Making Electronic B2B Payments Is Easier than You Think

Dale Sorenson, Associated BankSharon Jablon, The Clearing House, AAP

Windy City Summit, June 7, 2012

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What’s Happening?

• Yes, checks are disappearing – but primarily with consumers

• Superstructure for B2B electronic payments is largely in place

• Corporate awareness and practices still lag

• It’s easier than you think

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B2B Payment Patterns

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Checks Continue to Disappear

2006 (billions) 2009 (billions) CAGR*Checks 31 25 -7%

ACH 15 19 9%

Credit Card 22 22 0%

Debit Card 25 38 15%

Prepaid Card 3 6 22%

Total 95 109.0 5%

* CAGR = compound annual growth rate

2010 Federal Reserve Payments Study

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Check-Clearing Times Shrink

Source: Phoenix-Hecht

2005 2006 2007 2008 2009 2010 20110.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Lockbox Deposit Clearing Averages

City PointsRCPC PointsCDA Points

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Postage Rates Climb

19201924

19281932

19361940

19441948

19521956

19601964

19681972

19761980

19841988

19921996

20002004

20082012

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

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Why Pay Electronically?Benefits of Electronic Payments

Organizations Rated Benefit among Their Top 3

Cost Savings 52%

Improved Cash Forecasting 40%

Fraud Control 37%

More Efficient Reconciliation 32%

Working Capital Improvement 28%

Straight-thru-processing for A/P and A/R

24%

Better Supplier/Customer Relations

24%

Reduction in DSO 22%

Ability to Take Early Pay Discounts

18%

“2010 AFP Electronic Payments: Report of Survey Results”

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Barriers to Change

Major Barriers to Increasing Use of Electronic Payments

Percentage Distribution

Lack of integration between payment and accounting systems

34%

Shortage of IT resources for implementation 33%

Difficult to convince customers to pay electronically 32%

No standard format for remittance info 28%

Trading partners can’t send or receive automated remittance info with electronic payments

28%

Check systems work well 20%

“2010 AFP Electronic Payments: Report of Survey Results”

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B2B: Checks Still Swamp ACHPayment

Type*2010 Vol. of

B2B (bil.)% Total Adjusted % Comments

CCD Debits 0.6 6% 0% Corp’s decline debits

CCD Credits 1.4 16% 8% Often internal transfers

CTX 0.07 1% 1%

Checks 6.7 76% 91%

Total 10.0 100% 100%

“Typical organization makes 57% of its B2B payments by check” 2010 AFP Electronic Payments study

* ACH data from NACHA’s Annual Report Check data from 2010 Federal Reserve Payments Study

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Electronic Payment OptionsACH (CCD+) ACH (CTX) Fedwire/ CHIPS

Vendor Experience Medium Low HighTransaction Fees $ $ $$$Characters of Remittance Data 80 800,000 9,000

Format for Remittance Data

• EDI segment or Data Element•NACHA Banking Convention

• EDI • STP820•UN-EDIFACT

• EDI • STP820• XML• ISO20022• SWIFT• UN-EDIFACT• TAGS• Narrative

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Payment Networks

The Clearing House (TCH)

Network Payment Type Market Share

EPN(Electronic Payments Network) ACH Domestic 52%

SVPCO Check Images 44%

CHIPS(Clearing House Interbank Payment System)

Domestic & International Wire Transfers

(High Value Payments – Real Time Final Settlement)

43%

Clears and settles 65 million payments, valued at nearly $2 trillion/day

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Payment Flow – STP 820

Payor’s Accounting Software or Bank’s Online Portal

Accounting Software

CTX with

STP 820

STP 820

CTX with STP 820

CTX with STP 820

Payables DataPayee’s

Customer Account NumberCustomer NameInvoice Gross AmountAmount PaidInvoice NumberInvoice DatePO NumberDiscountAdjustment AmountAdjustment Code

The Clearinghouse/Fed

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101 021000018 3112345670302120140F094101ASSOCIATED BANK JONES PLUMBING X5220JONES PLUMBING 1311234567CTXPAYINVOICE 030212 1021000010000012622021000021182389281 0000012001EP10019 0008ACME IMPORTS 1021000010038729705ISA*00* *00* *30*311234567 *14*9088877320000 *030129*101000100387297051*U*00401*000000001*0*P*~\GS*RA*311234567*9088877320000*20030129*1615*1*X*00401000020038729705\ST*820*0001\BPR*C*120.01*C*ACH*CTX*****1311234567**01*021000021*DA*182389281*2000030038729705030129\TRN*1*EP10019\N1*PR*JONES PLUMBING*91*123456789012345\N1*PE*ACME IMPORTS 00040038729705\ENT*1\RMR*IV*3920394930203**30.01*40.01*2\REF*R7*3920394930203*NEW BUILDING PRO00050038729705JECT\DTM*003*20030123\ADX*-8*01*TD*USED CATALOG 199JAN2003\RMR*IV*254221222500**0006003872970545*50.01*4\REF*PO*5722319*MARKETING DEPARTMENT ORDER\DTM*003*20030125\ADX*-1.01*0007003872970504\RMR*R7*21222500**45\DTM*003*20030129\SE*17*0001\GE*1*1\IEA*1*000000001\ 00080038729822000000900021000020000000000000000000120011311234567 0210000100000129000001000002000000090002100002000000000000000000012001 X 

5 = Batch Header Record6 = CTX Corporate Entry Detail Record7 = CTX Addenda Record STP 820

NACHA File for CTX Payment with STP820

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Bank Portal for Electronic PaymentsRunning Total of all remittances

User inputs Payee information

To get to detail

Summary information of remittances already established to the payee

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Bank Portal for Electronic Payments

User key enters remittance information

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Software SupportCertified by

Promoted by

Adopted by

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Remittance Information and Wires

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Transaction = Payment Data +

9000 characters of remittance information

ISA*00* *00* *17*071000366 *17*021000021 *090129*1011*U*00401*000000001*0*P*;\GS*RA*071000366*021000021*20090129*1615*1*X*004010STPW…..

Wire Remittance Information (CHIPS and Fedwire)

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Format Characters

Unstructured• EDI• XML• SWIFT

9,000

Structured • Tags 9,000

Related Remittance Info

• Reference number• Fax, email or URL

number2,048

Options for Sending Remittance Info with Fedwire and CHIPS

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Verizon

Posts toAccounts Receivables- STP 820 module

The Clearing House Great Plains DynamicsAccounts Payable – STP 820 module

TCH’s Bank Verizon’s Bank

Experience with STP 820 & Accounting Software

ACH Operator

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TCH Payments to VerizonChallenge

• Many checks (1200 per year) to Verizon

• Many “pay to” addresses and duplicate invoice numbers (phone #)TCH Electronic Payments Program

• Verizon initially did not respond to TCH’s mass request for banking info

• But TCH discovered that Verizon processes EDI Electronic Payments for Verizon – “No Brainer”

• Unique invoice number is now phone number + date = XXXYYYZZZZ MMYY

• Immediate conversion (4-6 weeks) and savings of $1,200

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Leading Business Practices

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Miracle at Schwing America

2011 2012

Check Payments 100% 0%

ACH Payments 60% 40%

Average Transaction Cost* $1.12 $0.60

*Banking Fees• Check = $1.12• ACH = $0.26

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Steps to Success

1. Convince senior management

2. Persuade vendors that payments will be faster

3. Adopt “belts & suspenders” approach to remittance data

4. Start with voluntary program, thereafter involuntary

5. Automate if you can – but don’t wait on automation

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February 14, 2011

Dear Valued Vendor: As Schwing America continues to improve the promptness with which we remit payment to our valued vendors, we now have the capability to expedite payment further by remitting payment via electronic funds transfer in the form of an ACH payment. By utilizing ACH payments, you, our valued vendor, will receive payment directly into your checking account instead of waiting for the USPS to deliver a paper check to either your office or lockbox. You will also receive via e-mail a payment advice detailing which invoices were paid and the total dollar amount deposited into your bank account. In order to start this process we need to gather the following information from you:

• Vendor Information:• Your standard information (Name, address, Tax ID etc.)• Contact Person• E-mail of the contact person – this will be the e-mail address used to receive the payment

advice.• Vendor Bank Information• Vendor Authorization

To start this process we ask that you complete the attached form.Please note that all sections must be completed.  Once you have completed the form, both signing it and dating it we ask that you scan and e-mail the form to ap@schwing.com or fax the form to 651-287-0413. Since payment via ACH is both faster for you and less costly for us, this payment method is now our preferred payment method. Presently, payment to you via ACH is optional; however, in the near future Schwing America will require that you accept ACH payments or be assessed a processing fee to cover the cost of remitting payment via check. Should you have any questions or require additional information, don’t hesitate to contact me. Best regards, 

Paul W. Steffensen Paul W. SteffensenTreasurer An electronic copy of this letter can be found by going to http://www.schwing.com/pages/news/index.html and selecting the corresponding press release.  

5900 Centerville Road w Saint Paul, MN 55127 w www.schwing.com w Phone: (651) 429-0999 w Fax: (651) 429-3464Subsidiary of Schwing GmbH

•You will receive payment directly into your checking account instead of waiting for the USPS to deliver a paper check.

•You will also receive via e-mail a payment advice detailing which invoices were paid.

•In the near future Schwing America will require that you accept ACH payments or be assessed a processing fee to cover the cost of remitting payment via check.

Vendor Solicitation

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MapQuest for Payment PioneersStarting point: Land of ChecksTrip to: Electronic Payment ZoneDistance: Shorter than you think

1. Start out by recognizing that you can change now or change later, but change is unavoidable

2. Merge accounting and banking systems with either low-tech or high-tech solutions

3. Don’t be afraid to experiment in order to control risk and obtain insights

Contact Info

Dale.Sorenson@associatedbank.com

Sharon.Jablon@theclearinghouse.org

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