Electronic Payments –Trends in Accounts PayableWinter 2010

INTRODUCTION

Today’s Accounts Payable (AP) departments withtheir heavy usage of paper and manual effortsare eroding the bottom line of large- and mid-size organizations on an order of severalmillion dollars each year. This is a stark contrastto many organizations’ continued efforts to drivegreater efficiencies and generate cost savings. Notsurprisingly, AP has come to the forefront asorganizations recognize the strategic importanceof AP to impact their bottom line – and withthat, the need to transform AP.

Many organizations are transforming APthrough the “electronification” of payments.Payment, an often overlooked piece of the AP process, is typically characterized by paperchecks, which are overwrought by manual and inefficient processes, lack of cash flowvisibility and the high cost of supplier financing.Electronic payments have emerged as analternative means of conducting business,offering numerous strategic benefits, including:

• Reduced payment costs

• Improved cash management

• Decreased risk of payment fraud

• Diminished paper from the AP department

• Increased operational efficiencies

Then why haven’t electronic payments beenuniversally adopted? Today only a smallpercentage of organizations have any significantlevel of payment automation in place. And whilemany organizations have moved a sizablepercentage of payments from paper checks toelectronic payment vehicles, a typicalorganization still makes 61 percent of itsbusiness-to-business (B2B) payments by check.So why does paper remain the rule rather thanthe exception?

Supplier Resistance: One of the top barriers to the adoption of electronic payments is the suppliers’ willingness to accept these payments.

Persuading suppliers to accept electronicpayments and align with their buyers’ needs is a time consuming and costly process. Anotherkey barrier is the trading partners’ ability to send or receive automated remittanceinformation with electronic payments. Onceagain, the time and cost associated withsuppliers reengineering their financial systemsand processes is a significant challenge. Butorganizations remain optimistic – more than 75 percent of buyers believe that the majority of their suppliers currently receiving paperchecks will be able to receive electronicpayments within three years.

Internal Resistance: In addition to perceivedexternal barriers, many organizations face their own internal challenges. While buyingorganizations agree that “electronifying”payment leads directly to improved supplierrelations, increased productivity and costsavings, they still have internal roadblocks such as justifying the cost to implementelectronic payment projects and the resourcesnecessary to manage the transition.

Many forward-thinking organizations havealready begun transforming their APdepartments to address these major challenges.Organizations are finding that electronicpayments have helped them evolve. Byautomating AP functions organizations canrealize noteworthy benefits such as precise cashmanagement, higher productivity, improved data capture, early-payment discounts andenhanced risk management. As more financialexecutives recognize the benefits of leveragingelectronic payment methods, they will workwith suppliers and internal stakeholders alike toremove barriers and capitalize on the benefits.

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STUDY OVERVIEW

Scope

As part of an effort to understand andimprove B2B payment processes, U.S. Bank,the American Productivity and Quality Center(APQC) and the International AccountsPayable Professionals (IAPP) conducted an in-depth survey of AP professionals betweenJune and July of 2010.

U.S. Bank, APQC and IAPP developed thissurvey to provide an overview of theelectronic payment landscape and address the following questions generally asked byfinancial executives:

• What challenges are organizations facingwhen it comes to AP processes?

• What factors are driving the migration frompaper checks to electronic payments?

• What barriers are hindering furtheradoption of electronic payments and howcan they be overcome?

Survey Demographics

More than 280 AP professionals, representing a wide cross-section of organizational sizes,industries and job titles, participated in thestudy, as shown in Figures 1, 2 and 3.

Spanning more than 15 industries, themajority of respondents (61 percent) hadannual sales of more than $250 million. A large majority of survey respondents were managers or directors with supervisoryauthority for their organizations’ APdepartments.

Survey results were reported as an overallconsensus of participants as well assubdivided by industry, organization revenue,and the job title of the respondent.

Figure 1

Figure 2

Job CodeOther16%

AP Staff29%

N=281AP Managerand Director

40%

CFO ControllerTreasury

15%

IndustryOther13%

Health Care9%

Services17% Wholesale

4%

Retail6%

Manufacturing24%

Government6%

Utilities, Energy,Communication

9%

FinancialServices

12% N=281

Figure 3

Revenue Range

$250M to $1B29%

Greater than $5B

11%

$1B to $5B21%

Less than $250M

39%N=281

ELECTRONIC PAYMENT USAGE

Overall, the study showed a strong universalmigration to electronic payments. Withelectronic payment methods being moreexpeditious, cost-effective and convenient than paper-based checks, it is not surprisingthat use of the various forms of electronicpayments has increased over the past year, while paper-based checks have declined.

While checks represent 61 percent of a typicalorganization’s B2B payments today, 64 percent ofrespondents reported a decrease in paper checkusage over the past year, as shown in Figure 4.This reduction in check volume correspondsdirectly with an increase in electronic payments.During that same period, 65 percent ofrespondents increased ACH/EFT use, and 50 percent increased purchasing card use.

Large organizations led the way: For ACH/EFT,82 percent of organizations with revenue inexcess of $5 billion—already the highestACH/EFT users—reported an increase in useversus the prior year. Organizations withrevenue of more than $250 million reported thelargest increase in purchasing card use.

Today’s current percentage of B2B electronicpayments just scratches the surface—almost 25 percent of payments are ACH/EFT; anothernine percent are card; and less than five percentare wire—providing ample opportunity fororganizations to continue the trend towardselectronic payments, as shown in Figure 5.

Overall, respondents plan to nearly doubleACH/EFT and purchasing card use over thenext three years. Survey results show thatelectronic payments will constitute nearly 70 percent of all B2B payments by 2013, with large organizations once again leadingthe way: 88 percent of total transactions fororganizations with more than $1 billion inrevenue will be electronic versus 59 percentfor smaller organizations.

It follows that respondents anticipate cuttingpaper check use by more than half in the nextthree years. This change is already well underway, especially among larger organizations,with 75 percent of organizations with revenuein excess of $5 billion reporting a decrease in paper check use. The largest organizationsanticipate that within three years only 13 percent of payments will be by check.

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Figure 4

% Reporting a Decrease in the Use of Paper Check

80.0%70.0%60.0%50.0%40.0%30.0%20.0%10.0%

.0%Less than 250 million 1 billion Greater than All

250 million to 1 billion to 5 billion 5 billion Revenues

58.2%69.0% 62.3%

75.9%64.1%

Figure 5

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD

100%

80%

60%

40%

20%

0%Now In 3 Years

9.1%

61.3%

24.5%

46.0%

30.9%

18.3%

Cardless purchasing accounts, relativenewcomers to the AP world, have beenadopted by 26 percent of total respondents. However, over 50 percent of organizationswith more than $1 billion in revenue, and 40percent of wholesale and health care industryrespondents, use these accounts. Whilecardless purchasing accounts are used only at a small percentage of organizations, theyare quickly growing due to an overall increasein purchasing card use. As organizations lookto reduce the cost and financial risk associatedwith check payments, they are enabling cardpayment for purchases that so far have notbeen paid by plastic cards.

Wire transfers, perhaps the most expedientform of payment, are often used for high-dollar,one-off transactions as well as internationalpayments. Wire transfers tend to be a nichepayment method that currently accounts for less than 5 percent of transactions, andrespondents anticipate that this minimal use will continue.

AP Challenges

A majority of respondents identified threemain challenges within AP, as shown in Figure 6. These top challenges—manual dataentry, invoice routing and error/exceptionresolution—are consistent across surveyedindustries, company sizes, and job families.

However, respondents in different jobcategories assessed the next tier of challengesdifferently. Lower-level staff viewedoperational issues, such as error resolution,routing and missing invoices, as moresignificant than did upper management.

Organization size also played a role inchallenge assessment. Although size increasesAP complexity, larger organizations reportedfewer challenges with error and exceptionresolution. Organizations with more than $5 billion in revenue also reported less

difficulty with routing and lost or missinginvoices than organizations with revenuebelow $1 billion.

Despite accounting for 67 percent of total AP expense1, payment costs were not seen to pose a significant challenge, neither wereconcerns of potential payment fraud.

While payment fraud is still present in allindustries—nearly 50 percent of respondentsreported at least one fraud incident in the past year—rising electronic payment use isenhancing fraud prevention efforts. Accordingto the survey results, on average paper checkswere related to 10 times as many incidents of fraud as ACH/EFT or wire transfers, andtwo-and-a-half times as many incidents aspurchasing cards.

1APQC Open Standards Research Data, June 2010

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Figure 6

Challenges

Manual data entry

Routing invoices for approval

Resolving errors and exceptions

Overall payment costs(staff, processing, etc.)

Lost or missing invoices

Lack of visibility acrossinvoice-to-pay process

Inability to accurately forecast liabilities

Potential risk of payment fraud

0% 20% 40% 60% 80% 100%

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Adoption of Electronic Payments

With today’s manual paper check systemscontributing directly to the challenges manyAP departments face, it is no surprise thatorganizations are looking to electronicpayments to address these pain points.

There are several common factors drivingrespondents’ efforts to increase electronicpayments, including the ability to (Figure 7):

• Reduce payment processing costs

• Enhance supplier relations

• Increase productivity in the AP department

• Decrease the risk of payment fraud

Additionally, maximizing rebates and incentiveson the purchasing card (37 percent) was afactor driving organizations to focus theirefforts in utilizing electronic payments.

Organization size is another driver of movingto electronic payments: Larger organizations,on average, have a higher current level ofelectronic payment use, anticipate more futureuse, and see fewer barriers to implementationthan their smaller counterparts.

As is apparent from the statistics above, andgiven the overwhelming interest in improving theperformance of AP departments, increasing theuse of electronic payments will be a top priorityfor organizations over the next three years.

Adoption of Electronic Invoice Presentment and Payment Solutions

While a majority of respondents have focusedon automating payment, the final step in the invoice receipt-to-pay processing cycle,many organizations are taking the idea of apaperless AP department to next level. Theuse of Electronic Invoice Presentment andPayment (EIPP) solutions are gainingpopularity among organizations of all sizes due to their ability to address many of the AP challenges reported by organizations.

Currently an EIPP solution is used in nearly16 percent of respondent organizationsoverall. Once again, organizational size drives adoption and use—more than 20percent of those with revenue greater than $1 billion use an EIPP solution, comparedwith just 13 percent of organizations with less than $250 million in revenue, as shown in Figure 8.

Figure 7

Benefits with using Electronic Payments� ACH/EFT � P-CARD � WIRE

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%Cost Better supplier Increase Decrease

Savings relations/ in in risksatisfaction productivity of fraud

70.7

%

48.1

%20

.5%

39.6

%

30.0

%48

.1%

38.9

%

41.3

%16

.3%

36.4

%

15.2

% 23.7

%

Figure 8

Current EIPP Usage100.0%

80.0%

60.0%

40.0%

20.0%

0.0%<$250M $250M $1B >$5B All

to $1B to $5B Revenues

13.1% 15.7%20.7%22.6%

12.3%

A high percentage of all organizations plan to adopt the technology within threeyears (Figure 9). Smaller companies have a lower percentage of predicted adoption, but even with this lower figure, nearly 50 percent of all organizations will soon use an EIPP solution to automate their AP processes.

Industry Trends and Predictions

Current trends and predictions for individualindustries are provided on the following pages.

Healthcare

The healthcare industry’s current electronicpayment and paper check use is in line with that of all participant industries, butrespondents predict a greater-than-averagemove toward electronic payment systems, as shown in Figure 10. Already one of thehighest users of cardless purchasing accounts,the industry anticipates a two-thirds reductionin paper check use within the next three yearsas well as a threefold increase in purchasingcard use—both well above the overall norm.

Manufacturing

Manufacturing currently leads in ACH/EFTuse, and respondents predict that it will continue to set the pace for all industries. Respondents also anticipate a 50 percentreduction in paper check use and a doublingof purchasing card use in the next three years, as shown in Figure 11.

Figure 9

Plans to Implement EIPP within 3 years

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%<$250M $250M $1B >$5B All

to $1B to $5B Revenues

41.07%

49.66%

57.14%53.13%

55.81%

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Healthcare Healthcare All Other All Other

Now +3 yrs Now +3 yrs

26%

61%

6%7%

47%

24%

6%

22%

24%

61%

3%10%

44%

33%

2%

19%

Figure 10

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Manufacturing Manufacturing All Other All Other

Now +3 yrs Now +3 yrs

30%

57%

6%7%

52%

27%

6%

15%

24%

61%

5%10%

43%

33%

5%

19%

Figure 11

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7

Government

While government use of ACH/EFT and paperchecks is at the average, the industry showstwo notable deviations from the middleground. Wire transfers constitute a negligiblepart of government AP, while purchasing carduse is more than double the average of allindustries—with another 11 percent growthanticipated in the next three years, as shownin Figure 12.

Financial Services

The financial services industry reports above-average use of checks, together withbelow-average use of electronic payments.Both items are predicted to change: Theindustry anticipates tripling the use ofpurchasing cards in the coming three yearsand reducing checks to the overall average of use (Figure 13).

If the industry is viewed without the insurancesector, interest in electronic payment adoptionis high. Since the insurance sector dependsheavily on paper checks, it is likely tocontinue a high rate of use in the future.

Utilities, Energy, and Communication

As highlighted in Figure 14, electronicpayment use is slightly above average forthese industries, partially due to above-average use of purchasing cards. Althoughpurchasing card use is expected to rise, theoverall predicted electronic payment adoptionrate is less than the average, and use of checkswill remain in line with other industries.

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Government Government All Other All Other

Now +3 yrs Now +3 yrs

27%

54%

0%

18%

41%

29%

1%

29%

24%

62%

5%8%

45%

32%

6%

18%

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Financial Financial All Other All Other

Services Now Services +3 yrs Now +3 yrs

23%

67%

3%7%

47%

31%

3%

20%

25%

60%

6%10%

44%

32%

6%

19%

Figure 12 Figure 13

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Utilities, Energy, Utilities, Energy, All Other All Other Communications Communications Now +3 yrs

Now +3 yrs

27%

57%

11%

42%

31%

4%

24%

24%

61%

5%9%

45%

32%

5%

18%

Figure 14

4%

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Wholesale

Wholesalers are the highest users of wiretransfers, and ACH/EFT and purchasing card use is also above average. And while the industry predicts a slower overallelectronic payment adoption rate, purchasingcard use is expected to rise, as shown inFigure 15.

Retail

The retail industry is behind in overalladoption: It has one of the lowest ACH/EFTrates, and despite predictions that electronicpayment use will double, the sector will continue to trail other industries (Figure 16).

Organization size alone does notaccount for the low adoption rate. Although 60 percent of theresponding retailers have revenuesof less than $1 billion, the sectorstill lags behind similarly sizedindustries.

BARRIERS TO ELECTRONIC

PAYMENT IMPLEMENTATION

The survey identified a number of actual or perceived barriers to

electronic payment use, as shown in Figure 17.Eighty-four percent of respondents cited supplierresistance to electronic payments as the primaryexternal barrier. A related barrier—the inabilityof trading partners to send or receive automaticremittance information—was cited by 72 percentof respondents.

The survey suggests that these external barriersmay evaporate. More than 75 percent ofrespondents expect that suppliers currentlyreceiving only paper checks will be able toreceive electronic payments within three years.

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Wholesale Wholesale All Other All Other

Now +3 yrs Now +3 yrs

28%

53%

10%

9%

36%

40%

10%

14%

24%

62%

5%10%

45%

31%

5%

19%

Payment Method Usage: Now vs. in 3 yrs.� ACH/EFT � PAPER CHECK � P-CARD � WIRE/OTHER

100%

80%

60%

40%

20%

0%Retail Retail All Other All Other Now +3 yrs Now +3 yrs

22%

64%

7%7%

46%

35%

7%

12%

25%

60%

5%10%

44%

32%

5%

20%

Figure 15 Figure 16

Figure 17

Actual or Perceived Barriers to Implementing Electronic Payments

100%

80%

60%

40%

20%

0%Check Concern Cost to Shortage of Difficult to Trading

systems about implement IT resources persuade partnerswork well payment electronic for suppliers to cannot send

fraud payment implementation accept or receiveprojects electronic automated

payments remittanceinformation

with electronicpayments

42% 44%62% 65%

72%

N=281

84%

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Internal costs, as well as resource and staffingconcerns, were reported to be the mostsubstantial internal barriers to implementation.However larger organizations see cost andinternal capabilities as less significant barriersthan do smaller organizations.

The survey results also show a barrier ofinterpretation: A high percentage of leadershipbelieves that check systems work well, reducingthe urgency of switching to electronic paymentmethods; significantly fewer of their lower-levelassociates, however, share this view.

CONCLUSION

Electronic payments have transformed the worldof B2B transactions. Electronic paymentadoption is well under way and gainingmomentum. More organizations are stating theirintention to adopt electronic payments over thenext few years, and that percentage continues togrow as organizations look for ways to cut costsand streamline processes.

However key challenges and barriers toelectronic payments still persist. Manyorganizations are gradually overcoming thebarriers to increased electronic payment useand reducing their reliance on checks, but forothers the hurdles remain—specifically aroundsupplier resistance. Suppliers’ reluctance topay fees that may be associated with electronicpayments and their concern around sufficientremittance detail remain obstacles.

Many financial institutions and paymentproviders are addressing these supplierchallenges and developing solutions to lowerthe acceptance barrier, including:

• Recruitment activities: on-boarding ofsuppliers through activation campaigns thatpromote the benefits of supplier acceptancesuch as improved cash flow, expedited cashapplication and reduced late paymentcollections.

• Payment and remittance adviceconsolidation: collection and delivery ofremittance information in multiple formatssupported by supplier systems such as e-mail, fax or direct integration withaccounting systems.

Yet steady adoption and increased use of thesepayments may address and minimize most ofthe perceived issues, especially as both buyersand sellers achieve quantifiable, bottom-linesavings as a result.

While moving payment from paper toelectronic methods provides immediateefficiency gains and cost take-out, a long-termpayables strategy can help an organizationachieve more significant results. Organizationsshould move beyond payment and expandtheir payables vision to include automation of the entire financial supply chain.

While it may be difficult to make the business case for change when “check systems work well,” organizations should prioritizeinvestment in electronic payments. It’s nolonger a question of whether AP should beautomated—but how to automate and towhat extent.

U.S. Bank Payables Solutions

To help organizations grow and evolve, given the increased strategic importance of AP, U.S. Bank offers comprehensive payablessolutions that deliver value from the purchaseorder through invoice processing andpayment. More specifically, our array ofintegrated products allows U.S. Bank toaddress all aspects of the financial supplychain and ease organizations’ evolutiontoward electronic processing and payment.

From treasury management solutions tocommercial cards to electronic invoicepresentment and payment tools, U.S. Bankhas the industry-leading resources andimplementation experience to make your

payables program work harder for yourorganization. We continue to invest inproducts that meet market needs and will help organizations execute an integratedpayables strategy to drive cost savings andworking capital improvements.

ABOUT APQC

APQC is the leading resource for performanceanalytics, best practices, process improvement,and knowledge management. Its researchstudies, benchmarking databases, andrenowned Knowledge Base provide managerswith intelligence to transform theirorganizations. A member-based nonprofitfounded in 1977, APQC serves Global 1000,government, and nonprofit organizations.

ABOUT IAPP

IAPP is internationally recognized as thetrustworthy guidance-setting association for the accounts payable profession. Servingmembers throughout the world, IAPP is the AP professional’s global voice, chief advocate,recognized authority, acknowledged leader,and principal educator on all AP operational,regulatory, leadership, tax, control, and fraud-related topics. Together, the IAPP andits sister organizations, International AccountsReceivable Professionals (IARP) and TheAssociation for Work Process Improvement(TAWPI), have more than 6,000 members in70 chapters throughout the United States,Canada, and the United Kingdom. Theyprovide training; conferences; knowledgesharing; certification; online resources; APMatters, AR Matters, and today magazines;and more. For additional information, visitwww.TheIAPP.org, www.TheIARP.org, andwww.tawpi.org.

ABOUT U.S. BANK

U.S. Bancorp (NYSE: USB), with $283 billionin assets as of June 30, 2010, is the parentcompany of U.S. Bank, the fifth largestcommercial bank in the United States. Thecompany operates 3,002 banking offices in 24 states and 5,309 ATMs and provides acomprehensive line of banking, brokerage,insurance, investment, mortgage, trust andpayment services products to consumers,businesses and institutions.

Corporate Payment Systems (CPS), a divisionof U.S. Bank, offers unique solutions to meet clients’ payment needs. CPS is a singlesource for an array of payment options, fromstraightforward purchasing, travel and fuelcard programs, to sophisticated electronicinvoice presentment and payment tools.

CPS pioneered the nation’s first commercialbankcard, serves as the federal government’slargest commercial card issuer, and is ranked the second largest bankcard issuer of corporate, purchasing and fleet cards. CPS continues to lead the industry on multiple levels, offering:

• A comprehensive suite of electronicpayment solutions, including traditionalcommercial cards and innovative e-Payables account options.

• Experience with a wide array of client sizes and industries, serving 277 of theFortune 500

• Financial supply chain solutions thatautomate the entire invoice receipt-to-payprocess for general payables, utilities andfreight.

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5357 © 2010 U.S. Bancorp. All rights reserved. U.S. Bank is registered to U.S. Bank National Association ND. All other trademarks are the property of their respective owners. CPS 3581 (12/10)

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Contact U.S. Bank for more information

From purchasing cards to access tools to complete electronicprocure-to-pay systems, U.S. Bank offers organizations the solutions they need to cut costs and operate more efficiently. For more information, please contact us at 866-274-5898,intouchwithus@usbank.com or visit usbpayment.com.