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Migration of corporate payments from check to electronic format: a report on the current status of payments.

The Treasury Management Association (TMA) is a professional association representing executives in treasury and financial management positions as well as those who provide services to the profession. TMA regularly conducts survey research to document practices and to solicit information about the profession.

In early 1998, the TMA surveyed its finance executives to identify the various incentives, barriers, and benefits associated with moving corporate payments from paper check to electronic formats. In this context, electronic formats include only automated clearinghouse (ACH) and electronic data interchange (EDI), not wire transfers. This article reports the findings of that survey.

I. Survey Methodology and Respondent Demographics

The survey instrument was prepared by TMA's Research Department after extensive consultation with two groups of TMA volunteers: the members of TMA's Government Relations Committee and the members of the National Banking Task Force.

The survey was then mailed to 4,450 TMA members on December 30, 1997. These members were selected such that only one member at any organization (corporation, governmental unit, etc.) received a copy of the survey. A reminder postcard was mailed to all original survey recipients two weeks after the survey mailing. As of January 26, 1998, the cutoff date for responses, a total of 623 completed surveys were returned, providing a 14% response rate.

Since all organizations have the potential to utilize electronic payments, the original sample of survey recipients represented a variety of industries and organizational sizes. Table 1 summarizes the asset and sales sizes of respondents' firms; Table 2 contains information on their industries. As indicated in Tables 1 and 2, the respondents represent the diversity of firm sizes and industries that is typical in TMA's membership.

II. Issues Related to Payment Transactions

A number of factors potentially affect perceptions about barriers to and benefits of electronic payments. Those issues include the extent to which a respondent's [TABULAR DATA FOR TABLE 1 OMITTED] [TABULAR DATA FOR TABLE 2 OMITTED] organization has already invested in electronic payment technology and the degree to which mail float times provide additional cash-management opportunities. This section explores these and related issues.

A. Ability to Initiate or Receive Electronic Payments

Survey respondents were asked whether or not their organizations were capable of initiating or receiving electronic payments. Table 3 reveals that of the 623 respondents, over two-thirds of them (69.8%) can both initiate and receive electronic payments. A limiting factor, however, is their ability to send or receive accompanying remittance information (i.e., the information that allows them to apply the payment to the proper account).

Of the 500 organizations capable of initiating electronic payments (initiate only or initiate and receive), only 55.6 % of them (278) can transmit remittance information with their payments. Among the 479 organizations capable of receiving electronic payments, 61% can also receive remittance information.

The 72 organizations which report that their organizations lack systems to support either receipt or initiation of electronic payments include all industry groups within the survey respondents except banking and energy (non-petroleum). The diversity of industries reported in Table 2 were combined into three major industry groupings to examine potential industry effects for this, and subsequent, analyses. The three groups were constructed as follows:

Group 1 = Manufacturing only

Group 2 = Insurance, Petroleum, Retail, and Utility due to their commonality in consumer payments

Group 3 = All other industries.


Difference in electronic payment capability across industry groups was examined using the chi-square test. The test-statistic value of 8.961 has a significance of 0.176. Consequently, the results do not support the theory that firm type affects the response as to ability to initiate, receive, both initiate and receive electronic payments, or neither; i.e., manufacturing firms are equally likely to be able to either initiate or receive electronic payments as firms in other industries. The same conclusion is reached for firms in Group 2, as defined above.

With regard to their organization size, over three fourths of the 72 respondents are at organizations with under $1 billion in sales. By comparison, only 44.1% of all survey participants report being with organizations having under $1 billion in revenues. This suggests that organization size may be a factor in the decision to use electronic payment methods. Correlation analysis confirms a relationship between organizational size and the ability to receive or initiate electronic payments.

Comparing increasing electronic payment capability (where 1 = neither receive nor initiate, 2 = receive only, 3 = initiate only, and 4 = initiate and receive) with organizational size, as measured by sales revenues, produces a Spearman rank correlation coefficient of 0.175, which is significant at the 0.01 level. In a statistical sense, therefore, larger firms are more likely to initiate electronic payments, receive electronic payments, or both, than are smaller firms.

B. Initial Decision to Adopt Electronic Payment Capability (Receipt or Initiation)

The 544 respondents who indicated an ability to initiate or receive electronic payments were asked to rate the relative importance of seven factors in the original decision by their organization to adopt electronic payment capability (whether initiation or receipt). Using a scale of 1 = "None or very low importance" to 5 = "Very high importance", the most dominant factor in adopting electronic payment capability was federal mandates, followed by state mandates. These results are presented in Table 4. Federal mandates are a compelling motive for many of the survey respondents. In fact, 340 respondents (54.6% of all participants) report receiving vendor payments from the US government.

When the responses to the seven factors were separated according to whether firms had initiate-only, receive-only, or initiate and receive capabilities, the relative rankings tended to remain the same for all seven factors; i.e., federal mandates as most important, state mandates as second most important, etc. The most notable exception is for those firms that report being able to receive but not initiate electronic payments. These receive-only respondents reported "trading partner request or requirement" as the third most important reason for implementing electronic payment receipt capability at their organization, behind both federal and state mandates. The trading-partner factor received an average score of 3.3 from the receive-only respondents, compared to a 3.1 average assigned by all respondents. As the chi-square statistics in Table 4 reveal, however, this exception does not produce a statistically significant result.

In terms of sales/assets size, there is little statistical difference across respondents overall as to their motivations for adopting electronic payments. Table 4 includes Spearman rank correlation coefficients between total sales revenue and each of the seven factors. This statistic is significant for only one item; "trading partner request or requirement."

The only statistically significant result due to industry classification is driven by manufacturing firms. They rated federal and state mandates as first and second, respectively, in importance as did all other respondent categories. Manufacturing firm respondents, however, rated "trading partner request or requirement" as the third most important reason, assigning it an average score of 3.4, compared to an average 2.9 importance [TABULAR DATA FOR TABLE 4 OMITTED] score assigned by all non-manufacturing firm respondents. Additionally, they rated "cost/benefit analysis" 3.0 overall while non-manufacturing firms assigned an average 3.4 value to that item. The results of a chi-square test applied to each of the seven factors are reported in Table 4.

C. Counterparty Capabilities

The 544 survey respondents with some electronic payment capability were asked about their counter-parties' capabilities to accept and provide payment information. As the results in Table 5 indicate, banks' capabilities to provide remittance information has been a factor in facilitating organizations' usage of electronic payments. Of respondents, 60% only use banks capable of providing remittance information in either electronic or paper form. As shown in Table 5, 43.5% of survey respondents report that 80 to 100% of their banks can provide ACH addenda record information on paper. An additional 39.3% of respondents report 80 to 100% of their banks can provide the addenda information electronically.

In comparison to banks' capabilities, most respondents have vendors that cannot accept electronic payments accompanied by remittance information. Half the respondents (50.7%) report that fewer than 20% of their major vendors can accept electronic payment accompanied by remittance information. Three fourths (74.9%) report that 20% or fewer of their non-major vendors can accept electronic payment accompanied by remittance information.

A chi-square test applied to each item in Table 5 using industry grouping as a classifying variable produced no significant statistical values (at a 0.05 or better level). Using correlation analysis between total revenues and the responses to each item in Table 5 similarly revealed no significant relationships. Those values are reported in the two right columns of Table 5.

D. Mail Float

A potential factor affecting the decision to use electronic payment methods is the existence of mail float. To the extent that some vendors may accept the postmark as the date of a customer's payment, there [TABULAR DATA FOR TABLE 5 OMITTED] would be a disincentive to adopting electronic payment methods. Survey participants with electronic payment capability (initiate or receive) were asked to indicate the percentage of the dollar value of their payments to vendors for which vendors would accept the postmark as the date of payment. One-fourth of survey participants left this question blank. Since respondents could choose "0%" as the percentage of vendors accepting the postmark, the reason why respondents would leave this question blank is most likely that they did not have an easy grasp of the approximate value. If we interpret a non-response as some value, however small, then 90.3% of respondents have one or more vendors that accept the postmark as the payment date. Excluding these "missing values" from the analysis and using only those who provided an answer still leaves just 13.5% of respondents indicating that none of their vendors accept the postmark as the date of payment. Therefore, 86.5% of the survey respondents who responded to this question have one or more vendors who do accept the postmark as the date of payment for an invoice.

As indicated in Figure 1, 14.0% of those answering the question report that 80 to 100% of the dollar value of their payments to vendors are considered paid by the vendor based on the postmark. One-fifth (21.3%) report 40 to 60% of their vendor payments are covered by the postmark. Collectively, over half of the respondents report that 40% or more of the total dollar value of their vendor payments are considered paid based on the postmark. Respondents were asked whether or not they had direct experience with switching from paying vendors by check to paying electronically; 331 did. Fewer than half of those respondents (141, or 42.6%), however, attempted to renegotiate payment terms to be float-neutral. Figure 2 reveals that the majority of those who attempted to negotiate float-neutral terms were successful.

Only 2.3% were totally unsuccessful in negotiating float-neutral payment terms. In contrast, nearly one-third of respondents were very successful in achieving float-neutral terms upon adopting electronic payment methods.

One reason why fewer than half of the respondents attempted to renegotiate float-neutral terms is that negotiating payment terms based on float is not a common practice. Only 13.8% (86 of the 623 respondents) indicated that it is their organization's practice to negotiate payment terms based on float.

Do respondents believe loss of mail float is a barrier to more payments being made electronically? The majority of respondents (55.8%) said "No", i.e., it is either not a factor or they perceive it to be a factor only to a minor extent. The results to this question are contained in Figure 3. Just 15.4% of the respondents think of lost mail float as a great or very great barrier to moving more payments from paper check to electronic form.

Two-thirds of the respondents believe they could be successful to a moderate extent or greater in renegotiating float-neutral trade terms, if they were to rely less on check disbursements. As indicated in Figure 4, fewer than 10% of the respondents believe they would be unable to renegotiate payment terms to achieve float neutrality. Another 24.3% believe that they could renegotiate trade terms only to a minor extent.

Overall, mail float is not a significant factor in moving payments from check to electronic methods. For the 13.8% of respondents who negotiate payment based on mail float, loss of mail float is perceived as a barrier. However, the majority of respondents do not hold that view. The success in renegotiating float-neutral terms by those who moved some of their vendors from check to electronic payments confirms mail float as being an insignificant barrier.

One potential reason why respondents either do not negotiate payment terms based on mail float, or believe that they could renegotiate payment terms to be float-neutral, is relatively short mail float times. Only 40.4%of all respondents reported knowing the average mail float time for their organization's check disbursements. Of those who knew the value, however, the average was 3.2 days, with the responses ranging from one to 10 days.

Figure 5 illustrates the mail-float times for the 244 respondents who knew their organization's mail-float time.

The distribution of reported mail-float times is not dependent on either industry grouping or firm size. The chi-square statistic for industry grouping is 8.760 (significance level of 0.555) and the Spearman-rank correlation with total revenues is -0.040 (significance level of 0.547).

E. Clearings and Receipts

When asked what the average bank-clearing times for check disbursements was, the 55.9% of respondents who knew the value reported a range of one to 20 days with the average at 3.2 days. Of these 348 respondents, 90.3% put the value at five days or less. Figure 6 provides a summary of bank-clearing times.

In addition to clearing times, respondents were asked to assess the extent of their ability to forecast clearings and receipts. Respondents report a much greater capability to forecast clearings than receipts. As the values in Table 6 indicate, 50.6% of respondents report [TABULAR DATA FOR TABLE 6 OMITTED] that they can forecast payroll and dividend check clearings to a great or very great extent. Their ability to predict vendor clearings declines from that mark, with only 25.0% reporting the ability to forecast vendor clearings to a great extent or better. 41.3 %, however, do report a moderate ability to forecast vendor check clearings. The ability to forecast any clearings "not at all" was selected by a distinct minority of respondents.

Respondents' abilities to forecast receipts, on the other hand, are less certain. One-third or more of the respondents report being able to forecast receipts either "not at all" or only to "a minor extent." Approximately 15% of the respondents can forecast any form of receipts to a great extent or better. Of the respondents who did not check the "not applicable" box, 40 to 50% can forecast consumer, government, or corporate receipts either to "a minor extent" or "not at all."

F. Barriers to More Electronic Payments

A number of factors would limit or restrict the greater use of electronic payments relative to check payments. Respondents were asked to provide their opinions on four issues that might create barriers to electronic payments. Table 7 summarizes their responses.

The values in Table 7 indicate that the majority of those who did not check "not applicable" believe that the banking industry does have a vested interest in maintaining paper checks. Over 56% of the respondents rated this factor at the "moderate" extent or greater. Only a small number of individuals consider each of the remaining three factors listed to be some form of barrier or impediment to the use of electronic payments. These three factors are not considered barriers (to a moderate extent or greater) by two-thirds or more of respondents.

Currently, ACH payments do not settle on the same day. When asked if their organizations would increase the use of the ACH system if transactions settled on the same day, 52.2 % of the respondents said_they would increase their use of the ACH system. Of the 319 respondents who would increase ACH system use, 8.3% would do so for receipts, 21.5% for payments, and 70.2% would increase ACH use for both payments and receipts.

Another consideration affecting the decision to make payments by check or electronically is the cost of the different payment methods. When asked about the relative costs of check and ACH payments for disbursements and payments received, the majority of the respondents reported lower costs for ACH transactions than for checks. As indicated in Table 8, two-thirds of respondents said the ACH cost is less than for a check payment received by their organization. On the disbursing side, three-fourths report that the ACH cost is less than the cost of a check.

Respondents were asked, in an open-ended question, to provide up to three hurdles they see for their organization to move from check to electronic payments. Their free-form answers were coded based on the content of their answers. Table 9 summarizes the top reasons, by category of electronic-payment capability, respondents cited as barriers (based on the frequency of mention).

The numbers in Table 9 confirm the results previously reported in Table 5; i.e., vendor capabilities are the most limiting factor for the majority of respondents. It is the most frequently cited barrier by those capable of both initiating and receiving electronic payments (39.1% of respondents) and those who initiate but don't receive electronic payments (44.6%). Vendor or customer acceptance is the second most frequently cited barrier by the other two groups as well.

Among those who either have the capability to receive but not initiate electronic payments, and those who neither initiate nor receive electronic payments, the most frequently cited reason is system integration or compatibility with financial systems (45.5% and 43.1%, respectively). System integration is the second most frequently mentioned factor by both groups of respondents at organizations that can initiate electronic payments.

More than one in five respondents expressed concern that lack of management commitment is a barrier to using electronic payments. The results also confirm that float is not a significant issue, being mentioned by only 12% of all respondents.

G. Current Plans

Respondents were asked to characterize their organization's current plans for electronic payments. Because of the issues they cite as barriers to making greater use of electronic payments, the responses contained in Table 10 indicate that a significant number of respondents report that they will continue to rely predominantly on checks.

Those currently able to both initiate and receive electronic payments will continue to move toward more electronic payments; only one-third of them will continue to rely predominantly on checks. Furthermore, one-third of those who report having neither initiation nor receipt of electronic payment capability have plans to move payments to electronic formats while an additional 7% are in the process of converting checks to electronic payments.

III. Issues Relating to Control of Payments

One argument in favor of maintaining check disbursements relative to electronic payments is the [TABULAR DATA FOR TABLE 7 OMITTED] [TABULAR DATA FOR TABLE 8 OMITTED] [TABULAR DATA FOR TABLE 9 OMITTED] [TABULAR DATA FOR TABLE 10 OMITTED] need for paper records of payments; i.e., canceled checks. When asked who in their organization's payment processes requires a canceled check, only 38.7% of respondents indicated no one required it. Of the respondents, 24.7% report their own organizations require canceled checks. The largest demand is among respondents' vendors, with 290 respondents (46.5%) reporting one or more vendors requiring a canceled check. Additionally, 28.1% of the respondents report one or more of their customers require a canceled check.

A companion question asked respondents to indicate the extent to which they agree or disagree with the statement:

"The demand for a paper trail in the audit process is a barrier to my organization making greater use of electronic payments methods."

The numbers in Figure 7 indicate that only about one-fourth of the respondents agree that the paper trail_requirement is a barrier. As indicated in the chart, the majority of respondents (51.4%) disagree or strongly disagree with the statement.

A. Security Concerns

For some organizations, security concerns play a major role in the decision to implement electronic payment methods. To get a sense of how important an issue this is, respondents were asked the extent to which they agree or disagree with the statement:

"Because of internal security control issues my organization does not encourage electronic payments."

As indicated in Figure 8, the vast majority of respondents (88.2%) believe that internal security is not an issue. This low level of concern is confirmed by the number of respondents at organizations which allow others to debit their organization's account via ACH. Only 34.6% of the respondents' organizations do not allow others to debit their account. Also, 10.6% allow others to debit their account while an additional 54.8% allow pre-approved payees to debit their account. Furthermore, 26.4% of the respondents report that their organization anticipates increasing, in the near future, the number of payees authorized to debit the organization's account via ACH.

B. Benefits of Making Payments Electronically

In addition to assessing barriers to electronic payments, respondents were asked to evaluate the importance of six potential benefits to making payments electronically, as opposed to paying by check. Table 11 reports respondents' assessments of the importance of all six items.

The "average importance score" in Table 11 is obtained by using a scale of "1 = very low importance" to "5 = very high importance" and taking the average of the responses. The most compelling reason for adopting electronic payment methods is for reduced costs. This finding supports the result reported previously; i.e., for the majority of respondents, the cost of an ACH transaction is less than the cost of a check, both for disbursements and receipts. Certainty of payment date and improved cash-flow projections are the next most important overall reasons for making payments electronically, as opposed to by check.

When the items in the table above are examined as to the extent to which organizations have adopted electronic payments already (e.g., initiate only, initiate and receive), the rank order of the six items does not change.

C. Controlled-Disbursement Banks

One final question on control of payments deals with the use of controlled-disbursement banks. Respondents were asked to report the percentage of their [TABULAR DATA FOR TABLE 11 OMITTED] organization's controlled-disbursement dollars drawn on banks in the Eastern time zone. The responses ranged from 0 to 100%, with an average of 64%. The single most frequent response was 100%, reported by 296 respondents (47.5% of the sample). Collectively, 53% of the respondents indicated that 90% or more of their controlled-disbursement dollars are drawn on Eastern time zone banks. In contrast, 149 respondents (23.9% of the sample) reported using no Eastern time zone controlled-disbursement banks.

IV. Issues Related to Technology

In anticipation of the role technology-related issues might play in inhibiting the use of electronic payments, respondents were asked the extent to which they believe various technology-related factors are barriers to their organization making greater use of electronic payment methods. Table 12 summarizes their views.

Using a value of "1 = not at all" through "5 = a very great extent," the responses are ranked by the average value (average extent) to which each is perceived as a barrier to greater electronic-payment method usage. As indicated in Table 12, the lack of systems integration at their organizations poses the greatest barrier. Lack of systems integration is rated as a barrier to greater use of electronic-payments methods either to "a great extent" or to "a very great extent" by over half of all respondents. Previously, respondents had indicated both technology compatibility and accounting issues as hurdles to using more electronic payments (see Table 9). This finding confirms that result.

Costs associated with additional software and hardware received the second highest average score. One-third of the respondents believe that this cost is a barrier to greater use of electronic payments at their organizations either "to a great extent" or "to a very great extent." As noted previously (Table 9), cost of implementation is the fifth most frequently cited barrier to organizations making greater use of electronic-payment methods. The results support that assessment, with the cost of additional software/hardware ranking second among the six factors.

The results in Table 12 summarize all respondents' views. When the total sample of respondents is separated into those who report that their organizations' systems have the capability to initiate electronic payments (initiate only or initiate & receive) versus those which cannot initiate electronic payments (i.e., receive only or neither initiate nor receive), the importance of the first two factors becomes much greater, as indicated in Table 13.

While lack of systems integration is important to a "great extent" or a "very great extent" for half (49.6%) of those reporting the capability to initiate electronic payments already, two-thirds of those without this capability view system integration as a significant barrier. The difference between the two groups is even greater when the issue of cost is raised. While 30% of those with electronic- payment initiation capability view cost as a barrier to a great or very great extent, 56% of those without initiation capability view cost as a serious barrier. The chi-square statistic for "the cost of additional software/hardware" with the variable for electronic payment capability is 42.393 (significance level of 0.000). The chi-square statistic relating systems integration to electronic payment capability is 30.873 (significance level of 0.002).

V. Conclusions

Respondents report that their organization's initial decision to adopt electronic-payment methods arose primarily due to Federal mandates. The second most important factor was state mandates. Respondents report that moving to electronic payments has been facilitated, however, by service providers' capabilities in this area and a general automation of treasury and accounting functions.

The majority of respondents report reduced costs (internal and external), certainty of payment date, and improved cash-flow projections as highly important benefits of making payments electronically. Among those who already initiate or receive electronic payments, the majority would increase their use of the ACH system if ACH payments settled on the same day.

Chief among the barriers to making more payments electronically is counterparty capabilities. The majority of respondents have vendors who lack the ability to receive electronic payments accompanied by remittance information. This result is consistent with the observation that fewer than half (292 of 623) of all survey respondents report their organizations' systems can accept electronic payment accompanied by remittance information.

Organizations that do not currently participate in electronic payments, either as an initiator or recipient, tend to be smaller-size firms (measured by sales or assets). For these organizations, a number of them report that the cost of an ACH transaction is either the same or higher than the cost of making a check payment. In addition, a number of them do not place a high importance on the benefits of making electronic payments, such as certainty of payment date, improved cash-flow projections, etc.

Factors that contribute most to organizations' not making payments electronically are the cost of technology and its integration/compatibility with [TABULAR DATA FOR TABLE 12 OMITTED] [TABULAR DATA FOR TABLE 13 OMITTED] existing financial systems. In addition, one in five respondents reports a lack of commitment by management for moving toward electronic payments. As a consequence of these and other factors, 42.6 % of all respondents indicate that they will continue to rely predominantly on checks for payments.

Loss of mail float and the need for a canceled check in the audit process are not significant barriers to moving more check payments to electronic payment. Furthermore, internal control for security purposes is not a significant factor, with two-thirds of respondents allowing others (usually on a pre-approved basis) to debit their accounts via ACH.

Aaron L. Phillips is Director of Research with the Treasury Management Association.
COPYRIGHT 1998 Financial Management Association
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Author:Phillips, Aaron L.
Publication:Financial Management
Date:Dec 22, 1998
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