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Automated Payment Solutions Virtual Card Settlement VS Checks. Presented by: John Widdifield , Executive Director, Automated Payment Solutions JPMorgan Chase Global Commercial Card – Government, Not-for-Profit, Higher Ed, and Healthcare. October 3, 2013. Agenda. Current Payment Landscape

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automated payment solutions virtual card settlement vs checks

Automated Payment SolutionsVirtual Card SettlementVS Checks

Presented by:

John Widdifield, Executive Director, Automated Payment Solutions

JPMorgan Chase Global Commercial Card – Government, Not-for-Profit, Higher Ed, and Healthcare

October 3, 2013

agenda
Agenda
  • Current Payment Landscape
    • Market share by Pay Type and Trend
  • What is a Commercial Card
    • Types of Commercial Card Programs
  • Card Based Options for Settling AP Invoices
    • AP Cards / Supplier Cards
    • E-payments / Single Use Accounts
  • Commercial Card Benefits VS checks
    • To your organization
    • Vendor Benefits
  • Sample Business Case for Virtual Card Settlement
  • Q&A

MasterCard® smartdata.gen2TM is a registered trademark of MasterCard Worldwide and the smartdata tool is a MasterCard Worldwide Incorporated solution

landscape of vendor payments
Landscape of Vendor Payments

Checks remain the principal form of payment. Small and medium-size transactions dominate payment activity.

Transactions by Payment Type

  • 76% of CFOs cite “lower invoice processing costs” as top AP goal
  • However, paper checks:
    • Can cost $0.75 to $8 per transaction
    • Offer little float, minimal controls, no visibility
    • Make fraud and misuse harder to detect
    • Do not earn rebates

Checks

64%

76%

29%

Card

13%

6%

ACH

4%

6%

Wire

3%

Transactions Below $2,500

Transactions Between

$2,500 - $10,000

Source: Aberdeen Group, September 2009, Visa Middle Market Study 2007, RPMG 2007

factors driving electronic payment processes
Factors Driving Electronic Payment Processes

Given the tangible benefits electronic payments deliver over paper-based checks, it is not surprising that adoption of electronic payments has significantly increased over the past five years, while manual payments have declined.

  • Benefits
    • Cost reduction
    • Decreased paper consumption
    • Compression of procure-to-pay cycle
    • Ability to capture rebates and early payment discounts
    • Improved visibility
    • Reduction in fraud

Source: Federal Reserve and NACHA research

commercial cards defined

Commercial Cards Defined

What is a Commercial Card?

what is a commercial card
What is a “Commercial” Card

Commercial Cards are credit cards with special controls and value-added functionality

  • Different from a small business or private label card
      • Spend and merchant controls
      • Credit based upon organization, not principal officer or cardholder
      • Statement balance due in-full
      • Sophisticated analytical tools available
  • Terminology
      • Purchasing card (P-Card)
      • Corporate card (T&E)
      • OneCard (combination of the two)

Two lines of embossing

types of commercial cards
Types of Commercial Cards
  • Purchasing Cards
    • Cards used at the point of sale for small dollar purchases
    • Issued to individuals that need to make ad hoc purchases
    • Centrally billed and centrally paid with Corporate Liability
  • Travel Cards (Corporate Card)
    • Cards issued to individuals used primarily for travel expenses
    • Could be individually billed or centrally billed
    • Individually billed programs are Joint & Several Liability
  • Accounts Payable Cards
    • Cards used as a payment mechanism to pay invoices per

the regular procurement process

    • Usually virtual or “ghost” cards tied to AP or a supplier
  • E-payments/Single Use Account “Virtual Cards”
    • Fully automated and secure virtual card alternative to checks

Used

in place of

invoice

Typically used after invoice

approval

Alternative

to checks

slide9

Virtual Card Based Options for Settling AP InvoicesAP Card / Supplier Cards ande-payments / Single Use Accounts

1 ap card or supplier card
1. AP Card or Supplier Card
  • Card(Ghost) accounts are issued to the Accounts Payable Department or Supplier and are used to pay invoices in lieu of issuing checks
    • Purchasing and approval processes remains intact
      • Vendor is flagged in AP data base as a card paying vendor
      • A/P Department already has processes in place to capture
        • Account allocation
        • Capital equipment accounting
    • Benefits of an AP/Supplier Card
      • Reduce the number of checks issued
      • Retain vendor history
      • Increase DPO and decrease Vendor DSO
    • The financial incentive can turn Accounts Payable into a profit center
a p card process works with all systems
A/P Card process works with all systems

Your Organization

1. The process for matching, entering and approving invoices in your company’s AP system remains intact – nothing changes

Notify your supplier of approved payment(Liability to bank rather than “cash”)

2. Vendors are flagged as pay-type “card” in AP system.

Your Supplier

6. Transaction data extracted from online system for account reconciliation and bank is paid (liability to bank is cleared to “cash”)

4.Supplier processes transaction on POS device and is paid within 48 hours

5. Vendor transaction is posted and becomes available online

e payments single use automating vendor payments
e-Payments/Single Use: Automating Vendor Payments

An electronic payment solution that offers the security of ACH with the float and rebate earning potential of commercial card

Invoices

  • Virtual payment account number – no physical plastic is issued
  • Reduces the opportunity of vendor and employee errors or misuse
  • Auto reconciliation of vendor transactions
  • Similar to checks:
    • A unique 16-digit virtual account number for each payment
    • Accounts are active for a defined time period (e.g., 30 days)
    • Account credit limit equals the exact payment amount – to the penny
e payments offer check like controls with security of ach
e-Payments offer check like controls with security of ACH

Delivered to a Specific Vendor

Defined Time Period

Credit Limit is set to the specific payment amount

Unique Account Number

Remittance Data accompanies each Payment

Invoice #001…

Invoice #002…

Invoice #003…

how do e payments single use accounts work
How Do e-Payments/Single-Use Accounts Work?

Automated (check-run) file exchange, notification to the suppliers, and reconciliation

5. Reconciliation, billing and payment

Bank

1. Payment file

4. Transaction data

YOUR ERP SYSTEM

VISA OR MASTERCARD

2. Supplier notification

Vendor enrollment done by bank

3. Supplier payment

SUPPLIER

1 reduction in paper check volume and processing
1. Reduction in Paper Check Volume and Processing
  • Paper check costs: $.75 - $8 / per check
  • Daily Operating Issues:
    • Voids
    • Re-issues
    • Uncashed
    • Paper Check Fraud

“Every year fewer and fewer of our payments are made via paper check sent

via the US mail. Leveraging virtual cards for some vendors allows us to take

advantage of the efficiencies of electronic payments, and create an income stream.”

County Auditor, May, 2013

2 increases your dpo while decreasing vendor dso
2. Increases your DPO while decreasing vendor DSO

Example

30 Day Billing Cycle with 14 Day Payment Terms

AVERAGE PAYMENT FLOAT = 29DAYS

30-day billing cycle

14-day grace period

Day 1 of billing cycle

  • Billing cycle begins
  • Pay vendor with purchasing card throughout cycle
  • Vendor processes payment for settlement

Day 30

  • Billing cycle closes
  • Statement is presented
  • Payment not due for another 14 Days

Day 44

  • Payment due in full

Grace Period (time before payment is due) may be longer or shorter than 14 days

Shorter = higher rebate Longer = lower rebate

3 card payment can alleviate 1099 misc reporting
3. Card payment can alleviate 1099 MISC reporting
  • IRS regulations effective for the 2011 tax year shifted the burden for 1099 reporting on transactions paid by card to the acquirer
    • Acquiring entity is now responsible for reporting all card transactions to the IRS
      • You no longer have to marry card and check transactions to verify payments the $600 reporting threshold
      • Your company still has to report transactions paid via check, cash, ACH and wire
    • MasterCard’s whitepaper outlines the legislation
4 rebate sample rebate earnings directional only
4. Rebate (Sample Rebate Earnings - Directional Only)

$15MM x 1.34% = $201,000/year

$25MM x 1.47% = $367,500/year

Reduced Check Volume

Increased Cash on Hand

  • Notes:
  • Billing Terms/Frequency of Payment impacts rebate
  • Large Ticket Interchange (LTI) rebate
    • Incentive for large suppliers to move to card settlement at a lower rate
    • Brings in additional spend, but at lower rebate %
electronic card settlement yields multiple benefits for vendors
Electronic Card Settlement Yields Multiple Benefits For Vendors
  • Guaranteed form of payment by the bank for customer approved transactions
  • Early payment liquidity solution for vendors that require immediate cash on hand
  • Reduced check processing costs.
  • Simplified reconciliation with full remittance and payment processing details
  • Access to payment portal showing historical (24 months) payment and remittance history (e-payments option)
  • Automate postings/clearing of paid invoices (e-payments option)
  • Minimal to no-change management (majority of vendors already have a POS terminal)
  • Large Ticket Rates can lower vendors’ card fees
where do virtual cards fit segmenting your suppliers
Where do Virtual Cards Fit? (Segmenting your suppliers)

There are four main value drivers associated with Virtual Card Payments

  • Check Processing Benefit – moving spend to e-Payments results in the reduction of checks. Benchmark cost to process a check is between $0.75 to $8 – this cost would be eliminated for those vendors moved to e-Payments
  • Days Payable Outstanding Extension – e-Payments allows accelerated payments to vendors while extending DPO
  • 1099 Reporting – 1099 reporting burden removed
  • Financial Rebate – Receive a rebate on all spend transitioned from checks

Rebate earning solutions

Check/Wire/ACH

  • Examples
  • MRO
  • Office Equipment
  • Professional Services

Automation benefits

Virtual Card Settlement

  • Examples
  • Business Retail
  • Office Supplies
  • Lodging

Commercial Cards

a p card e payments adoption grew 67 from 2009 to 2011
A/P Card/e-payments adoption grew 67% from 2009 to 2011

Projected

Actual

2012 RPMG Purchasing Card Benchmark Survey

ap cards vs e payments which is the best fit for me
AP Cards VS e-Payments: Which is the Best fit For Me?
  • AP Cards:
    • Simple to get up and running, no IT work
    • Less automated process (i.e., buyer notification to vendors of payments)
    • Generally recommended for programs with projected annual charge volume of < $10 million/year*
  • E-payments:
    • More automated and secure solution for both Buyer and Suppliers
    • Vendor Portal offers significant value to suppliers (remittance interface and data repository)
    • Requires IT integration work, vendor enrollment process
    • Generally recommended when annual charge volume > $10 million/year*

*How much Spend Can Be Captured:

Rough Rule of Thumb: ~10% - 15% of total AP spend can be converted to a virtual card settlement solution

e-payment solution generally requires $75 - $100 million+ annual AP spend to achieve $10 million+ in annual card spend

mastercard visa acceptance allows for usage beyond common categories
1099 Vendors

Construction projects

Consulting fees

Courier services

Drug testing

Insurance premiums

Internet provider fees

Landscaping

Licenses

Relocation expenses

Rental equipment

Road maintenance

Short-term leasing

Temporary services

Waste removal

Workman’s comp premiums

MasterCard/Visa acceptance allows for usage beyond common categories

A vendor match will help you discover which of your vendors currently accepts cards

understanding spend potential via a vendor match
Understanding Spend Potential Via a Vendor Match
  • Quick and cost free service
  • We’ll help you identify which vendors already accept MasterCard/Visa and what level of data they provide.
  • Essential to determine program spend potential
  • Confirm MCCs for easier program set-up

Providing annual spend and number of invoices will allow for a thorough analysis