To combat fraud, companies are rationalizing their banking relationships and moving away from checks to digital payment solutions. But they're doing so slowly.
That's a key finding of the recent "SunGard B2B Payments and Bank Connectivity Study." Nearly 400 treasury and finance professionals from around the world responded to the survey. Among those with more than $1 billion in annual revenue, 15 percent said their company uses paper checks more than any other payment method. Checks were supplanted years ago as the most common payment method; this year, electronic funds transfer (EFT), wire, and Automated Clearing House (ACH) were each cited by around a quarter of respondents as their most prevalent payment method (see Figure 1, below). Still, the companies that remain check-heavy are making more than 20 million payments per year via paper checks, putting those organizations at significant risk of check fraud.
"We still see substantial check use in the U.S.," reports Andrew Owens, head of SunGard's AvantGard Payments business. "It's coming down, and I think it's coming down precisely because of the effort to reduce fraud. As fraud prevention and control become more important, we're also seeing the barrier to entry coming down for moving to a single-payment solution and connectivity."
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For some companies, the answer is to set up a payment factory. The company's enterprise resource planning (ERP) and/or other accounts payable systems generate payment instructions, which they route to the payment factory software. The payment factory determines which payment method makes the most sense for each transaction (ACH, wire, etc.), then initiates the transactions. The payment factory may also interact with the organization's treasury management system, especially if the company uses a payments-on-behalf-of (POBO) structure or has a lot of intercompany transactions.
The top drivers of centralization of payments processes and solutions are control and fraud prevention, cited by 29 percent of respondents; reduction of internal costs, such as labor and infrastructure costs (27 percent); reduction of external costs, such as bank fees (18 percent); and improved visibility (16 percent). Owens says that centralization has been slowly gaining momentum for years, but that only recently have fraud concerns moved to the fore as a key driver of the transition. He points out that a centralized payment system also offers functional benefits, such as minimizing errors that get sent to the banks, and it enables companies to undertake POBO or other intercompany payment structures.
Worries about fraud are also pushing companies to connect their payments software—whether it's a payment factory, a treasury management system, or an ERP system—directly to their banks via the SWIFT network. Almost one in three survey respondents larger than $1 billion in annual revenue are currently using SWIFT, and 41 percent expect to be doing so within the next two years.
"Fraud concerns are driving an increase in the number of companies outside of financial services that are moving to SWIFT for payments," Owens says. "SWIFT was once the domain of the very largest corporates, but the benefits mean the business case is now stacking up for corporates that are large but not the very largest. What typically happens when a company decides to move to a centralized payments platform is that they're also deciding to replace all those specific bank connections with something like SWIFT connectivity so that they consolidate the bank connectivity piece and the payments piece at the same time."
A final means of reducing the risk of fraud is to reduce both the number of banks a company does business with and the number of accounts it holds with each bank. Not surprisingly, the larger companies in the SunGard study tend to juggle more banks and more accounts than do the smaller organizations. Overall, a quarter of respondents work with more than 10 primary cash management banks, and nearly as many have more than 1,000 bank accounts.
This level of diversification in banking activities increases the chance of fraud and reduces visibility into a company's cash position. But, says the SunGard study, one of the main benefits companies have achieved through payment centralization projects is the ability to streamline bank relationships.
Standardizing payment processes, centralizing payments on a single platform companywide, reducing the number of banking partners, and taking advantage of SWIFT connectivity to directly initiate payments with those banks that remain are four keys to reducing a company's risk of payments fraud. The fact that these approaches to payments also strengthen cash management is icing on the treasury layer cake.
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