Payment rail options continue to evolve, with more alternatives available to corporate treasurers than ever before. Unlike earlier days of payment processing, where check/controlled disbursement, Fedwire, and ACH were the most common methods of payment, finance teams can now decide between same-day ACH and traditional ACH, real-time payments (RTP), Fedwire transfers, FX transactions, IATs, and even cards.
With so many payment options available, and finance teams more focused than ever on maximizing the use of funds – especially in the current interest rate environment - how can corporate treasurers know which option is best suited for their needs? One answer: intelligent payment routing.
What is intelligent payment routing and how does it work?
Intelligent payment routing has become an essential part of treasury operations for corporate treasurers looking to maximize their resources. Instead of the company’s AP team choosing or defining the method of payment within the payable file, the basic payment data is sent to the bank to determine which payment method is best to complete the payment.
A typical process for intelligent payment routing can include the following steps between the bank and the company:
#1. Define payment objectives: The bank and company work together to define payment objectives and acceptable parameters within the company’s risk/funding policies and acceptable payment methods. For example, some companies may not be supportive of the use of procurement cards because of the financial impact on their payees.
#2. Deep dive into company needs: Next, the bank will use the company payment data to gain a deeper understanding of a company’s payment needs and generate a payment file based upon the parameters (e.g., time sensitive or the most cost effective) in order to select the best way to complete the payments.
#3. Decrease likelihood of fraud: Most bank solutions can quickly and accurately assess security issues and payment errors, thereby reducing these concerns on both sides of the payment.
#4. Establish rules for payment reconciliation: The last step is to establish reporting guidelines for the reconcilement of payments. An important part of the solution is the ability of the bank to send reconciliation information back to the company. This information details the payment rail used or how each payment was completed, when it settled, and the payment purpose (addenda information accompanying the payment) to quickly reconcile completion of the payment, enhance overall payment transparency, and provide peace of mind.
It's worth noting that intelligent payment routing is improving its ability to evaluate and validate payment methods to find the optimal route. For example, it can check to see how the company previously made the payment, evaluate their unique parameters, and potentially recommend a more suitable payment rail. If there is a reason that payment methods should be consistent (such as if payees are expecting to see the same payment method used), the customer should bring this to the bank’s attention in the setup process.
Benefits of intelligent payment routing for corporate treasurers and their businesses
Benefits of intelligent payment routing generally include:
#1. Improves cash flow forecasting and liquidity management: Employing intelligent payment routing can help produce precise payment settlement dates that users can leverage to actively manage cash flow forecasting and liquidity – be it the timing of investment divestitures or use of working capital facilities. For example, payments that are selected to be made via ACH and book-to-book transactions (payments to DDAs within the same bank) provide predictability of payment completion that can be timed with the funding source, eliminating worries of idle balances being held in the DDA. In turn, intelligent routing can be used to aid in the account receivable practice by choosing optimal payment types to initiate debit payments (e.g., same-day ACH, RFP as part of RTP) and expedite the collection process – also helping to assist in forecasting cash positions.
#2. Reduces operational costs: Since intelligent payment routing can readily identify the most cost-effective method for each payment, users can take advantage of lower transaction costs and processing fees, while saving valuable time associated with actively managing the payable process. The result can be reduced overall operation costs in managing AP and AR for the company.
#3. Limits the potential for errors and fraud: By leveraging the bank’s payee database that generally verifies payee information, common payment errors (i.e., incorrect payee data) can be minimized. In tandem, instances of fraud can be mitigated from built-in fraud management processes within the solution.
#4. Enhances the overall experience: Outsourcing payment processing decisions (for both payments/payable and payments/collections) and potentially leveraging all payment rail types, with the opportunity to reduce the risk of fraud and processing errors, offers an improved customer payment management experience.
Potential complications of adopting intelligent payment routing
While intelligent payment routing has numerous benefits, finance teams should be aware of potential issues of introducing it into their AP or AR processes. One notable issue for some companies is the ability to reconcile the payments and collections, which is complicated by the various payment methods selected (i.e., different formats, timing of receipts) by the bank. Because these payments can be made on a variety of rails, it is critical that the company’s ERPs or treasury workstations be able to receive or pull that information and map it to the payment type for quick reconciliation. This means that the payor’s payables team will need the help of their IT team to ensure successful deployment of the varieties of reconcilement information received from the bank.
Adoption challenges and how to respond
Finance teams that want to incorporate intelligent payment routing within their AP and AR processing operations may find it challenging to create a business case. Achieving buy-in may be difficult if there are opposing goals, such as if the treasury team is focused on achieving more automation capabilities in an efficient and cost-effective manner but other leaders within the organization want to avoid integrating new processes to reduce complexity. Focusing on the cost-benefit analysis (with an emphasis on reduced operational costs) in addition to the advantages noted above can help convince leadership of the importance of adding this powerful solution to their payment and receivable management.
Intelligent payment routing is becoming an important tool for successful treasury operations. From improving cash flow forecasting and automating processes, combined with reducing costs, it can help teams do more with less and give valuable time back to busy treasury, AP, and AR teams.
