ACH Transactions to Top Checks As Top Form of B2B Payment by 2020

ACH Transactions to Top Checks as Top Form of B2B Payment by 2020

Robert Unger, Senior Director, NACHA ([email protected])

Agenda

• Study background-respondent profiles • Payment preferences • Trends • Differentiators and best practices

About

• Credit Research Foundation – The Credit Research Foundation is an independent non-profit, consisting of a dynamic community of like-minded senior/executive business professionals with a vested interest in maintaining a competitive advantage in the disciplines and processes related to credit and accounts receivable management. Membership contains a cross section of industry segments and representation from companies within the Fortune 1500.

• NACHA-The Electronic Payments Association – As a not-for-profit association, NACHA also represents nearly 10,000 financial institutions via 11 Regional Payments Associations and Direct Membership. Through the Payments Innovation Alliance, accreditation programs, conferences and educational offerings, NACHA unites payments systems stakeholders, fostering dialogue and strengthening the ACH Network together.

• The Credit Research Foundation (CRF) surveyed its membership on payment-to-cash trends, and related opportunities and issues to: – Define leading practices – Share results from like-minded professionals

• CRF collaborated with NACHA-The Electronic Payments Association on the survey design and analysis.

• CRF invited their membership to participate in the online survey, and 130 responded.

Respondent Profile

• U.S. based - primarily

• Annual sales revenue – 32%: $1 billion or more – 40%: $100 million-$1 billion

• Primary industry – 43% manufacturing – 9% consumer products – 6% food, beverage, grocery – 34% “other” (distribution, construction-related)

Respondent Number of Customers

How many active customers do you have?

Greather than 20,000 10.0%

10,001 - 20,000 6.9%

5,001 - 10,000 10.0%

2,501 - 5,000 19.2%

1,001 - 2,500 23.8%

Less than 1,000 30.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Size of Customers

What percent of your customers are:

Small (customer has less than $10 million in annual 47 revenue)

Medium (customer has $10 million - $99 million in 22 annual revenue)

Large (customer has $100 million - $500 million in 15 annual revenue)

Mega (customer has more than $500 million in annual 16 revenue)

0 5 10 15 20 25 30 35 40 45 50 Size of Customers

Annual Volume of Payments

How many total payments do you receive annually?

100,001 and 23.8% above

50,001 - 100,000 14.6%

10,001- 50,000 32.3%

Less than 10,000 29.2%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Agenda

• Study background-respondent profiles • Payment preferences • Trends • Differentiators and best practices

Payment Method Decision

Who, or what determines which payment types and remittance advice methods you receive from customers?

Customer Decides 47.2

Payment Method is Negotiated 38.4

Your Company Decides 9.6

Other 4.8

0 5 10 15 20 25 30 35 40 45 50 Payment Method Decision

Payment Type Preference

What is your preferred method of receiving payments from your customers?

ACH credit Respondents overwhelmingly prefer to have Check customers pay them via ACH credit

Wire

ACH debit

Credit card

Cash

Debit card

0 10 20 30 40 50 60 70 80 Payment Type Preference

© 2017 NACHA — The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. This material is not intended to provide any warranties or legal advice and is intended for educational purposes only. 12 Reasons for Payment Preference – Sample Verbatims • ACH credit – Supports automation and cash application • ACH with CTX allows for automation with SAP, ACH is lowest cost payment method; Bank to bank transactions and we get an EDI remittance. Very clean. • We have the process automated with the bank and remittance to auto apply to accounts within SAP. It's an efficiant process. • ACH payments offer us a high degree of automation within our cash application system; Auto application • Less manual handling, fewer duplicate payments or unearned credits taken. – Speed, cost and cash flow • least expensive form; ACH with detail enable better match rate • Better for cash flow; Helps Cash Flow/DSO; Lowers DSO -low cost for customers • Less time delay by mail and reduced credit card fees • Immediate access to funds, no processing fees • Cost - bank fees are much less for ACH than check or wire; cheapest, fastest, easiest • Cash maximization; We can anticipate cash and apply accordingly • Quicker payment, less fees than credit cards • Faster, predictable, use of funds, cheaper • No delay in receipt due to mail time and no fees which come with credit card payments • self-service events by customer at no cost to our organization – Certainty • Knowing that the payments will arrive at a specific date is great for our Treasury Department. • no worries of insufficent funds © 2017 NACHA — The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. This material is not intended to provide any warranties or legal advice and is intended for educational purposes only. 13 Reasons for Payment Preference – Sample Verbatims

• ACH Debit – Payments are on time, for the correct amount, less manpower, fewer errors &/or questions about where to apply, etc – We know when and how much will be paid on a specific day - delinquency drops – cheapest for us to process – Less fraud and delinquency. – fewer late payments • Check – ACH is more work – Auto processing through lockbox – Have not been able to change behavior yet. – Checks carry the least cost structure and come with remittances. – Less credit card fees – Our lockbox is automated, ACH are not – because customers don't always send payment details with ACH or wires. – little to no cost on our end...CC, ACH, all electronic forms come with fees.

• Credit card – Better preference for International payments – Although Credit cards are higher transaction costs, the reduced risks and process efficiency tip the A/R process in their favor. – faster payment – Less work on our part • Wire – Secure and quick – Same day receipt – Secure and funds can't be clawed back.

Preferred Channel to Receive Remittance Advice

What is your preferred channel for receiving remittance advices from customers?

Bank/vendor/network file sent to you 55.6

Email 28.6 Best opportunity for Mail 6.3 automation

Customer's Portal (you have to access) 5.6

Other 4 At least 35% of respondents prefer channel that is difficult to automate. Fax 0

Telephone 0

0 10 20 30 40 50 60 Preferred Channel to Receive Remittance Advice

• Bank/vendor/network file transmission to you (ACH remittance and lockbox) – Themes: payments plus information = automation and accuracy • Receiving the remittance advices along with the payment is more efficient. It does not require us to contact anyone or go to another website, etc. • For electronic payments we want to see the remittance info with the payment (in the correct format); payment and details all together • Payments can be uploaded quickly with high level of accuracy. • Format consistency • Auto upload enables touchless application; limits the number of human errors in posting cash; less room for interpretation of data errors (human error); most likely to auto cash without errors

• Email – Themes: simplicity, speed and convenience • Simpler and more direct; simple and accessible by all appropriate staff (we have an alias setup for "remittances" ) • Email is quick; Quick and easily accessible • Usually the remittance precedes the wire, so you know it's coming • We get information early and can ID problems before payment is received. • Would rather get email than have to go to multiple portals to get payment information which is time consuming.

– And – method to address internal technology deficiencies • No automatic cash application software in place • we do not do auto cash application • Until our software is able to handle-this is easier

• Mail – We want the remittance to accompany the check – Most payments are via mail now. Eventually email or portal – A majority of payments come via mail with advices

• Accessing Customer’s Online Portal – Easiest methodology, especially with big-box retailers – Ease of receipt, speed, cost to retrieve – Less manual handling, fewer duplicate payments or unearned credits taken. – Downloads can be automated and the web address would rarely change

Preferred Format for Receiving Remittance Advice

What is your preferred format for receiving remittance advices from customers?

EDI 37.6

PDF 26.5 Best opportunity for automation Excel Spreadsheet 17.1

At least 46% of respondents BAI/BAI2 11.1 prefer format that is difficult to automate. Other 6

Free Form Text 1.7 Best opportunity for automation ISO 20022 0

0 5 10 15 20 25 30 35 40 Preferred Format for Receiving Remittance Advice

Agenda

• Study background-respondent profiles • Payment preferences • Trends • Differentiators and best practices

Payments Mix: 2014 – 2017 - 2020

Payment Mix Check, ACH Credit, ACH Debit, Credit Card, Debit Card, Wire, Cash 70%

60%

50%

40%

30%

20%

10%

0% Check ACH credit ACH debit Credit card Debit card Wire Cash 2014 2017 2020

Causes for Shift in Payment Mix

Cost Customer Push 13% 23%

Card/Bank Push Tech 7% Improvement 28%

Internal Push 29%

• Internal Push – Marketing to customers to pay online or by ACH. Calling. – Worked with sales to force all customers to pay via wire/ACH. – We moved more of our customers to ACH intentionally. – Educating customers about wire and ACH transactions. – We contacted our customers directly and requested they move. – we requested ACH payment in our contracts – Our standard process for new customers is ACH – CS & Sales being able to provide a discount for early electronic payment & pushing for electronic payment • Tech Improvement – We just began using a payment portal to allow our customers to pay via ACH online. – Security, ease of transmission, cost savings – Ease of paying online – Changes within ERP systems, improvements – Automation – Ease of process – faster processing, less paper – invested in web portal

• Customer Push – As more of our larger customers go paperless, they find the simplicity of …ACH for payment more expedient, and the ideal tool for cutting costs, regarding checks, interest expense, etc. – Customer reducing costs moving to E-payments – More customers are paying via ACH – Customers want to pay via ACH – AP dept are finally understanding the cost savings of ACH vs check and they are coming to us to convert to ACH vs us asking them. – more people opting to use credit cards- rebates and incentives and cash flow – More customers want to use credit cards for points. – Customers are increasing credit card payments and ACH , which gives them better control of funds. Less past due and able to take advantage of any early pay discounts. • Cost – Cash maximization initiative – 1. working capital management. 2. shrinking headcount demands automation of payments as well as cash application. – Reduced cost of processing an ACH vs Check – Customer cash flow – Taking advantage of cash discounts, reducing check processing costs

• Card/Bank Push – we experienced an increase in credit card transactions, pushed by card issuing financial institutions – Customers are pushing for credit card payments – Credit Card Companies pushing reward programs – Banks marketing of credit card methods of payment. Customers expanding their cash flow with this method. • Other mentions – specifically about checks – Increase in fraud with checks – Concerns about security with checks and mail delivery slowing. – Fraud and higher costs to use checks.

Percentage Auto-Posting of Remittance Advices

What percentage of your payment remittance advices flow through your system and are posted automatically, such that cash can be applied, and invoices can be closed, without any manual intervention?

81-100% 19.1 91-100% posting = 5.6%

61-80% 13.5

41-60% 11.9

21-40% 4.8 55.6% have less than 40% 0-20% 50.8 auto post

0 10 20 30 40 50 60 Percentage Auto-Posting of Remittance Advices

Use of Incentives to Encourage ACH Payments

Do you offer any incentives in the form of payment discounts or extended payment terms to specifically encourage customers to use ACH payments?

Yes 9%

No 91%

Agenda

• Study background-respondent profiles • Payment preferences • Trends • Differentiators and best practices

Barriers to ACH Adoption

Of the following statements, which represent barriers to ACH adoption?

My customers are not capable of sending ACH… 44.6 My customers are capable of sending ACH… 33.9 My company has not invested in the proper… 21.4 The ACH system does not allow for effective… 17.9 Other 17 My company is unable to accept and process… 8 The economics associated with accepting ACH… 5.4 My bank is unable to accept, process and provide… 4.5 0 5 10 15 20 25 30 35 40 45 50 Barriers to ACH Adoption

• Stop blaming the “bad” customers! • Companies have clearly demonstrated success in increasing ACH through customer outreach and investment in technology.

• Assumption: STP (aka auto cash; hit rate; cash application) is an indicator of payment operation/order- to-cash efficiency – Key to bridging old age (rekeying/data massaging) with golden age (machine-to-machine) data exchange – What characteristics distinguish and differentiate between organizations with high STP vs organizations with low STP?

• The 7 “habits” of organizations with high STP – Compared organizations with 81%+ hit rate vs organizations with 0-20% hit rate

Who, or what determines which payment types and remittance advice methods you receive from customers?

35% Customer Decides 49%

50% Payment Method is Negotiated 37%

10% Your Company Decides 11%

5% Other 3%

0% 10% 20% 30% 40% 50% 60% High STP Low STP

Do you track payment cost metrics? Do you track payment cost metrics? (High STP Orgs) (Low STP Orgs)

Yes 11%

Yes 35%

No 65%

No 89%

* Still – kind of surprising overall result is low

High STP Organizations vs Low STP Organizations: 2017 Payment Mix Check, ACH Credit, ACH Debit, Credit Card, Debit Card, Wire, Cash 60%

50%

High STP orgs already have more ACH payments than checks 40% 47% ACH vs 32% check; low STP orgs have 24% ACH vs 53% check

30%

20%

10%

0% Check ACH credit ACH debit Credit card Debit card Wire Cash 2017 - High STP 2017 Low STP

High STP Organizations vs Low STP Organizations: 2020 Payment Mix Check, ACH Credit, ACH Debit, Credit Card, Debit Card, Wire, Cash 60%

50% High STP Orgs anticipating even more ACH payments (and less card) 40% 57.25% ACH vs 22.75% check in 2020

30%

20%

10%

0% Check ACH credit ACH debit Credit card Debit card Wire Cash 2020 - High STP 2020 - Low STP

When customers send payments, how often do you receive remittance advice (information beyond payment amount, e.g., invoices being paid, discounts applied, etc.) in the following methods?

44% Bank/Vendor File 22%

19% Customer Portal 9%

27% Email 51%

8% Mail 16%

1% Phone 1%

0% Fax 1%

1% Other 1%

0% 10% 20% 30% 40% 50% 60% High STP Low STP

How often do you receive remittance advices in the following formats?

37% EDI 18%

27% Excel 10%

21% BAI/2 3%

9% PDF 46%

2% Free From Text 13%

4% Other 10%

0% ISO 20022 0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% High STP Low STP

How satisfied are you with respect to company How satisfied are you with respect to company attitude toward adoption of ACH? attitude toward adoption of ACH? (High STP Orgs) (Low STP Orgs) Not satisfied 0%

Somewhat satisfied Not satisfied 16% Very satisfied 14% Very satisfied 27% 37% Somewhat satisfied Satisfied 39% Satisfied 20% 47%