The payments system is not something you ordinarily think as outsourced. However, the moment somebody in your organization decides to receive a payment via an intermediary (lockbox, collection agent, bank, third-party providers of “receivables management” servicers and more) or make a payment via an intermediary (AP servicer, freight forwarder, procurement specialists or software and more) – you’ve outsourced a payment.
There are 10 areas of risk to know about, assess, manage and mitigate so that the payments side of the business doesn’t become a risk headache, according to Michael Alfonsi, VP and portfolio manager for BancTec. He says all of these risks begin with the simple questions:
- Are your payments in the mail? The USPS boasts it delivers 80 percent of the mail on time. If you answered yes, then an immediate second question is important:
- How do you process the payments once you receive them? Do you process them? Does somebody else process them? Or do you use a combination of both?
“If you answered yes to either question, the risks, unfortunately, are abundant,” posits Alfonsi. They include:
1. Order entry risk. Do your business expenses get into the system on time?
2. Bill print and mailing risk. Does your business print and post the bills in a timely fashion?
3. USPS delivery risk. The risks are both outbound and inbound. The USPS has never been in such turmoil in its 236 year history. “Confusion and chaos reign as the Postal Service groans under severe contractions in processing centers and third-party, inter-city contractor delivery services,” he reports. “The only assurance now is that mail sent IN a city to a business in that same city will be affected the least. And for 170 smaller cities in the U.S., that’s not even true.” Every company who receives more than $180M a year in mailed check payments needs to review where it receives those payments from to ensure they are not leaving money on the table,” concludes Alfonsi.
4. Payer turnaround time risk. You lose time if the payer takes its time.
5. Provider risk. Who performs your payment processing services? Do you use a lockbox, in-house scanners or other capture devices or software? Alfonsi says third-party lockbox processors “are contracting and consolidating at an alarming rate.” He says there is a price war going on for these services due to this underutilized capacity. “Providers want to offer cheap deals with long- term commitments to ensure revenue streams,” he explains. “It’s like buying a cheap ticket for a flight 45 days from now on an airline that may be out of business in 30 days. Selecting these providers can be a foolish business decision and a double whammy in implementation costs,” he says.
6. Fraud risk. What are you doing to prevent fraud and mitigate payment risk? Alfonsi says “providers and banks are transferring risk onto the receiver of payments in return for discount rates and processing costs, claiming co-sourced arrangements make anyone involved in a transaction liable. The implication is whoever receives that payment, no matter what the form, will ultimately carry the business risk. This is a sea change in approach.”
7. Rate increase risk. Alfonsi reports payment costs have increased at double the core inflation rate for the last four years. Provider consolidation, banks’ need for non-credit revenue streams, new product features, risk management tools and product functionality will all drive up costs, he points out.
Do you know how much your payment service really costs? “If you do not know every cost element and how cost dynamics affect your organization, you are in trouble,” says Alfonsi. He explains a company that does not have the correct method to capture unit costs, the financial framework to view costs (especially if they are invisible) or the competency to forecast cost is at risk for a spike in services costs. “This can be a career ender,” he adds.
8. Payment type risk. Do your payment media match your customers’ preferences? If not, Alfonsi says “your payments strategy delays getting your payments.” He says it is “mind-boggling to see how often payments take a back seat when organizations fear a new payments channel like e-Check or M-initiated payments.” Forcing customers to use traditional ACH or even paper checks “leaves tens of thousands of dollars on the table in costs of funds and poor payment operations,” he observes.
Even in B2B payments, customers comfortable with emerging payment media like payments made via a social media channel expect companies they do business with to adapt, not freeze. The issue is managing costs and risks to accelerate payments and improve posting and data for analysis purposes.
9. Information risk. Where do you get advice in outsourcing and the payments system? “Hopefully, the answer is from a wide variety of sources and not just one relationship manager at one bank or a friendly third-party processor,” says Alfonsi. He says:
- Data on PCI compliance should come from the Payment Security Council.
- Data on payment and treasury services costs should come from Phoenix-Hecht.
- Data on e-payments should come from NACHA.
- Reliable data comes from associations like local chapters of the IAPP and IARP.
10. RFP risk. Alfonsi says enterprises that put out RFPs for services “rarely get the exact solution to meet their needs.” He says organizations that scored the lowest costs, had the shortest time to implement and ended up with the lowest risk and most efficient solutions followed a new model. They challenged prospective providers to come up with their best thinking, which included revealing their true costs and cost reduction targets; these providers have “a clear vision of a future state that is realistic given the constraints,” he explains. Today Alfonsi says “the buyer must be the story teller, not the sales person.” He underscores this approach requires new sourcing and management skill.
Alfonsi says addressing these 10 risks “with truthful, comprehensive answers” produces “a clear picture of where your payments outsourcing and strategy lie – from top quartile to bottom decile. This is the best way “to make payment outsourcing effective for your organization,” he concludes.
For more information on reducing risks in outsourcing payments, visit www.banctec.com.