Dispelling The Myths Surrounding Electronic Payments

Over the past few years, organisations across the board have streamlined processes and gained significant cost efficiencies. They have also embraced electronic payments in their many guises, from Bacs through Faster Payments to Direct Debits.

Yet in the vast majority of organisations, those tasked with payroll, managing expenses, paying suppliers and collecting money from customers are operating separately and often using very different payment processes.

This lack of a consolidated, strategic approach to payments is undermining efficiency and adding unnecessary cost. And while many organisations cite security and business risk as the reasons for continued reliance on third party payment methods – from payroll bureaux to banks – these arguments are fundamentally flawed.

This article outlines the benefits associated with a single, consolidated payments method.

Payment Inefficiency

Over the past decade virtually every business, from multi-national to independent garage, has embraced electronic payments. Or have they? While there are 2 million registered companies, just 25,000 are actually submitting direct to Bacs. The rest still endure an inefficient mix of bank-led electronic payment methods; such as same-day payments, internet banking, bank-hosted Bacs solutions, and incredibly manual methods such as cash or cheques.

According to the latest figures from the Payments Council, 65% of private and public sector businesses had used a cheque in the month prior to the research, with each writing around 13 cheques a month, and an average £1,677 cheque value. Given that cheques were only reprieved from abolition as a result of a concern over the vulnerable members of society, including the elderly, who still rely on this payment method, the continued corporate use of this expensive and inefficient approach is extraordinary.

From an efficiency perspective, the good news is that 87% of the population now receive their pay directly into their bank account via Bacs Direct Credit. However, few of these payments are made from the organisation directly to Bacs. Instead, the majority of businesses still incur the additional costs associated with a third party payment bureau service or bank – which then processes the payment via Bacs – rather than handling the payment directly.

And this is just the tip of the electronic payment inefficiency iceberg. A close look at most companies will reveal an extraordinary lack of consolidation between payments. From the insurance company that collects from customers each month via Direct Debit yet pays out claims via cheque, to one of the leading UK supermarkets that is still paying over 50% of its suppliers by cheque, payment methods are fragmented, often inefficient and provide limited management visibility over liquidity.

Dispelling Myths – Part One

Given that most organisations have embraced electronic payment methods in at least one area of the business, why are they not leveraging a single payment solution to handle all payroll, supplier payments and collections from customers? There are clear opportunities for streamlining and automating processes providing the Financial Director with a single view of all payment activity to improve insight into liquidity, and for reducing costs by centralising processes with a single payments software solution. So what is holding businesses back from making this logical?

It is time to dispel some myths. One of the reasons organisations cite for using a third party payroll service is confidentiality: the company does not want internal payroll clerks knowing the annual salaries of employees. Similarly, many companies perceive that it is not secure to use their payroll payments solution for supplier payments for fear of purchase ledger clerks gaining access to salary information. But this is not the case, as direct Bacs solutions make it possible to manage users access to a limited set of information as appropriate (for one person – the Financial Director, for example – to have access to that sensitive data).

In contrast, by outsourcing your payroll, every member of the payroll bureau team will have access to the salary information of the customer’s staff, which hardly provides the confidentiality required. However, in keeping payroll in-house, the inherent user security within the solution, together with the use of encryption and Public Key Infrastructure for direct payment submissions, actually delivers more security than any third party solution.

Dispelling Myths – Part Two

The second myth is that making electronic payments via the bank, whether for supplier payments or payroll, is the same as paying via Bacs or indeed more direct. It is not. Adding a third party to the process adds significant cost, reduces control and extends the process. Furthermore, banks undertake account validation at the time of making the payment, rather than when entering account details, raising the risk of compromising the payment to either a new employee or critical new supplier and adding unnecessary steps in the process when errors are found.

From a cost perspective, once an organisation attains a certain payment volume – typically 200 payment transactions a month or more than one payment run – the bank charges become unjustifiable and far exceed the cost of taking the direct Bacs route. In addition to reducing bank transaction costs, Bacs provides a single line on the bank statement rather than individual payment transactions, streamlining the reconciliation process. As a result, for any organisation with this volume of payments, taking the payments process in-house and making payments direct to Bacs will produce a return on investment (ROI) in less than a year.

Dispelling Myths – Part Three

The third myth relates to risk. There is a perception across organisations that relying on the bank to make payments is the lowest risk approach. Putting to one side for a moment the business risk associated with the cost of bank processed payments, organisations need to consider the level of dependency associated with this approach. What happens if the quality and reliability of the bank service is deemed inadequate?

To change banks the organisation will need to change their entire payments system, introduce new processes, adopt new file formats and retrain staff – a somewhat risky, time-consuming and costly process. Taking control of payments internally removes the reliance upon a single bank by making the banking relationship independent of the payment process. Far less risky.

Consolidation and Visibility

Given the continued need to reduce costs, improve efficiency and impose strict financial control, it is clearly time for organisations to consider how connected their current payments processes are. Consolidating disparate payment processes into a single system can transform costs, provide the Finance Director with a far better view of liquidity and deliver better control over the management of Bacs limits with a single source of information.

For any company still using a mix of payment methods, from payroll bureaux to internet banking and direct Bacs, it is time to step back and consider the role a single, consolidated payment solution could play in reducing costs and improving efficiency.

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Adrian Stafford-Jones has been involved in the payments industry for over 25 years, even helping to influence the design of the Bacstel-IP system. Adrian founded Albany Software in 1989 capitalising on a niche in the Payments industry namely Bacs payment software. Adrian has since forged close relationships with all the major banks and is a respected member of the European Banking Association, the European Software Association, the Payments Council and the Institute of Directors. He is frequently called upon for his expert knowledge of the payments industry and most recently for his expertise in both Faster Payments and SEPA.