Few large financial institutions are equipped to take on the challenge on behalf of relatively small businesses. But some, including Fifth Third Bank, can provide supplier enablement services to companies with as little as $3 million in annual purchases that potentially can be converted to payment by card.

When considering the outsourcing of supplier enablement, companies sometimes have reservations about ceding any control of their supplier relationships. Companies can manage these concerns with a comprehensive discussion of program goals, terms and processes, with early attention to the supplier communication strategy. For example, a company might identify key suppliers it will contact personally to introduce to the bank personnel who will subsequently present the benefits of accepting card payment, explain potential new payment terms, and ultimately help implement the program.

When working with a bank on supplier enablement, the company will partner to design the communication strategy, including review and approval of text that will be used by the bank when presenting the new card payment opportunity or the company's revised payment policy. By reviewing the vendor file, developing a target strategy including prioritizing vendor outreach to focus on gaining immediate efficiencies and economic benefit, there are significant working capital benefits for the buying company. It is important to have all stakeholders aligned and in agreement with the strategy and process.

Developing the Payments Strategy

Companies are more successful when they have a clearly stated payments strategy. By incorporating a mix of payment vehicles they can improve supplier relationships, better manage working capital and achieve financial benefits along with meeting operating efficiency objectives. In evaluating options, Fifth Third Bank, uses various databases, industry knowledge and practical experience to help clients optimize their supplier base. A carefully developed approach in reaching out to suppliers will help determine how successful the payments strategy will be. Bank personnel dedicated to the conversion program should remain in contact with suppliers to monitor the process as it unfolds and promptly address any snags that might crop up.

The first step is generally for the bank to assess the magnitude of the opportunity. That involves the bank identifying — using databases made available by the major card brands — which suppliers currently not being paid by card are already set up to receive payment that way. This first step is critical because it enables the buyer to achieve quicker, more positive results.

Another step involves identifying which suppliers are already being paid electronically in other ways, such as through the Automated Clearing House (ACH) network. Those suppliers are generally eliminated from the card conversion prospect list, since most would not see a clear benefit from shifting to card payments from ACH, unless an aggressive strategy regarding payment terms is implemented.

A vendor-by-vendor review of payment volume is another basic element of the process of assessing the supplier base.

Perhaps the most important determinant of conversion potential for each supplier is the buyer's current payment terms with the supplier. Payment terms represent the buyer's principal point of leverage in persuading suppliers to accept card payment.

Overcoming resistance

When it comes to accepting card payments, a natural point of resistance for suppliers is the prospect of incurring interchange fees. However, a company's offer to significantly shorten payment terms generally will overcome that impediment. Likewise, a company can extend payment terms as part of the overall payments strategy for those suppliers who might be hesitant to change.

It is sometimes possible for the company's bank to arrange for the supplier to pay lower interchange fees, if the supplier takes advantage of an alternative card payment processor.

Once you have completed an overall assessment of the potential for converting suppliers to card payments, the strategy can be devised, and tactics chosen, beginning with prioritization of the supplier conversion prospect list.

The most basic strategic question is the balance of "carrot" and "stick" approaches that you will take. The ultimate stick, applicable only to marginal suppliers, is simply to state that your new policy is to pay all suppliers by card, allowing a reasonable grace period for the supplier to adapt or decline and lose your business.

The carrot approach generally involves offering accelerated payment terms and the promise of higher purchasing volume as part of a "preferred supplier" program.

Supplier segmentation

A supplier segmentation strategy must be established to determine which suppliers get more carrot than stick, and vice versa. The volume of business conducted with each supplier, while important, isn't the only consideration.

Other criteria include discounts and the frequency of purchases. A supplier whose large-ticket services you purchase only two times a year, for example, might not be as high a priority as a supplier whose small-ticket products you must purchase far more frequently, involving much more check processing. After all, the cost of processing a $100 check payment is the same as processing one for $10,000.

It's important to prioritize suppliers in order to determine which ones you will attempt to convert first. As noted, companies need not play any direct role in communications with suppliers (except with perhaps the most strategic ones), leaving that task to the bank partner's dedicated payment conversion team.

The benefits of accepting payment by card that should be spelled out to suppliers, in addition to the prospect of improved payment terms, include:

•  Improved cash flow as payment is received the same day it is issued,

•  Reduced administrative costs, including occasional required collection efforts and time spent chasing down lost checks, and

•  A competitive advantage achieved by attracting and retaining customers that prefer card payment to writing checks.

Card acceptance also benefits suppliers by automating basic accounting functions and providing a real-time window into the status of transactions.

Such supplier benefits typically can be communicated more effectively by a banking professional who sits between buyers and sellers and understands both of their perspectives.

Program metrics

As with any significant corporate initiative, it is important to establish metrics for measuring the success of a card payment conversion program. The following are commonly used in the initial stage:

•  Working capital improvements after adjusting for (typically) reduced payment terms offered to the supplier, (Days Payable Outstanding)

•  Rebates earned from financial partners, and

•  Conversion rate.

Over a longer time horizon, key success metrics for buyers include supplier retention, as well as overall progress in moving suppliers to acceptance of electronic forms of payment. For example, if a supplier is unwilling to accept card payment, a fallback position is using the ACH network. While typically not as advantageous to the company, it still represents an improvement over payment by check.

Dedicated and experienced payment method conversion professionals from your bank can provide ambitious yet realistic targets for corporate purchasers, as well as help them to accomplish those goals. It is not a "set it and forget it" process, however. You need to establish milestones and monitor performance against them, so that you can make tactical adjustments along the way.

e-Payables Conversion

A leading distributor of data communications and electrical supplies, industrial tools, security equipment and lighting systems, achieved its goals in an e-payables conversion campaign executed by Fifth Third Bank.

When the company launched the program in August 2013, it was paying less than $1 million of its supplier payables by card. By mid-2016, the company had enrolled about one-third of its approximately 5,000 vendors, accounting for 20% of total dollars paid to vendors.

With Fifth Third Bank's supplier enablement support, the company was able to convert more than 31,000 checks to electronic payment, resulting in $93,850 in net savings.

In effect, the company's payables department has become a profit center, and progress in converting more suppliers is ongoing. The company is now projecting that by the end of 2016 its e-payment volume will reach $70 million. 

Best practices for e-payables conversion

1.  Secure top management support for the program.

2.  Involve all stakeholders in the effort.

3.  Build the enablement strategy around payment terms.

4.  Maintain communication with suppliers.

5.  Incorporate card language and conditions with supplier contracts at renewal.

6.  Monitor program analytics to assure the program is performing to expectations.

Ro Susalla
Fifth Third Bank

Scott Mills
Fifth Third Bank