As a supplier in the business-to-business sphere, you’ve no doubt encountered buyer organizations that wish to pay you electronically rather than via paper checks. How do you determine which forms of payment your organization will accept from buyers? Are you concerned about added costs associated with electronic payment formats? And if you do go electronic, which format makes the most sense for your B2B payments?
In the face of so many questions marks, it’s easy to say no to all forms of electronic payment and maintain the status quo with check-based payments. But by considering the payment needs of your customers first, you may actually boost your B2B sales and reap dividends you never expected to from your accounts receivable.
Why Accept Virtual Payments at All?
A collaborative research study conducted by First Annapolis Consulting and the National Association of Purchasing Card Professionals in 2010 analyzed supplier acceptance of payment cards, and identified several major benefits to suppliers:
Benefits of Accepting Virtual Payments
- Quick payment
- Guaranteed payment
- Process ease
- Cost reductions, such as eliminating invoice creation, handling and mailing
- Electronically deposited funds
- Ability to redirect staff to more value-added activities
Of these benefits, “quick payment” is undoubtedly the most popular with suppliers, with 66% of end-users citing it as the most important benefit of Virtual Payments Technology for their vendors.
Which Electronic Payment Format is Best for B2B Suppliers?
As AP has gone increasingly paperless, two formats for electronic business-to-business payments have come to be preferred: Automated Clearing House (ACH) transactions and Commercial Card transactions. Both ACH and card transactions (including virtual cards, one-time use cards, and purchase-cards (P-Cards)) are electronic. Both eliminate check use. Yet, for the vast majority of B2B payments, card-based virtual payments yield benefits for suppliers that ACH transactions simply cannot match. Beyond the simple speed of payment, significant security advantages and the ease of reconciliation offered by virtual card, suppliers benefit from several other aspects of virtual cards vs. ACH:
If there is a dispute over services or returned merchandise, ACH payments can be reversed by the buyer, simply removing the money from the merchant’s account. Although suppliers can pay for the extra service of blocking ACH debits, this requires using multiple checking accounts along with additional costs and reconcilement time. While buyers can dispute a virtual card transaction, the process allows for input from the merchant before the transaction is reversed.
While at first glance ACH transactions might appear to offer suppliers lower costs than virtual card transactions, in actuality there are monthly charges for using ACH. In addition, ACH transactions are subject to Non-Sufficient Funds (NSF) fees, typically ranging from $20–$35 per transaction, if there aren’t enough funds in the buyer’s account. More costs include additional employee time required to set up the ACH transactions for each buyer and employee time spent manually processing each transaction. In fact, the total supplier transaction cost for a $500 payment made by ACH are $32.80 vs. $20.38 for a card-based purchase – a 62% increase in costs. Still using checks or wire transfers? That will cost you even more ($33.17 for check and a whopping $43.22 for wire).*
Cash flow, always a concern for Accounts Receivable, is improved by card acceptance. Since virtual card transactions clear in real time, you will know immediately if a charge is approved or declined. The funds then appear in your bank account the next business day. On the other hand, ACH funds typically take 2–3 business days to appear in your bank account, and it may take 3–4 business days before you receive notice of a rejected transaction. In addition, suppliers can take advantage of reduced credit risk with card transactions over ACH. With ACH, the supplier must provide trade credit to the buyer and risk non-payment and NSF returns. With card payments, the buyer’s card provider assumes the trade credit risk, and the supplier gets guaranteed payment with real-time card approval.
Perhaps the single biggest benefit of accepting virtual card payments, however, is strategic: you can grow your business simply by doing business via virtual cards. As more of your existing customers make the inevitable transition to simplified electronic payments, you don’t risk losing them to other vendors if your company has already made the transition as well. And because many organizations now look to do business only with suppliers that accept virtual cards, you have an automatic sales advantage with that buyer pool if you accept virtual cards and your competitors do not.
Chad Clay is SVP of Client Management at Kontrol Payables, a Lost&Found partner focused on commercial payments solutions.