Key Issues Involved in Building a Seamless Payment Environment

There are a lot of exciting developments in payment technology. Buy Now Pay Later (BNPL) provides sellers the ability to eliminate late payment risk while offering longer terms to customers. Blockchain technology and cryptocurrencies are being used to simplify, shorten, and reduce the fees involved in the settlement process for cross-border payments. The advent of Real-Time Payments (RTP) is opening up a host of use cases for B2B enterprises including accelerated order release, reduced uncertainty from payment delays, and more precise working capital management.

To realize these benefits, payment technology most provide a seamless interface between the seller, the buyer, and the financial institution. Where advances in electronic payments have fallen short, the problems typically relate to one of the partners in this ecosystem. Credit managers are well aware of the disconnects related to customer AP portals, which often cause credit personnel to assume the role of data entry operator in order to submit invoice details into the portal. Likewise, credit departments often find it a challenge to onboard customer AP departments to their Electronic Invoice Presentment and Payment (EIPP) solutions self-service features.

At the core, this is a communication problem, both on a human level and from a data transfer perspective. The solution involves a more holistic approach to the implementation of new payment technologies. In the past, too much emphasis has been given to technology without enough consideration for people and processes.

Expect Fraud Attempts

Before considering any type of payment transformation, it is vital that the impact of fraud be acknowledged. Financial institutions have perfected check security over many years using watermarks, holograms, chemicals that react when a check is altered, “void” showing up when a check is copied, micro-printing, positive pay, and so forth. With electronic payments, the playing field has changed.

“ACH payments are relatively new, and I don't think banks are really providing a full range of services to help prevent fraud because the transaction happens so quickly. There's only a couple of day's window with ACH. You have a much longer window to identify and recover any kind of fraudulent payment attempt involving checks,” observes Joshua Cyphers, President of Nvoicepay.

“I hear a lot about real-time payments and other cool stuff coming out that's faster. It's okay to be faster, but whenever you make payment faster, it increases the risk of fraudulent activity,” he continues. “There was a significant increase in payment fraud when the UK first released real-time payment because even if the network is completely locked down, the fraud originates outside the network. It's the AP and AR team who feed information into the network that ultimately determines where the control risks exist.”

A major source of fraud, even with checks, comes from business email compromise attempts. There are numerous variations of this, but a common one involves using what appears to be a seller's legitimate email account to instruct the customers' AP department to send the payment to a fraudulent bank account.

“From the supplier's perspective, there's a chance that they don't get payment because some bad actor circumvented the buyer's internal controls, and updated the bank information right before a big payment went out. The AP team doesn't realize they paid a fraudulent supplier or sent the money to a fraudulent bank account until a week later when the supplier calls and asks for payment,” says Cyphers.

That's an uncomfortable phone call for everybody concerned and is why authentication and validation of every transaction is key. As electronic payments approach occurring in real-time, there is no chance to stop the transaction after the fact.

Data Security Is Paramount

This situation highlights a critical fact. To initiate an electronic payment, bank account information needs to be shared. That information needs to be validated and subsequently verified and managed if it is going to be stored. It also needs to be kept secure or you risk a lot more fraudulent activity than a one-time email compromise.

“There's a lot going on in terms of Sarbanes-Oxley (SOX) requirements for publicly traded companies to protect supplier bank information. We've heard horror stories from almost every finance or AP team that we've talked to about their experiences trying to manage the supplier's bank information themselves. Most of them don't meet the control requirements,” Cyphers notes.

“From the supplier perspective, there aren't many who trust the way their customers manage their bank information and so aren't really comfortable just giving out their bank information to any accounts payable team and having them keep that on record. Make sure your customer's AP team has these controls so that you're confident when you give them bank information it's not going to be hijacked by some bad actor and payments end up going out to someone other than your firm,” he adds.

The rule of thumb for credit organizations is to not share bank account details with customers that are managing that data on their own. An exception might be a large public company, but don't take it for granted. Credit organizations naturally look at customers from a traditional credit/financial risk perspective, but as commerce increasingly moves to electronic payment ecosystems, it is absolutely vital that customers be evaluated from a third-party risk perspective. That involves looking at a host of vulnerabilities related to not only shared information, but also digital, environmental, reputational, and security risks.

Where you can be more comfortable sharing banking information is when your customer partners with a SOX compliant vendor to manage the data. The best payment platform vendors, whether working for the supplier or the customer, will devote considerable time and effort to data management, data security, and verifying and validating bank information.

Payment platforms should “not just do a penny-test transaction to make sure that the bank account works, but really establish that the bank account is linked to the supplier. There are lots of good databases that you can ping and get validation. Having the right thresholds in place when payments get to a certain size to trigger a review; having audit trails tracking when updates were made, who engaged the update, how it was initiated; and then verifying the source of that update” are essential says Cyphers.

This also applies to any EIPP vendor a supplier might choose as a partner. It's absolutely essential that they be capable of fully assuming the data security and compliance burden. There is no reason for credit organizations to get involved in regulatory compliance and data security. Moreover, during the implementation, the best EIPP vendors will help with cleansing and updating your customer master file, which is critical to alleviating payment accuracy and anti-fraud concerns.

Matching Payments to Receivables

For receivables organizations, a major challenge is connecting remittance advice to the funds received, which needs to be done before you can match the payment to the AR. Artificial Intelligence (AI) and Machine Learning (ML) tools have taken most of the labor out of the cash application processes, but the effectiveness of this technology is limited by the detail level of the remittance advice captured.

As Cyphers notes, “It's the data that needs to come across, not just the money. ISO 20022 is doing more to try and accommodate more data, but the way ACH generally works and the way a lot of payment data works is it doesn't come across because it doesn't integrate well with the buyer's ERP.”

With check payments, the remittance advice typically accompanies the check. With ACH and other electronic funds transfer (ETF), the remittance advice is often sent separately via email, in a spreadsheet, or even not at all. Part of the reason for separate remittance advice data channels is because an ACH payment covering multiple invoices has only limited capacity to include payment details. As more and more B2B payments move from check to ETF, remittance processing has become increasingly burdensome.

Solving the problem requires the ability to translate data from one format to another in order to accommodate both buyers and sellers. When a customer makes a payment, their ERP will generate remittance details that the seller then needs to capture and apply within their ERP. If the output format of the buyer is not compatible with the input format of the seller, translation needs to take place. The extensive number of ERP systems being used by both buyers and sellers complicates the issue. Standards, such as ISO 20022 provide an intermediary to which all participants in the payments ecosystem can adhere.

Receivables organizations, therefore, are well advised to work with an EIPP vendor that provides a lot of ERP integrations, accepts file outputs from ERP systems that have not been integrated, and can accommodate a multitude of formats: corporate trade exchange (CTX), comma separated values (CSV), extensible mark-up language (XML), and even portable document format (PDF) among others. With those capabilities, the EIPP vendor can then act as the intermediary with your customers to meet their needs as well as yours.

If there is not a collaborative approach taken with your customers, onboarding the majority of them onto your EIPP platform will prove to be a challenge. Whether it's your platform or theirs, unless the needs of both buyer and seller are met you will not be able to both enjoy the benefits of a seamless payment process. Keep in mind, much of those benefits derive from the shared access to each other's AP and AR details.

Looking at the relationship from the buyer's side of the transaction, Cyphers states, “Suppliers don't want another portal to go through, so it's really important for us that we're not only creating a great experience for our customers' AP teams, but we're also creating a great experience for their suppliers.” That involves providing tech support to both the buyer and seller and making it readily available. Beyond tech support, payment platform vendors should have support teams dedicated to both the buyer and seller in a trading partnership.

Discounts and Invoice Finance

Terms play a key role in the trading partnership and so are critical to the payment process as well. Traditionally, open account terms have been arbitrary and industry related. This was all well and good in a payment universe centered around physical checks and industry distribution patterns. In an e-commerce world, traditional terms can run into obstacles.

“We've found more and more that there is a challenge navigating terms for the AP team and making sure the suppliers get the terms with which they're comfortable. One of the stats from some research we did found 80 percent of suppliers were willing to accept early payment discounts or financing in exchange for an earlier payment. However, only 20 percent of the buyers were taking advantage because they were busy with so many other things, and weren't able to engage or adhere to the processing requirements to meet those early payment discounts. There's obviously a gap,” concludes Cyphers.

In most cases, this gap is related to how quickly AP can process payments. Timely, accurate, and complete invoice details can help close the gap by enabling AP to process payments faster. This is a clear example of how both parties to a transaction can benefit from collaboration. It's not just information, but also workflow. By understanding each other's processing environments, everybody can benefit.

Addressing invoice and payment processing issues facilitates third party financing. This is the last mile in a seamless payment environment. Incorporating invoice finance at the juncture of invoicing and payment approval provides working capital management opportunities for both buyers and sellers. Discounts or access to extended payment terms at reasonable interest rates allow buyers to better manage cash outflows as their working capital requirements allow. Likewise, earlier payments, whether in the form of a discount from the buyer or a third-party finance company, will accelerate cash inflows for the seller.

Bottom line: there's one key question credit organizations need to ask themselves if they are committed to improving their payment process. “How are you giving your customers the information they need on your invoices? It's as simple as that,” concludes Cyphers. If you are not capable of meeting your customers' needs, you should now know what needs to be done to rectify the situation. If you can answer this question in respect to both billing details and the communication channels available for sharing this information you are in good shape.

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