- Improve supplier relationships
- Lead to cost savings
- Reduce fraud risk, and more.
In this article, we will explain what payment automation is, the challenges of manual payment processing, and the benefits of payment automation.
What is payment automation?
Payment automation is using automation technologies to automate B2B payments to vendors and suppliers.
The payment process is a step within the accounts payable (AP) process, itself being a part of the larger P2P (procure-to-pay) workflow. The payment process should go smoothly because on-time payments ensure the vendor’s cash flow stability and on-time release and delivery of goods.
How does payment automation work?
Payment automation mostly2 , but not always, is done via Automated Clearing House ACH transfers:
- The payee creates a payment order (PO)
- The originator bank receives it
- The originator bank will compile all the POs and send them to an Automated Clearing House (ACH)
- The ACH operator approves and releases the PO amount to the recipient bank
What are the challenges of a manual payment process?
By some estimates, an average business makes 25-303 vendor payments monthly. Manual payment process has the following challenges:
1. Duplicate payments
Staff could accidentally pay the same invoice twice. This will affect the company’s expected cash flow, especially if the invoice amount is large. It will also create more workload for the accounting staff, requiring them to work with the vendor to ensure the refund.
A research done by an audit group showed that ∼50% of their clients’ duplicate payments were resulted from manual data entry errors (Figure 1). Payment automation helps eliminate that issue.
2. Payment fraud
There are many kinds of payment fraud. For our purposes, they mainly concern an employee:
- Misusing the company’s fund for personal interests
- Overestimating a PO to skim some off the top
- Sharing financial data with unauthorized personnel, thus creating security risks.
3. Late payments
Since the pandemic, late payments have been observed4 in Asia, North America, Europe, and Africa. For instance, in 2020:
- In the US, 53% fewer invoices were paid on time compared to 2018 and 2019
- In China, more than 52% of invoices were paid late
A reason for late payments has been COVID-induced economic issues. However, delays, human error, and slow manual processes also cause late payments.
4. Strained vendor relationships
A survey5 of 400 finance personnel revealed the following about the impacts of late vendor payments:
- 73% said their supplier relationships suffered because of late payments
- 59% said suppliers eliminated early payment discounts
- 62% said suppliers withheld goods shipment until the PO had cleared
- 55% said the supplier didn’t work with them again
Late payments from staff’ forgetfulness, or manual data entry errors, can strain vendor relationships and brand reputation.
How is payment automation beneficial?
Payment automation streamlines the P2P and AP process in the following ways:
RPA bots and finance APIs enable seamless integration and data collection between ERP and 3rd-party apps in a single dashboard. This transpires the payment status of outstanding and/or settled debts. The benefit is a streamlined treasury management process in which cash flows can be accurately estimated without over/underestimating the amount of outstanding debts.
Thanks to increased visibility, payment automation solution also flags duplicate payments to avoid them.
2. Lower payment processing costs
73%6 of organizations are “considering transitioning their B2B bill payments from paper checks to electronic payments.”
The lower payment processing fee is the main driver behind its adoption: sending paper checks costs7 between $2-$4, compared to $0.26-$0.5 for each ACH transfer. So the cheaper processing costs are a main benefit of automated payments.
3. Fraud risk reduction
Attended RPA solutions require a human in the loop to initiate a workflow. An automated payment system functions on that premise. This way, human controls are applied to each payment release, thus lowering payment fraud.
Moreover, automated systems can also detect and flag anomalies and suspicious transactions in real-time.
4. Safe & fast
Processing payments electronically has generally gotten more secure 8 throughout the years. Advanced security protocols allow the accounts payable department to process its electronic invoices digitally.
Lastly, automating electronic payments is quick. ACH transfers, for instance, can be done in a rules-based manner via RPA bots. And their clearance usually takes a day 9. The benefit of payments’ faster processing is that the:
- The company avoids vendors’ late fees
- Supply chain disruptions will be minimized
- The AP team will be sure that payment processes are going as planned
Automated payable systems are scalable. This is important for a modern business because bots will make payments as planned, regardless of the company size, workforce, or business transactions. This gives the company a competitive advantage. It also eliminates the need to hire more employees to pick up the load.
Automation tools such as optical character recognition (OCR), NLP, RPA, and other intelligent document processing tools can work together for processing invoices in batches and the background. This gives the AP team time to focus on other tasks which could require advanced analytics and human intelligence.
The “division of labor” offers a strategic future for the company’s AP department by enabling higher efficiency and automation potential in other workflows.
For more on fintech
To learn more about finance processes that are being automated, read:
- How Can Automation Help Your Order to Cash (O2C) Process?
- Top 4 Benefits & Use Cases of Asset Management Automation
- Top 6 Accounting Processes to Automate With RPA
If you are interested in leveraging a fintech solution, we have data-driven lists of vendors prepared in our financial services hub.
We will guide through the vendor selection process:
Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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