Of particular interest to any organization receiving customer payments is the format and delivery method of remittance data – information that explains what the payment is for, including associated invoice number, customer, specific items purchase and more. This data is critical for supplier organizations, allowing them to align submitted invoices with payments that are then reconciled with customer accounts. Not only is retrieving the data important, but how that data is retrieved is just as important. With the introduction of electronic payments, that remittance data began being delivered through different channels, whether it be via email, EDI transmission or some other form. While electronic payment, in and of itself, may have proven to be more efficient and less costly, retrieving and handling the remittance data has become the new issue. There are five challenges supplier organizations face when dealing with remittance data associated with electronic payments.
- No one likes change
When transitioning from receiving paper checks to ACH payments, recipients could no longer refer to the check stub to retrieve the corresponding remittance data. That data would now be submitted as a fax, as a PDF document or spreadsheet attached to an email, or via EDI. Regardless of how the remittance information is delivered, if payment is made electronically and the supplier is used to receiving remittance data via check, an effective process must be implemented to ensure proper receipt and handling of that data. One reason why some suppliers still prefer checks is the remittance data is always attached to the payment. The legacy systems (e.g., lockbox) in place for organizations to gather and use that remittance data to then properly manage their cash application is seen as something that works. The thinking often goes, “if something isn’t broke, don’t fix it.” Too often, supplier organizations have not been interested in fixing it.
- Remittance data is delivered in different formats
When receiving payment via ACH, the remittance data can be delivered any number of ways, depending on the customer, the tools and the bank handling the transaction. Delivery channels may be email, EDI, customer portal or fax. Different formats may be PDF, Excel spreadsheet or freeform text. Many supplier organizations have been frustrated with the different formats when handling remittance data associated with electronic payment. Different customers have different formats and practices when submitting remittance data. The necessary effort to get customers on the same page may seem overwhelming to some suppliers.
- Remittance data is delivered separately from the payment
When customers pay electronically, the remittance data can be separated from the actual payment. When this occurs, suppliers must then retrieve that data and may have several methods in which to do it, depending on what method the customer is using. This results in more time, effort and resources expended by the supplier to retrieve and apply the data for accurate cash application.
- Additional time and effort is needed to handle remittance data
Supplier organizations want fast, straight-through processing when reconciling incoming payment with invoices, customer orders and accounts. Without remittance data formatted in a consistent manner from customer to customer, the accounts receivable team must spend valuable time identifying and correctly applying that data. The more time and effort spent to do this, the more resources are needed, and the higher an organization’s DSO.
- Inefficient handling of remittance data increases costs
Spending more time and effort to retrieve and apply remittance data costs supplier organizations money. These additional costs must be applied somewhere. When compared to the costs of accepting credit cards, processing paper checks and wire transfers, ACH payment is always seen as more affordable. But, that advantage could be lost if additional resources are required to retrieve and input the remittance data associated with such payments. ACH payments can prove to be much more cost effective, in the short and long term, if the remittance retrieval process is streamlined.
The Fix: Include remittance data with ACH payments
Suppliers can improve ACH payment processing, and further lower cash application costs, by encouraging customers to leverage the ACH’s capability to facilitate remittance data with the payment. The remittance data in ACH payments is standardized, allowing suppliers to automatically apply payment and close open invoices. In fact, the notion of delivering dollars and data together is more the norm than the exception.
A best practice for suppliers to receive standardized remittance data is to provide customers the remittance file requirements. Remittance specifications can also be specified in contract negotiations with customers. Suppliers may also work directly with their financial institution to receive necessary remittance data when being paid by customers via ACH. The solution around receiving proper remittance data lies with supplier organizations being proactive and ensuring they will receive that data in a way that works for their organization – well before the first customer payment is made.
Additional remittance delivery methods in the works
Recently, international efforts to standardize remittance data associated with electronic payments have been underway. The Business Payments Coalition, supported by the Federal Reserve Bank of Minneapolis, has made progress in educating stakeholders about the ISO 20022 XML-based standalone remittance standard. ISO 2022 is a harmonized set of XML messaging standards across major financial services domains, such as cash, securities, trade, card and foreign exchange. As an international standard, ISO 20022 can be an ideal platform for the exchange of remittance data. NACHA, the governing body for the ACH Network, collaborated with many other industry organizations to ensure that ISO 20022 remittance can be used for remittance data in ACH payments. As more progress is made, ISO 20022 will become a real option that organizations can leverage for reliable and consistent remittance sharing.
As B2B electronic payments become even more ubiquitous in the near term, organizations will find remittance challenges that were plaguing them several years ago are now a thing of the past. Accepting payments electronically with corresponding remittance data has become easier, more cost effective and something every supplier organization can achieve.
Supplier organizations can gain additional understanding around how to effectively ensure remittance data is coupled with ACH payments in an upcoming webinar titled How ACH and Full Remittance Can Quickly Reduce DSO by Up to 20%. The webinar will be hosted by Receivable Savvy and features NACHA ,The Electronic Payments Association, on Tuesday, Oct. 30 at 2 PM EST.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. He currently chairs the Vendor Forum of the Federal Reserve Bank of Minneapolis and his resume includes time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.