In March, Tom Hunt, Director of Treasury Services at the Association of Financial Professionals (AFP) hosted a webinar about determining the true cost of payments. He was joined by Mark Penserini (Corpay), David Deranek (Health Care Service Corporation) and Bridget Meyer (Redbridge).
As the webinar made clear, there are now many different types of payment methods available to consumers and businesses, from traditional checks and ACH payments to electronic and digital options. While each method has its benefits, they also have associated costs. Determining the true cost of each payment method is important for companies to understand their financial impact.
Deranek says his organization uses a “combination of bank fee software, our treasury management system and something we call our ‘tier database.’ We’re really putting a lot of effort into it.” He says the company is conducting a modernization project because “we can’t do it manually. It’s just too overwhelming.”
A survey by AFP of cost awareness shows that most organizations are either aware or extremely aware of the costs associated with payments, depending on the type of payment. For example, 40% of survey respondents indicated that they are aware of the costs of checks, while 45% said they were extremely aware of these costs. So there is a high level of awareness of the costs. But how can organizations effectively calculate such costs?
Choosing a model for determining payment costs
Meyer offers some advice on how companies can calculate the true cost of different payment methods. The initial step is to isolate all charges related to the payment type, including those hiding in other product families.
“The first challenge to any project is the accessibility of data,” she says. “You need to understand if you’re going to be building this for a single bank or all of your banks. It’s not as simple as just looking at a PDF statement.”
Bank statements can also lack transparency. “Banks can add additional charges in the general account services section for credit and debit postings. You have to decide how accurate you want to make your model for determining payment costs.”
After the data for the model has been gathered, all one-time setup fees need to be removed. For Meyer, this approach to cost analysis is like a “jigsaw puzzle” because it involves assembling and putting together the various pieces. “Are we going to keep or remove all hard charges, exceptions, reporting, etc. Or are we taking them out and just focus on core processing charges? That’s going to be activity-based charges. It’s a big decision.”
Once this step is done, payments and collections need to be separated. “It may seem obvious, but it’s not that simple,” says Meyer.
After the data has been gathered and the decisions regarding modeling have been determined, it’s time to think about the divisor. As Meyer notes, “You can’t just take all of these line items that you’ve isolated on your analysis statement and add the volumes.” Instead, you need to isolate specific trigger volumes of line items to avoid duplication.
One service line does not tell the whole story. Including other items like ancillary costs, fraud charges and maintenance fees, for example, is very important. Meyer says the key question to ask is, “If I were to completely change from ACH to RTP transactions tomorrow, which services would go away?” Any services that would not disappear should be included in the model.
How AFP codes help
AFP codes allow organizations to sort data by product so they can easily identify the various charges on their statements. Each has a designated product family in the product code structure. Assigning the correct AFP codes makes it possible to easily filter prices and volumes. However, it is also important not to double any volumes.
Meyer says that ACH payments can be the most difficult product family to calculate correctly. This is because in many cases, banks do not differentiate between debits and credits. There are additional fees for credit postings in general services. And significant maintenance charges can swing results.
A case study in determining payment costs
HCSC offers a case study in managing bank fees. The company is currently implementing a payment modernization project that involves standardizing data. As part of this effort, the treasury department is trying to create a new foundation for evaluating both the company’s payment cost and its overall cost in bank fees.
“We know our business is swimming in data and we need to make sure that we’re in a position to use that data to make more informed decisions for the profitability of our business,” says Deranek.
The future is digital
One of the company’s main focuses is moving more payments to a digital format. “Obviously, you want to be more digital in your payments, but there are still those aspects where you’re doing checks. You can’t get away from it. It’s a slow process to convert it,” says Deranek.
According to the AFP survey, about 73% of responding organizations are currently moving B2B payments away from paper checks to electronic payments. The primary reasons for this shift are fraud prevention, reduced costs and increased efficiency.
While there may be some pain points when adopting automated payment solutions – including a lack of IT resources, existing supplier relationships (which would require a major effort to update) and multiple workflows – doing so can lead to operational efficiencies and make determining the true cost of payments easier.
Understanding costs propels the future
Understanding your true cost of payments is not an easy task. There are a number of factors involved, and considerable time and effort is required. However, taking the time to determine your true cost of payments will allow you to make informed decisions, build bridges across all departments and better prepare for the future.