Benefits of Automatically Generated Payment Files

The speed, security, and cost savings afforded by ACH and card payments provide motivation for disbursement-focused working capital optimization efforts. As companies are working to increase automation across all their disbursement methods, they need to simultaneously work on creating an integration plan with a trusted banking partner. Organizations that most effectively drive automation do so via payment files initiated directly from their ERP systems, and by working with a knowledgeable and experienced banking partner that understands how to create a superior payment-file strategy.

File transmissions that integrate payment initiators with their banking partners enhance the payer's working capital in several different ways. First, they provide tighter control over timing of payments, which allows for better cash forecasting. A payer that uses batched payment initiations can more effectively control the date on which each payment is initiated through the automated process. This helps reduce variance in when payments will ultimately settle and be deducted from the disbursing account, because it decreases dependency on human intervention for payment initiation.

Second, batching payments together, and eliminating the manual tasks associated with the initiation of many individual payments, reduces payment costs. By using technology to do the heavy lifting for the payment initiation, a payer dramatically decreases the expenses related to initiating, tracking, and researching payments.

Third, the payer benefits from superior fraud mitigation via file-based payment controls. By implementing common automated controls within their ERP system prior to file initiation, the payer avoids intervention by their own employees or by outside parties that could disrupt the intended payment. This can result in significant savings.

Finally, when file integration is used to drive payment volume to online purchasing cards—commonly referred to as cardless payments, or virtual cards—this can result in a revenue share rebate agreement with the card issuer. If the payment dollar volume justifies it, the payer may receive a cash payment equal to an agreed-upon percentage of the interchange collected by the card issuer, an arrangement that provides an obvious benefit to the company's working capital.

For all of these reasons, establishing bank integration is crucial in developing the efficiencies that lead to working capital optimization. And for companies looking to automate the generation of payment files, the next consideration is whether it makes more sense to build a separate file for each payment type, or to develop a custom payment process through which they consolidate all types of payments to a single, consolidated disbursement file.

When Segregated Files Make the Most Sense

Some organizations choose to maintain a separate file for each payment type. Doing so can simplify the creation of payments in an ERP system. The ability to generate a simple payment file for check issuance, for ACH, or for batch wires comes standard in many ERP systems. For example, many ERP payment modules can generate a NACHA-formatted ACH file out of the box. As a result, treasury or payables teams looking to implement a simple file-based ACH initiation process can do so themselves.

In contrast, setting up a new, customized payment process might require treasury or payables to enlist other resources to create or find file-layout specifications and then to manually code them into the ERP system. Depending on resource constraints outside treasury and payables, this might not be an option.

Even in a company that has the IT resources to create customized payment files, using the file types that come standard in the ERP system, off the shelf, can reduce implementation timelines. If the company uses a single ERP system, and if timeliness is a key factor in the payments initiative, then the company should carefully consider how long each option would take before deciding whether to consolidate payments or to maintain separate payment types in separate files.

When a Consolidated File Is the Way to Go

However, over time, organizations can achieve significant benefits by consolidating payments for batch wires, ACH, virtual card payments, and check payments that are outsourced to a third-party processor. There are several benefits of dedicating the necessary resources to develop a custom payment process and generate a consolidated file for all of a company's various payment types.

One benefit is that developing a custom payment file gives an organization greater flexibility in which details it includes with its payments, and with increased efficiency. If a company chooses to add an additional piece of information to its payment files, and it uses a separate ERP export file for each payment type, then it will have to undertake multiple updates to get the new transaction detail added to the different payment files. Consider a property management company which determines that it should include the property number on outgoing payments in order to most effectively reconcile payments going forward. If the company is currently initiating four separate payment files, for ACH payments, batch wires, virtual card payments, and outsourced checks, adding the property number to every payment type will require the company to undertake four separate projects to update these files. Conversely, if it is using a single disbursement file, it will be able to accomplish its goal through a single update.

Another benefit of using a custom, consolidated file is that it provides for a consistent format and process across all payment types. With a consolidated file, a company can complete all payment runs via a single process—with one file created, one approval process, etc. Companies that make payments via segregated payment files use separate processes to produce ACH, check, wire, and card batches. Thus, they have separate processes for everything from file creation through approvals to confirmation.

The variations among these different processes can cause confusion and inefficiencies. Many payers find it challenging to control and understand the payment detail submitted with each option. For example, employees of a company may assume that a certain level of detail is included across all payments, when in reality one payment file may allow for more remittance detail than another. Depending on how a company is using addenda information, this can be a common difference between ACH and check payment files. And the discrepancy may result in suboptimal payments, with subsequent customer service support expense to reconcile, for both the payer and payee. A consolidated file helps to ensure that the payment detail is consistent across payment types.

Treasury teams that use segregated files also have more work around ensuring that their banking partners receive the payment files and in keeping track of associated responses. A company using four file-payment exports can be accountable for monitoring four separate response files on a daily basis (sometimes more often). The challenge is magnified if certain payment options are not in every payment run—so, for example, some days the company may not have any batch wires. Using a single file helps simplify payment generation, as well as providing benefits resulting from a consolidated response file.

Additionally, once a company has created a custom, consolidated payment file, it becomes easier to add new payment types in the future. As the organization grows and adjusts, the flexibility that a consolidated payment file offers can be paramount. The consolidated file enables the company to add new payment types more easily; simply plugging them into the company's existing process minimizes the need to test and monitor new payment-file transmissions. For example, an organization that currently issues outsourced checks, ACH payments, and batch wires in a consolidated file could add virtual card payments to that file more efficiently than it could create and transmit a new, separate file for virtual-card–only payments.

And although this analysis has focused on the four payment types that are commonly transmitted today, it's likely that additional automated payment options will be developed in the future, for both consumer and business payments. Payers that have established a consolidated process for payment transmission should be in a position to more efficiently take advantage of the benefits that emerging technologies will offer.

Another benefit of using a consolidated payment file is that transitioning payments for certain vendors and consumers from one payment type to another will not disrupt payment initiation and reconciliation. Due to contract renegotiation, market pressures, and other factors, trading partners often shift from payments via one method to payments via another. For the payer, a consolidated payment file streamlines the migration of transactions between payment types. The processes of creating and reconciling a transaction are not materially affected when the payment type changes, as long as both types use the same consolidated payment file.

Conversely, for an organization that uses segregated payment files, switching payment types (e.g., transitioning from check to ACH) requires the paying company to ensure that it is properly set up to direct payments for that particular payee to the desired type of payment file. This can be a challenge if the payments for that specific payee require unique payment details in order to reconcile. For example, a multinational distributing company may send a location code with each check payment to a specific manufacturer, but it may not have that functionality in place with its ACH payment file. If it needs to convert that manufacturer to ACH payments, but doing so requires changing the format of the ACH payment file to add a location code, that may delay the conversion, and may create additional cost for the distributor.

It's also worth noting that although the most common direction of migration is currently from check to ACH or virtual card, new options in the future may offer efficiencies that lure companies to migrate away from today's popular payment types. Whatever the future brings, a consolidated payment file would support the migration of transactions from one payment type to another, whereas introducing a new payment type in a process using segregated payment files would require the establishment of a new file format and transmission connection to the company's banking partners.

Finally, issuing a single payment file transmission increases security. Just as a consolidated payment file simplifies file maintenance, and response file consolidation improves efficiency, security is enhanced when a company has fewer files to monitor. Monitoring four or more separate files every payment run creates more opportunity for error and business disruption. In contrast, a consolidated approach means all security efforts can be focused on transmission of, and payment controls can be concentrated on, this single file. As payment risk and file maintenance continue to be areas of focus for attentive organizations, the need to enhance security measures and simplify file-based processes remains. By creating an environment where a single file transmission is used, a company optimizes the process for ensuring business continuity.

What's the Right Payment Approach?

In deciding whether to use a consolidated payment file or segregated files, treasury managers should analyze the types of payment files the organization is currently generating, along with the types it anticipates adding in the future. Consider the case of a company that is already creating and transmitting one file for printing and issuing checks, another file for NACHA-formatted ACH payments, and a batch wire file that is sent directly from the company's ERP system to its banking partner. If the company has decided to add a virtual card program to the payments mix, it should evaluate the pros and cons of consolidating all these payment types into a single file. Decision-makers may find that adding on a separate virtual card payment file output makes more sense than tearing down and rebuilding, due to the short-term cost and timing benefits.

Ultimately, which method is best for a particular organization depends on that company's goals, timelines, and resources. A company that has already established integration with its banking partner for separate batch wire and ACH transmitted files, with no intent of optimizing check payments and with no interest in virtual cards, may not be best served by investing in the creation of a consolidated file. Additionally, creating a separate payment file for each payment type is prudent for organizations that are attempting to minimize implementation timelines and are facing significant limitations when it comes to technical resources.

Most other payment originators should see a significant positive impact if they consolidate payments into a single file. The simplicity, consistency, scalability, and flexibility of a consolidated payment file can create long-term efficiencies that provide significant financial benefits such as cost savings and fraud expense avoidance.

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Adam Kruis is a vice president and a working capital consultant with U.S. Bank. As a working capital consultant, he helps companies optimize cash conversion cycles by providing tailored consultations on their processes. As a financial optimization agent and process improvement specialist, he works with all levels of clients to streamline, increase controls, and reduce costs through industry expertise and emerging technologies.

NOTE:  This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or a guarantee of future results. This information is not intended to serve as a recommendation or solicitation for the purchase or sale of any particular product or service. It does not constitute advice and is issued without regard to any particular objective or the financial situation of any particular individual.