Pandemic Creates Opportunity for Transforming AP
A lot has been written over the last few years about the slow progress of digitizing the finance function—particularly business-to-business (B2B) payments. Compared to business-to-consumer (B2C), adoption of electronic payments in B2B has been slow across the globe, including in the United States.
Although COVID-19 has brought many obstacles, one bright spot that has emerged is that remote work requirements have highlighted both the need and opportunity for automating accounts payable (AP) as part of the finance function. This has set the stage for some big changes in 2021.
At the start of 2020, manual approval and payments by paper check were in place in roughly 60% of small and medium-sized businesses. The shift to home offices at the onset of the pandemic highlighted the associated gross inefficiencies. The logistical challenges of multiple people handling, approving, signing, and mailing out paper checks—not to mention the additional costs and lack of control over cash flow—have put paper checks and inefficient manual processes on a path to extinction. Small and medium-sized businesses will do a lot more than replace paper checks with electronic payments. Here are some major areas where these businesses will see tremendous benefit this year.
Payments-as-a-Service vs. BPO
Digitizing payments has primarily been seen as a business process problem best solved by building custom technology solutions for a manual business process and workflow. That has been a stumbling block for a lot of B2B companies that are not interested in the complexity and unknowns of a business process reengineering or systems integration project. In fact, fewer than 30% of small and mid-sized businesses have automated processes like AP. They’ve been happy to stick with their existing way of doing business. Until now, anyway.
Today, robust, cloud-based payments-as-a-service solutions give businesses of any size ready access to comprehensive capabilities built on best practices in business processes. These solutions automate the entire end-to-end, invoice-to-pay process with the following:
- Flexible and easy-to-use workflow management
- Automated invoice/purchase order matching and approval routing
- Tailored e-payments to supplier preferences
- Easy connection to a wide variety of different financial systems through application programming interfaces or pre-built connectors
These robust capabilities, coupled with these packaged services, remove many of the preconceived difficulties to AP automation and make business process outsourcing (BPO)-led solutions unnecessary for small and medium-sized businesses and even larger enterprises.
Virtual Payment Cards
Every major financial player has made one related announcement or another about virtual payment cards in 2020. These unique 16-digit card numbers are created solely for a single use between a payer and a payee, making them highly secure for both parties. This is important because as many as 74% of businesses in the United States saw an increase in check fraud exposure in 2020, according to the Association for Financial Professionals (AFP). That compares to just 3% for virtual cards.
Aside from the security benefits, virtual cards have become widely accepted. Businesses that use the cards can take advantage of rebates to generate extra cash. Perhaps most important, though, is the added visibility and control they give businesses over their cash flow. For all these reasons, virtual cards will become a standard payment method for businesses in 2021.
Adapting AP Processes to Remote Work Requirements
With the pandemic raging, and limits on office occupancy still in place, finance teams will have to continue performing functions like AP remotely. For some, this will require new tools to automate the process and minimize manual handling and approvals. Some of the specific areas businesses should consider are the following:
- Invoice capture and entry—Digitizing the capture of invoices eliminates the need to code invoice data into accounting systems while also preventing manual errors. It also avoids the need for someone to physically go to the office and collect paper invoices for processing.
- Approval workflows and purchase order matching—Remote work situations have made it virtually impossible to manually route invoices for approvals. Some have tried doing it with PDFs and emails, but the need for countless communication threads and emails to check status are incredibly time consuming and inefficient. Businesses can deploy tools that automatically match invoices to purchase orders and flag items that require further inquiry. Invoices are then routed automatically to the right people for approval, with timed reminders about upcoming deadlines.
- Payment execution—Manually tracking approved invoices and making timely payments is difficult from a centralized office, let alone while working remotely. With an automated payment solution, approved payments can be scheduled and sent out at the optimal time, taking advantage of early-pay discounts and cash-back opportunities. They can also synch with your finance systems, like enterprise resource planning (ERP), to keep them up to date. ERP integration gives the following benefit:
- ERP integration—An AP automation tool should integrate with your ERP and accounting systems. The best automation tools are coding invoice data at 99.5% accuracy, leaving little to no room for errors. They also synch payment data seamlessly to ensure you have one financial system of record for your business.
Annual B2B payment volumes in the United States are estimated at approximately $25 trillion. The manual business processes and high invoice volumes associated with those payments can create big operational challenges for understaffed finance teams at small and middle-market companies. Many have been slow to tackle these challenges—either due to the cost and complexity of available solutions or simple inertia. Advances in easy-to-use AP automation technologies and the enormous benefits that come with them, coupled with the impact of COVID and extended remote work requirements, will dramatically accelerate adoption, and deliver tremendous value.
Vijay Ramnathan is President of MineralTree, a company specializing in AP and payment automation for middle-market and enterprise-level companies. A self-professed fintech and payments geek, Ramnathan has spent more than 20 years in the space, including strategic leadership and operational roles at companies including US Bank, Fifth Third Bank, and COMDATA/Fleetcor.