Tricks To Spot Hidden Costs In Payments Processing

$33 per invoice. That’s what the IOFM says it costs to process paper invoices. Dodging those and other lurking hidden costs, says Store Financial CEO Eric Mettemeyer, requires organizations to focus not only on the payments method but also the payment process. PYMNTS caught up with Mettemeyer to get his perspective on what companies should ask their payments processors to get the best results, and how to leverage low-cost borrowing to drive both value and efficiency across the supply chain.

So we had previously discussed the costs associated with enabling payments as it relates to commercial cards. This time, I would like to explore what companies need to do in order to find hidden costs and make money in the process. What do you think organizations should be asking their payment processors to ensure they are getting the best possible results? 

EM: Organizations should be asking their payment processors to help them with both optimizing the payment method being used as well as the process around the payment. Oftentimes, payment processors are experts at particular payment methods and have one that they feel is more optimal than another, but so often the hidden costs are really not in the payment methods (those are quite obvious) but in the processes around the before and after part of the payment.

A recent study ranked the best practices of top performing AP organizations. The rankings were interesting to me because they were a mix of payment method optimization and process improvement. The first, for example, was the ability to send electronic payments, which is a very payment method-focused effort. The third was automated invoice processing – getting out of the paper invoice payment game, which has nothing to do with the payment method and everything to do with process. Process is where we’re seeing a lot of hidden costs, so as an organization, you want to focus on the method and the process.

A few examples of the hidden costs in those processes lie in two areas – processes before and after the payment, and the management of the working capital in the buyer organization. In the first part, examples of hidden costs include fraudulent payment. What is the cost of that fraudulent payment? It’s not just the fees spent to make that payment, but the entire amount of the payment. That can be a very expensive cost.

Another example would be a wrong payment – what’s the cost of the wrong payment? Well, there’s the cost of chasing that payment down and getting it applied appropriately, getting it back and getting it to the right party. There’s a lot of rework involved.

Then, there’s the hidden cost of payment from a paper invoice. Referring back to an IOFM study on AP automation, they quoted the cost to process a paper invoice at $33 per invoice. If you’re getting your cost of making a payment down from $8 to $1, but you’re still spending $33 to process paper invoices, you’re not making a very big dent in your overall cost.

The last example is payment made after the early pay discount period that a supplier offers to the buyer. That can be a significant opportunity cost – if you’re a large organization that’s spending $1 billion a year with suppliers and you could have received a 1 percent discount, that’s $10 million a year. Those numbers outweigh the cost of optimizing the payment method.

The second area of hidden costs is in working capital and the management of that. We tend to see organizations focused on extending their days payable outstanding (DPO), and we’re in a time when many organizations have more money on their balance sheets than they’ve ever had. They have access to low-cost borrowing credit lines. Not taking advantage of that idle cash or low-cost credit lines is a huge hidden opportunity cost within the payables processed. We’ve seen the ability to generate returns of 12-36 percent ROI using idle cash or credit lines to make an early payment along with a virtual card payment method – those two things combined can generate significant revenue.

What other best practices should organizations follow when paying their suppliers, and what pitfalls should they be aware of? 

EM: Other examples of best practices that we’ve seen are organizations focused on sending rich remittance data with the payment. That’s important because if the wrong remittance data is sent, or not enough data, there’s the cost of inquiry from the supplier. The supplier will call back to the AP organization to seek help in applying the payment sent. So choosing a payment method that allows you to add more remittance data is a best practice.

Another area is the ability to capture early pay discounts, and that has a lot to do with the speed of processing and invoicing. Paper processes are obviously slower than automated processes. A lot of organizations are spending money on AP automation systems to get them into a lower cost position, and to be able to take advantage of early pay discounts where previously they could not because they couldn’t process the invoice fast enough.

How can cash or low cost borrowing be leveraged, and what impact can these options have on the supply chain?

EM: I refer to this area as supply chain finance. If the buyer is in a better cash or borrowing position than the supplier, then the buyer can leverage that position to create a win-win situation for both parties. That then assumes the supplier would appreciate earlier payment because they are in a worse cash position, and for that earlier payment they’re willing to give a discount on the price.

When companies think about innovation, payables is not typically an area considered strategic to their core mission. First, do you agree with this statement or have evidence to the contrary? Second, what are the consequences of this type of thinking?  

EM: I think it’s a matter of degree for each company, but I would not agree with that statement. Let’s walk through a couple of examples. For claims processing companies, payments is absolutely strategic – that’s what they’re in the business of doing: sending money to other parties. It doesn’t get much more strategic than that.

For large organizations, the general benefit is economy of scale. So each of the functions in the organization needs to be efficient to achieve those benefits. Payables is an area where larger companies can drive a lot of value and efficiency.

For small businesses, you could say payments is not as strategic. But those are the players that have fewer resources than anyone else, so why be inefficient with payments processes?

Payables is strategic to every organization – more for some than others – but not thinking about it in a strategic manner means failing to take advantage of a situation, whether it be economy of scale, or not dealing with resource constraints in a small business.

Finally, who is ultimately responsible for the vendor enablement process?

EM: Well, I guess it’s the buyer who is ultimately responsible, but that doesn’t mean they have to perform it. So many payment method and process improvement initiatives in the marketplace provide a vendor enablement solution to the buyer. So they’re responsible for it but they can have it as part of the service provided by the right payment processor.

To listen to the full podcast, click here.

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Eric Mettemeyer
CEO, Store Financial

Eric is the CEO of Store Financial, bringing 11 years of experience in the payments industry. His initial experience in the industry was the management of more than 10 acquisitions of prepaid, card processing and money transfer companies in Europe and the Americas for Euronet Worldwide. He then subsequently served as Managing Director of epay Americas and Asia, a division of Euronet Worldwide. His previous job experience also includes International Tax, Financial Planning and Treasurer roles for companies including Arthur Andersen, Sprint and Euronet. He received his undergraduate degree in Accounting from the University of Iowa, his CPA license from the State of Missouri and his MBA from Thunderbird School of Global Management.