In our newest Treasury Services Expert Conversation, Paul Simons, Managing Director, BNY Mellon Treasury Services, Supply Chain Product Management Group, discussed the progress made by Corporate Accounts Payable functions in creating value for their organizations, and what remains for them to do.
People have called for Accounts Payable to become a source of value for quite some time. But its progress seems to have stalled. What has been achieved so far?
Simons: Corporate Accounts Payable functions in many organizations, in partnership with Procurement and Treasury, have made proactive strides towards pursuing and capturing attractive discounts and rebates from suppliers. Their efforts have transformed the role of Accounts Payable (AP). Card associations (i.e., Visa, Mastercard, and Amex) and technology companies such as SAP Ariba have all been championing this transformation, and have helped drive impressive results.
However, most of the low hanging fruit has now been picked, leaving more than 80% of AP spend essentially untouched. Best in class card penetration of spend is in the 12%-14% range and has been growing more slowly, because it is primarily intended for smaller suppliers and smaller ticket purchases. Dynamic discounting may pick up another few percent. But that still leaves large suppliers and larger ticket items out of the mix.
What remains to be done?
Simons: The next step would be to take the lessons learned with cards and dynamic discounting and apply them to a payment method that is friendlier and more amenable to suppliers. Virtual purchasing cards are very costly to suppliers, offering often north of a 2% discount. Beyond that, processing payments requires a lot of manual intervention and shows higher error rates versus other payment types. One of the card associations has declared “supplier fatigue” as some suppliers have begun pushing back on this model. Another approach is needed to capture more value from that large portion of untouched spend.
As a result, we’ve seen dramatic growth of payment networks in recent years. Like the card associations, these networks offer immediate critical mass, but they add ACH with a lower discount as a payment type as well, which is much friendlier to suppliers. They offer other benefits as well, such as the ability to map rich remittance details to the supplier’s internal data specifications, which lowers exceptions and speeds payment reconciliations.
What are some examples?
Simons: Healthcare and higher education both offer great examples.
Many hospital systems and other healthcare providers been very successful with virtual cards, but they have a lot of room for success beyond cards. They also have faced tough cost pressures in recent years, which makes them eager for new sources of value. In addition, a high level of M&A activity has left many newly combined organizations with complex or redundant processes.
Outsourcing to a payment network shifts most of the heavy lifting outside of their organizations. They benefit by migrating more payments from paper to electronic – mostly ACH but also some virtual cards. They also earn some good rebates on the ACH spend, which is the new and exciting part of this value creation. Many of our healthcare clients in the U.S have come to us with the same challenges, and now are enjoying these benefits.
In higher education, we have a university-system client who has become increasingly sensitive to the risk of check and ACH payment fraud, based on incidents that have taken place at other institutions. Migrating to a payment network means that they no longer need to maintain supplier bank account information internally in order to push out ACH payments. The payment network fully vets and securely maintains supplier bank information on their behalf, essentially eliminating payment fraud.
How does BNY Mellon help its clients unlock this hidden value in Accounts Payable?
Simons: We offer our clients what we believe is the industry’s leading payment network, BNY Mellon with Paymode-X®. This network provides access to over 385,000 suppliers. It processed over $200 billion in payments in 2017. We take a vendor file from our clients and map it against this network to find immediate matches, which accelerates the time to value. We work with our clients to find the right adoption messaging to their suppliers and we can support different messages to different groups of suppliers, from more strategic to more commoditized. The net result is value creation that can include or complement a virtual card program, but goes well beyond that. Fraud risk is reduced, suppliers are more satisfied, and the value created is more likely to be sustained.
How will the evolution of payments evolution help drive further value?
Simons: The story is still being written, but there is a lot of excitement around tokenized payments and Real Time Payments, the first new payment rail in decades. We’ve also seen major updates to traditional payment rails, namely Same Day ACH and SWIFT gpi. The use cases for these payment types vary, but collectively they offer real value in addressing a number of traditional payment challenges, such as timeliness, convenience, transparency, and finality. It’s a really exciting time in the payments space for both BNY Mellon and our clients. And as the first bank to execute a Real Time Payment transaction last November, we’re committed to ensuring that our clients have every opportunity to take advantage of all of the new ways that these payment types can create value, for AP functions and beyond.