Legislation To Boost Electronic Payment Processing

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Many treasurers dream of eliminating paper from their processes and are moving both data and funds entirely electronically, according to Business Finance magazine.

Several new pieces of legislation will facilitate the move to electronic payment processing. One is back-office conversion, or BOC. Effective March 2007, BOC will allow retailers and other businesses to convert checks to electronic data streams.

"This allows retailers to move to the process of electronifying their payment process", said Stephanie Schmitt, vice president, commercial product management, with U.S. Bank in Minneapolis. Schmitt predicts that larger retailers that operate multiple checkout lanes will be the first to embrace the applications because they have the most to gain.

Another legislative change on the horizon is the Single Euro Payments Area, or SEPA. This regulation, which goes into effect in 2008, will eliminate the European Union's (EU) disparate pricing structures, which add cost and complexity to the payment process. Currently, each nation has its own payment structures, said Alan Koenigsberg, product executive, European cash management, with JPMorgan Chase Treasury Services in London. For example, file formats vary among countries. "SEPA will help drive consistency across the eurozone, with one file format for direct debits and one for credit transfers", Koenigsberg says.

To be able to process payments in each EU nation's unique clearing system, many large companies must now work with at least one bank in each country. But as SEPA takes hold, treasurers may decide to consolidate these accounts, Koenigsberg says.

"The biggest drive that we're focusing on right now is moving from the paper to the electronic realm", says Michael Cross, director of marketing with Mellon Working Capital Solutions, Mellon Financial Corp., in Pittsburgh. "Customers see the electronic realm as nirvana."

Treasury executives are looking forward to straight-through processing, seamlessly linked systems, more vendor discounts and reduced exception processing. "Electronification is the path to payments prosperity", says Craig T. Vaream, vice president and ACH product executive with JPMorgan Chase in New York City.

Many companies appear to be moving along that path. Results of a September 2006 survey of finance executives by PayStream Advisors Inc. in Charlotte, N.C., show that 47 percent of respondents are using imaging and document management applications in their procure-to-pay processes. Of these, 46 percent use imaging and document management with approval workflow applications to accelerate invoice-processing time.

One company that has made significant progress in transitioning from paper to electronic payments is BellSouth Corp., an Atlanta-based telecommunications company. Each month, the company processes between 12 and 13 million payments, says Melissa Bernardino, manager of remittance planning and analysis. Over the past several years, she and her colleagues have re-engineered many of BellSouth's payment processes and added electronic check to the other online payment options: credit or debit card and a bill-payment service. Adding electronic-check capabilities, called the biller-direct model, required entirely reworking BellSouth's online payment system. That's because electronic checks flow through the Automatic Clearing House (ACH) network, while credit card payments travel through the credit-card networks.

Electronic-check payments save the company money because they don't incur interchange fees (the portion of each credit-card transaction that the financial institution issuing the card retains to cover its cost of processing). To encourage customers to choose this option, Bernardino and her colleagues placed it at the top of the list of online payment options.

The BellSouth team's work has paid off. When they started the project, 75 percent of payments arrived by traditional mail, 15 percent came in over the counter, and only 10 percent were made electronically. Today, 30 percent of customers pay electronically, 10 percent hand-deliver their remittances, and 60 percent mail their payments.

During the same period, credit and debit payments have remained flat, while the volume of e-checks has grown. That shift has resulted in tangible time and dollar savings, Bernardino says. Although the volume of electronic payments overall has grown, the company's interchange fees have remained flat. In addition, exception-processing costs have dropped because it's easier to research e-check payments than credit- or debit-card payments.

A number of companies navigate the paper-to-electronic transition by outsourcing some payment functions. A case in point is Waltham, Mass.-based Mac-Gray Corp., which provides commercial laundry equipment for such locations as apartments and college dormitories. Kristine E. Stone, Mac-Gray's director of commissions and payables, says that the company issues between 15,000 and 20,000 checks monthly to apartment owners and university administrators, who earn a commission each time a tenant or student uses a machine. The business used to print the checks internally, but in June of 2006, it handed this task over to Payformance Corp. of Jacksonville, Fla. Each month, Stone and her colleagues send a payment-information file to Payformance, where the checks are printed.

"It saves staff time and wear and tear on the equipment", says Stone. In addition, Payformance can more efficiently handle tasks such as verifying addresses and bulk-mailing checks.

By working with Payformance, Mac-Gray can also offer its customers direct check deposit and online payment information. Developing this capability internally would have consumed more staff time than would have been cost-effective, Stone adds. "Developing direct-deposit software is not a core competency."

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