly. For most, paying easily without being shortchanged, not having to track purchases, and remitting faster than snail mail makes the electronic choice an easy one. But even with all those advantages, electronic payments are not as common in the B2B market.
In this guide we’ll uncover electronic payment systems, and what they mean for companies now and in the near FinTech future.
What is an Electronic Payment?
Unlike cash or paper checks, electronic payments are routed digitally from one bank account to another through payment systems. Rarely do they require manual labor, mailing or faxing to process.
As FinTech continues to innovate, accounts payable processes are becoming paper-free through automation, and companies are exploring electronic payments as part of that transformation. Before your finance department decides to stick with paper-based payment processes and their inherent risks, it’s important to understand the ins and outs.
Popular Electronic Payment Methods
There are dozens of systems to electronically send payments quickly and securely. Each has its pros and cons. A few of the most popular include:
- ACH (Automated Clearing House) – ACH transactions are electronically transferred from one verified bank account to another. ACH users are verified by the National Automated Clearing House (NACHA).
- VCC (Virtual Credit Card) – Rather than using a traditional credit card with an expiration date and security code, buyers can log in to their online banking portal to create a one-time use card.
- e-Wallet – Consumers add their credit card information to their mobile devices and pay with the click of a button at accepted businesses. Security information is entered during the initial set-up, so there’s no need to enter a pin or zip code. A popular provider is Apple Pay.
With advancements in the FinTech world, both companies and consumers are discovering new ways to pay quickly and safely. For your finance department, it’s all about choosing the best method to save time and money without sacrificing security and compliance.
The Preferred B2B Electronic Payment Method
Of all of the payment options for businesses to choose from, one of the most preferred electronic payment method is ACH. Companies trust ACH because of the quick and easy delivery. And most important, ACH comes with an extensive list of requirements to protect transactions.
How Do ACH Transactions Work?
ACH payments are managed by NACHA to ensure safe and speedy electronic payments, taking usually about one-to-two business days. ACH reduces the need to write and send printed checks. How does it work? Your staff enters the payment details, and the Originating Depository Financial Institution (ODFI) enters the information into a system on your behalf. This payment is then batch processed with others by the ACH operator. Next, the ACH transactions are sorted and sent to the Receiving Depository Financial Institution (RDFI). Finally, the RDFI transmits the payment to the vendor’s bank account on your behalf.
In 2017, 3.3 billion of ACH transactions came from the B2B market—up 5.6% from last year. That number is expected to continue to rise as more businesses adopt ACH Same-Day payments. This updated ACH option processes payments electronically within approximately one business day. With this new development, once a bank receives the funds, it usually only takes a few hours for the vendor to receive the payment directly into their bank account.
Electronic Payment Methods Over Checks?
Historically, checks were the number one method of payment for businesses. Finance departments wrote, signed, and mailed paper checks for a few reasons: cost savings, paper trails, or because their suppliers only accepted checks. Since the evolution of FinTech, more finance departments have begun to use electronic payment methods for those same reasons. They save time and money while reducing risks, including late payments and fraud. While both payment methods have the same goals in mind, organizations have to determine which is the better one to go with. Here are a few points to consider.
According to AFP, over the past decade, fraud risk for checks has spiked—rising from 60% in 2013 to 78% in 2017. There are a couple of reasons. Paper checks leave the perfect paper trail to replicate vital vendor and account information. On the other hand, when businesses send payments via electronic payment systems, there’s less risk. When pairing AP automation solutions and electronic payment systems, payments are controlled from start to finish. After information is electronically extracted from the invoice, it goes through your pre-determined approval process. After the invoice is approved, payments are disbursed. The finance team has broad visibility into the process, reducing the chances of unapproved signatures or invoices and, ultimately, payments.
When it comes to cost, checks are more expensive than many finance departments realize. It’s easy to overlook direct costs like stamps, envelopes, and paper—not to mention any additional internal costs. The average cost to process a single paper check is anywhere between $4 and $20. That doesn’t include the time staff spends preparing each check and the snail mail delivery time to get from your business to your vendor.
What is an Electronic Payment System?
An electronic payment system is a third-party SaaS or application used to electronically manage payments. Most electronic payment systems include a few key components:
- Functionality for businesses to efficiently manage and review payments.
- Easy data access and robust reporting of all payments.
- Ability to electronically update vendor details including payment methods and contact information.
- Automatic payment processing after invoice entry. Your AP staff shouldn’t have to worry about printouts, exports, or any additional manual steps to process the payment.
Electronic payment systems can easily process credit cards and e-checks; paper-based payments require additional manual labor. Enterprises that rely on Electronic Funds Transfers (EFTs) often also use electronic payment systems instead of paper-based processes to manage their payments without the paper-based risks and labor.
An electronic payment system creates a more smooth and efficient process to pay vendors quickly and safely. Your system should have the ability to do the heavy lifting of managing high volumes of payments without your AP staff worrying about errors or extra manual steps. Compared to a manual cycle of creating, signing, and mailing paper checks, the electronic payment system helps prevent duplicate payments, manual errors, and lost files that slow down the payment disbursement timeline.
Finance departments that implement electronic payment systems frequently pair them with AP automation solutions including e-Invoicing. A streamlined AP automation solution electronically handles everything from invoice extraction, purchase orders, and payments from start to finish without paper.
Online Bill Pay vs. Electronic Payment Software
Online bill pay is a bank system used to receive bills and make payments. Online bill pay users can use this same account to manage online banking and pay anyone in the U.S. If your vendor is not registered with your bill pay provider, a paper check is automatically mailed, leaving your vendor to wait and worry on the payment delivery. If your vendor is registered and accepts electronic methods of payment, the online bill pay system will automatically send the type of payment the vendor prefers.
Conversely, electronic payment systems handle many forms of EFT payment whether or not your vendor is registered with the bill pay provider. With electronic payment systems, as long as payments come from a verified bank account, the payment will be processed. When pairing electronic payment systems with AP automation solutions, vendor information is verified at the beginning to ensure payments are sent to the account the vendor confirms.
While both options take the heavy lifting off your finance department, find the better choice for your business by evaluating the advantages of each system. Generally, online bank bill pay systems have worked well with individual consumers. For larger companies or enterprise-level organizations, bill pay may not suffice given the number of vendors that are used and must be registered with the bank’s bill pay system to receive payments.
With AvidXchange, the payment process improves efficiency and accuracy with streamlined accounts payable workflows. The payment process also easily integrates into your business’ current accounting system. Every payment is automatically recorded to the general ledger without paper or exports.
Understanding Electronic Payment Processing Options
It may seem like electronic payments are instantly transferred from one bank account to another without any waiting, but different types of electronic payments have varying processing times.
- Real-Time Payments (RTP) are sent immediately to the authorized bank account—virtually no wait time. Think about P2P (Peer-to-Peer) e-Payment methods like Venmo, when the payment is transferred to the bank account immediately.
- Instant Electronic Payments can be initiated anytime. They often can take a few business days or hours, depending on when the payment was initiated. A good example is standard ACH debit or credit transactions.
In today’s world, both consumers and companies prefer faster payment processing. But before your finance department jumps on instant payments, it’s important to bear in mind that instant payments often include longer processing time—sometimes ranging from a few hours to a few business days. PaymentsJournal identifies a few factors to consider before your business decides to implement either payment method:
- The technology and operations necessary for implementation
- The consolidation of current systems to avoid inefficiency and fraud risks
- Any foreseeable compliance issues and regulations, including vendor communication and contractual agreements.
Looking to the Consumer Payments Market
For years now, consumers in the B2C market have trusted digital payments to quickly and securely pay for goods without carrying cash or a checkbook. In fact, a recent World Pay report points out that by 2021, 46% of global buyers will transition from credit cards and cash to e-Wallet in the e-commerce world. Consumers carry credit cards and mobile devices with confidence. If fraud or identity theft takes place, consumers trust banks to have extensive security measures and best practices, including the issuance of new cards at the first sign of fraud or verification of card transactions to unlock a card with suspicious payments. They even trust electronic payment systems to pay their friends with Peer-to-Peer (P2P) applications including Venmo and Cash App.
The B2B payment market falls behind for a few reasons. Companies fear that electronic payment methods won’t be well accepted by suppliers, so they stick to paper checks. They’re afraid implementing electronic payment systems will hurt healthy supplier relationships, but relying on paper checks limits control of the payment pipeline that electronic payment systems support.
Adding Up the Cost and Concerns of Electronic Payments
Getting Suppliers & Vendors On Board
It would seem that vendors would be more than ready to adopt a vendor payment system over checks. After all, RTPs transfer funds to their bank account immediately without any additional action or processing time. There’s less of a chance for late payments or account information falling into the wrong hands. But, according to the 2017 Paystream Electronic Payments Report, 46% of surveyed businesses still pay vendors via check.
The most important thing is to get vendors to join you on your journey. Showing the cost and time benefits is helpful, but it’s more advantageous to find out what your vendors need to know in order to feel comfortable accepting payments electronically. For some, it’s following the process of receiving their receivables, establishing security measures, or answering questions about technology and proprietary information needed on their behalf.
What is the True Cost of Electronic Payment Systems?
Electronic payments can seem costly to companies that primarily pay with paper checks. According to a recent study, the average cost to process a check is $3.00. Consider the hard materials used, including stamps, printed checks, and envelopes. Add the internal materials and costs associated with paying via check. It adds up. On the other hand, it costs between $0.26 and $0.50 per ACH credit processing, and card transactions cost $1.50.
But for some reason, businesses don’t quite buy the cost savings. The same article points out that two-thirds of finance leaders would adopt if they believed there was a clear ROI.
To determine how much your finance department could be saving with AP automation, use an ROI calculator to get results based on your monthly invoice volume, payments, and electronic payment processing volume. Regardless of the payment volume, your business is bound to see improved efficiency and accuracy without wasting time or money.
How Secure Are Electronic Payment Systems?
Questionable security is the biggest fear finance leaders face when they consider adopting electronic payment systems. According to a recent U.S. Bank survey, there’s very little trust in digital processes.
Trusting the Digital World with account information and dozens of confidential documents can be scary, but not as risky as using paper checks. With paper checks, finance departments have limited control over payment processing or delivery.
Finance executives often hear that electronic payment systems come with increased security, but very few understand how the security measures stack up against cash and checks. They come with encryption from the electronic payment system to pay without exposing account information during transactions. More specifically, here are a few methods and security measures:
- With Virtual Credit Cards (VCC), a one-time card is generated. This gives an extra layer of security over standard credit cards because the card number is never entered online. There’s less worry about the tangible card or its information falling into the wrong hands during a transaction.
- E-Wallets allow buyers to pay with their debit or credit cards via a mobile device. Once you add your credit card information to the mobile wallet, your account information is protected with tokenization, providing payment data information generated from the token, not the account information.
- Other payment methods, including ACH, transfer funds electronically from one verified bank account to another. There’s no need for paper, and each account has been verified by NACHA for security.
Paper lacks these heightened security measures. There’s the risk of duplicate, lost, or bounced checks. Thankfully, for those suppliers that insist on receiving paper checks, there’s an extra layer of security with AP automation. With AvidXchange Positive Pay, a fraud detection report is generated for every payment made via paper check. Without AP automation or electronic payment systems, finance departments are at a higher risk of fraud and data breach.
The Importance of PCI Compliance
Payment Card Industry Data Security Standard, otherwise known as PCI compliance, ensures protection for both your business and vendors. Compliance offers security with technology and payment processes to reduce risks during transactions or data storage. The PCI Security Standards Council sets goals to protect data, monitor networks, and enforce controls. For your company to be PCI-compliant when implementing your electronic payment system, there are a few points that both buyers and suppliers must remember when accepting or sending payments.
No card data should be stored on paper or computers. If your business is sticking to filing cabinets and shared computer folders, you should invest in an electronic payment system ASAP. All card data you store on a shared network should be encrypted.
Enforce compliance training. Requiring payment protection training teaches your staff members the importance of data security and identity theft risks. The PCI DSS Council has several resources to properly equip your finance department with up to date information and tools.
Meet with your IT department. Discuss firewalls, electronic payment system security, and password protection. Your IT department should be well aware of compliance risks and rewards electronic payment systems to provide you with helpful information specific to your business.
The New and Improved Payment Process
Lack of Payment Control
Finance departments fear that with electronic payment systems, they’ll spend a great deal of time collecting vendor payment information for each accepted method, which can take weeks. Finance executives imagine they are going to lose control after handing off all of their vendors’ information to an electronic payment system when, in actuality, they’ll have increased control.
With AP automation, once invoices have been approved, they’re sent to the AvidPay Network for payment where the team will work with your vendors to determine the preferred payment method on your behalf. Your finance department has 24/7 access to all historical payment data without searching through piles of paper or filing cabinets.
Making the Switch to an Electronic Payment System
Electronic payment systems offer big benefits to businesses. PayStream Advisors reports that the most appreciated advantages include convenience for employees and reduction in procure-to-pay cycle time. A few other major benefits of digital payment systems include:
- Cost-savings from more efficient operations
- Faster and more accurate payment processing
- Better data access and reporting
- Improved company and customer financial security.
When looking for an electronic payment system to handle all of your electronic or paper payments, there are a few must-haves:
- Easy adoption: It’s important to get your AP staff’s buy-in before implementing an automated payment solution. They’ll be using it nearly every day, so make every effort to understand their wish list. Look for an easy-to-use interface that includes the functionality that works best for them.
- Integration: When considering implementing an electronic payment system, there’s one critical point. Choose an electronic payment system that seamlessly integrates with your existing accounting or ERP system. Your payment success will rely on the smooth integration of the two without adding heavy lifting to your finance staff.
The future of your finance department: Consider your finance department’s future and present goals. There may be functionalities you need in the future. For example, evaluate the data and reporting interface. Make sure your provider is advancing with FinTech trends.
Interested in learning more about electronic payment software?
Chances are you have vendors with different payment methods. Some may request paper checks, while others prefer ACH or VCC. Regardless of the vendor’s preferred payment method, your staff shouldn’t have to do the heavy lifting that an automated payment solution can handle. With AvidXchange Pay, you can select payments from your ERP or accounting system to pay directly—instead of printing paper. Once you choose the payments, they are sent to the AvidXchange Pay application and routed to approvers for final review before payments are disbursed.
With AvidXchange, there’s no need to manually print, sign, and mail checks. All payments are debited from your business bank account and sent to your vendor’s verified account. There’s also no need to worry about keeping track of the multiple payment methods from suppliers. The AvidPay Network works directly with your vendors to stay up to date on accepted payment types, verifies that payments are received, and provides a supported vendor experience. In the end, your finance department will have the files associated with the vendor payment information for a simplified payment process.