Corporate e-payments can be made in a variety of ways. Traditionally, checks have been the most common method. Now businesses are increasingly moving to adopt more electronic payment methods, such as Automated Clearing House (ACH) transactions, wire transfers or commercial card payments.
Each of these four options — checks, ACH transactions, wire transfers and commercial card payments — involve several considerations, including payment float, process or effort, payment cost to the buyer, payment set-up, maintenance, payment risk, and details or accounting. Let’s look at a comparison of each consideration above in the table below.
Now let’s dive deeper into the details of each.
The National Automated Clearing House Association (NACHA) estimates the true cost of processing a paper check is about $8. The direct cost of writing a check includes expenses for supplies (paper, MICR ink, invoices, envelopes), postage, and bank charges for check processing. What this $8 cost doesn’t include are the following:
- The cost of an employee’s time to process the paper (load paper, stuff checks into envelopes, etc.).
- The prorated cost of a printer and printer ink (should also include power, maintenance).
- The cost of exception handling for lost checks (investigating, requesting a stop payment at the bank and re-issuing the check) and returned checks (investigating for the correct address and then additional mailing costs).
- The cost of fraud associated with stolen checks, which will include investigation, the cost of check cancellation (if any) and check re-issue.
Other information to be considered when paying by check:
- Payment effort is high, and payments need to be manually entered into the Accounts Payable system.
- Set-up for issuing checks is minimal — basically opening a business checking account and entering the payee information into your check writing software.
- Maintenance would require you to update any change in payee information, such as a change of address.
- There is a high risk associated with the check being intercepted and sensitive banking information being stolen.
- The only information normally received when the check is cashed is the check number and the amount of the check, and this information must be manually matched to the invoice.
ACH payments are usually handled automatically by your AP system. With ACH, there is no float. Even though ACH payments typically take a day or two to reach the vendor, the full amount must be available in your account the entire period in order to avoid overdraft charges. In addition, sending an ACH payment may cost up to $0.25 per transaction, depending on your ACH processor.
ACH payments require an initial set-up with a company that processes ACH payments and a payment set-up form for each client that wants to pay or be paid by ACH. Typically, the merchant set-up form is made available online through a portal and is completed in an enrollment process. Depending on the portal used, maintenance of the vendor information may be performed by you, or you may allow the vendor to update their own information.
ACH transactions use end-to-end encryption, helping to ensure their safety and confidentiality. Money transferred electronically passes through fewer hands than a paper check. Also, federal regulation and banking rules provide payers with protection regarding electronic payments.
With ACH, information is received to enable automatic matching, including customer account number, customer name, invoice number, invoice date, invoice gross amount, amount paid and purchase order.
While wires may be used for a one-time large payment or an international transaction, they are not generally used in corporate payment transactions. No standard exists for sending remittance information that allows efficient reconciliation and posting of an electronic payment once they are received. In addition, wires are more complex to set up and have a high cost, averaging $20–$35 per transaction to the buyer. Wire transfers happen in real time, so there is no float. And wire payments cannot be reversed or stopped.
Using a commercial card, such as a P-card or virtual card, provides the greatest float. The vendor is credited immediately, but just like with a consumer credit card, the charges are consolidated and become payable at the end of the billing period. Depending on where in the billing cycle the charge falls, you may have from 1–31 days before the end of the cycle. That means you have an average of 15 days’ float, and there is typically an additional 5-day grace period before the payment is actually due, yielding a 20-day average float.
There are additional benefits to using commercial cards:
- By issuing your authorized buyers with cards that have controlled spending limits, you can also eliminate the need — and therefore the processing costs — for many POs.
- Just as with ACH, commercial card payments can be handled automatically by your ERP, and set-up and maintenance are similar.
- Commercial cards use all the built-in fraud and security systems incorporated in the credit payment system, with virtual card payments being the safest form of transaction. With single-use virtual cards, a new virtual card number is generated for each transaction, and it can only be used one time and for no more than the amount specified. Additionally, since they are a one-time-use card, even if the card number is stolen, they can’t be used again.
- Charge-back rights are an additional benefit of using commercial cards. If the merchant fails to deliver on the services or products as specified, you have the right to dispute the charge and have the amount credited back to you. In the case of faulty merchandise, you have up to a year to make this claim.
Rather than incurring a cost per transaction that buyers have to pay, virtual cards actually pay your company a rebate via a rewards program, similar to your personal credit card. The rebate amount will vary based on your commercial card volume and the contract terms of your financial institution that issues the card.
To learn more about these payment options, including which one may be best for your organization, please contact us. If you’re interested, we’ll be glad to provide a complimentary assessment of your current payables process.