Strategies for Switching Small Businesses from Checks to ACH

Transcription

1 Strategies for Switching Small Businesses from Checks to ACH Peter McVey, AAP, NCP Director, Treasury Services Lead Bank Mary Hughes Senior Payments Consultant Federal Reserve Bank of Minneapolis PAYMENTS 2016 April 17, 2016

2 Peter D. McVey, AAP, NCP Vice President, Director of Treasury Services Lead Bank, Lee s Summit, MO Responsible for Treasury Services department, including sales, implementation, client support, product development / management, risk management Oversee Data Processing / Bookkeeping department Member of NACHA s Risk & Quality Rules Workgroup pmcvey@lead.bank direct Founded in 1928 Delivering smart financial solutions for business owners, managers & their families & communities Three branches (Garden City, MO, Lee s Summit, MO, Kansas City, MO [Crossroads]) Treasury, lending & personal banking services Advisory services (bookkeeping, interim executive, planning, capital sourcing, business brokerage) 2

3 Mary Hughes Senior Payments Consultant Federal Reserve Bank of Minneapolis Federal Reserve Banks Payments, Outreach, & Standards Group standards specialist Chair of X9C Corporate Banking Subcommittee Supports industry relations activities with business associations & end users Active on Remittance Coalition work groups hat-we-do/payments-information Provide financial services to depository institutions & U.S. gov t Supervise & regulate financial institutions Establish & execute U.S. monetary policy Maintain a stable financial system & contain systemic risk 2016 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 3

4 AGENDA 1) About the Small Business Payments Toolkit 2) Business Payment Trends 3) Talking with Small Businesses about Payments 4) Success Stories / Case Studies 5) ACH Fraud Case Study Views expressed today are those of the presenters & not the Federal Reserve Banks. The Small Business Payments Toolkit has been created by the Remittance Coalition & is intended to be used as a resource. Views expressed are not necessarily those of, & should not be attributed to, any particular Remittance Coalition participant or organization; nor are they intended to provide business or legal advice nor to promote or advocate a specific action, payment strategy, or product. Readers should consult with their own legal & business advisors.

5 What is the Small Business Payments Toolkit? FREE resource to be leveraged by small business (& their bankers & advisors) Not copyrighted OK to modify using Adobe Professional Encourages adoption of electronic B2B payments plus payment / remittance information exchanges Created by the Remittance Coalition Link to Toolkit 5

6 Remittance Coalition Participation: National group of associations, small & large businesses, financial institutions, technology & software vendors, standards development organizations & others Formed in members & growing No dues or criteria for joining, other than a willingness to work together Mission: Work together to solve problems related to processing remittance information associated with B2B payments in order to promote use of electronic payments & straight through processing (STP) 2016 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 6

7 Remittance Coalition Information Information about the Remittance Coalition: Visit the website to: Learn about activities Join the Remittance Coalition Volunteer on a project Listen to recorded webinars 2016 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 7

8 Contents of Small Business Payments Toolkit Payment Types Explained Understanding ACH Working with Your Banker Fraud Prevention & Mitigation Tips What Small Businesses Should Know about Chip Cards Intro to Alternative Payments Business Continuity Planning Resources Glossaries of Payment Terms Credit & Debit Card Resources ACH Resources (checklists, same day ACH, etc.) General Small Business Resources Fraud & Data Security Resources Regional Payment Associations Health Care Payments Bank Holidays 8

9 Payment Types Covered in Toolkit ACH Business Check Small Business Payments Internet Bill Pay Wire Transfer Credit & Debit Cards 9

10 Business Payment Trends

11 B2B Check Usage is Stagnant 35 Number of Checks Written by Counterparty 30 Checks in billions C2C C2B B2C B2B Source: Federal Reserve Payments Studies published in 2007, 2010, & See for reports Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 11

12 Checks Are the Leading Payment Type among Businesses % of Payment Transactions Made by Corporations, by Payment Type Cards, 6% Other, 1% Wire Transfer, 8% ACH, 20% Check, 66% Source: 2014 Phoenix-Hecht Treasury Management Monitor, survey of corporations with annual sales of above $20 million Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 12

13 Most Organizations Use Checks for at Least Half of B2B Payments 63% 82% What percentage of your supplier-related payments is processed using the following methods? 41% 21% 15% 3% 4% 21% Checks ACH Wires Cards Used for at least 50% of B2B Payments Used for at least 20% of B2B payments Source: PayStream Advisors, Electronic Payments & Card Solutions in 2015: Perceptions, Realities, & Strategies, Q Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 13

14 Profile of Heavy Check Users Heavy users rely on checks for at least three-quarters of their payments Under $100 million in annual revenue 29% 64% Have not addressed check usage in past 2 years Say many suppliers specifically request checks 17% 15% 49% 56% Cite high processing costs among greatest payment challenges 27% 44% Have taken actions to decrease checks in past 2 years 40% 81% Heavy Check Users Remainder of Repsondents Source: PayStream Advisors, Electronic Payments & Card Solutions in 2015: Perceptions, Realities, & Strategies, Q

15 Top Challenges in Payments Processing Challenges mostly result from manual payment management. They do not differ between larger & small organizations. High processing costs 35% Late payments 30% Missed discounts 25% Duplicate payments 20% Lack of payment visibility More than one payment method for some suppliers Employee confusion over correct payment method to use 13% 12% 12% Loss from fraud 4% Source: PayStream Advisors, Electronic Payments & Card Solutions in 2015: Perceptions, Realities, & Strategies, Q Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 15

16 Trend: Increased Use of E-Payments for B2B Payments Changes in Use, by Payment Type ACH 52% 46% 2% Cards 45% 46% 9% Wires 17% 66% 16% Checks 3% 34% 63% Have tried to increase Have not addressed either way Have tried to decrease Source: PayStream Advisors, Electronic Payments & Card Solutions in 2015: Perceptions, Realities, & Strategies, Q Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 16

17 Talking with Small Businesses

18 Why Promote Electronic Payments? Stickiness Increase chance that customer will continue to use / purchase your services Promote other services Use the opportunity to grow your business by selling other value-added products o E.g., helping a small business get set up to accept & send ACH payments allows them to accept contracts from large trading partners & the government Grow revenues 18

19 Methods for Targeting Small Businesses Ask small businesses Complete a needs assessment Review new business account list Collaborate with loan officers Designate small business experts in your institution Educate bank staff to direct customers to these experts when appropriate Use data mining to target customers 19

20 Examples of Data Mining Example of a small business activity with one location retail storefront: DATE AMOUNT DESCRIPTION 3/1/16 $ Deposit NO 5 3/1/16 $1, Merchant Settlement 3/1/16 $8, Intuit Payroll QuickBooks Example of customer that does not use payroll: DATE AMOUNT CHECK # 6/21/16 $ /21/16 $ /21/16 $ /21/16 $ /21/16 $ This is a customer that is accepting credit cards This is a customer that also deposits checks (5) This is a customer that is using Direct Deposit of payroll Could your FI offer merchant services at a better rate or more timely deposits? Does this customer need remote or mobile deposit? A small business may have problems getting to a facility before closing & need cash flow opportunities & convenience of remote Could your FI offer Direct Deposit of payroll at a lower fee? Look for patterns such as payroll checks being presented or cashed on an account & offer Direct Deposit 20

21 What Can Electronic Payments Do for Small Businesses? Using ACH, wires & / or cards can improve cash flow Predicable & managed posting of transactions Take advantage of discounts Consider requiring tighter, more restrictive payment requirements for delinquent customers Payment due before product / services delivered ACH credits, wires or cards Offer an incentive to pay early or to use an electronic payment method over paper 21

22 Talking about ACH with Small Businesses Many small businesses already understand ACH through payroll Use as a starting place for discussion o Educate on fee structure & options o Talk about number of payments required to justify costs Discuss ACH implementation issues Provide consulting services for ACH origination or help them find someone that can Requires underwriting o Other options (e.g., pre-fund) Workflow & control issues o Manage & secure payment identity of each payee Routing / transit number 22

23 Why Small Businesses are NOT Using Electronic Payments Is it reluctance or are there obstacles? Can reluctance be addressed with education & partnership between the financial institution & the client? What kind of obstacles technology, customer resistance? What can be done to overcome them? 23

24 Success Stories / Case Studies

25 Multi-Tenant Wishing to Gain Efficiencies Background Business partners own multiple duplexes & single family homes within a wide area Expect rent by 1 st of each month Checks mailed to central location & processed by office staff Use remote deposit capture (RDC) to make deposits Had prior knowledge of ACH through direct deposit Expected outcomes Reduce time spent opening mail, making deposits Quick notification of non-payment Automation 25

26 Multi-Tenant Wishing to Gain Efficiencies Results Needed help getting started, including authorization forms, training on online banking, managing exceptions & reporting o Added ACH debit authorization form to renter agreement; collected up front o Accounting system creates NACHA-formatted file to import into online banking 26

27 Multi-Tenant Wishing to Gain Efficiencies Results Converted over 60% (~45 checks) of recurring monthly payments to auto debit o Didn t expect 100%, happy with outcome; hoping to convert more Certain demographic groups refused to enroll in ACH direct debit Certain renters opt to send online bill payment checks o Able to process monthly ACH template / batch with very little time required Reduced time spent opening mail, preparing deposits & posting payments by 50% o Continuing to look for additional efficiencies Notification of non-payment remained the same if not increased slightly (2 days for check vs. 3 days for ACH) 27

28 Advertising Agency Background Regional advertising agency providing services across the country Business customers primarily pay via check Payment expected within 30 days of invoice date Checks mailed to PO box, picked up by courier, delivered to office Office staff processed deposits via RDC Had prior knowledge of ACH through direct deposit Staff already did research to determine what they needed to do, so there was only guidance & direction required Expected outcomes Reduce expenses, particularly courier & time spent processing deposits Encourage customers to pay quicker than 30 days from invoice date 28

29 Advertising Agency Results Client made two changes: o Opened a new account where their customers could remit ACH credit payments Desired to keep their primary operating account safe from outside sources Encouraged customers to remit payment via ACH (or wire) & provided a discount by paying earlier than 30 days (10% if within 10 days, 5% within 20) o For those customers not able / unwilling to send ACH funds, set up an authorization process to initiate debits to customers accounts Established agreed upon date of debit based on the first or third Friday of the month Created two primary ACH batches for their customers Modified courier schedule to pick up every other week (rather than weekly) 29

30 Advertising Agency Results Required staff to effectively communicate the change with customers & explain why it was being made o Included insert with invoice o Made phone calls Did not achieve 100% conversion to ACH (but did not expect to); payments made by check declined 50% (~175 checks) Aging A / R declined; experienced more predictable incoming cash flow 30

31 Construction Company Background Builds single family homes in large metropolitan area Issues on average over 200 checks per month o Employees Not on direct deposit o Suppliers o Utilities ACH transactions o Taxes o Insurance o Credit card payments o Utilities Expected outcomes Alternative options for employees Reduce checks to suppliers & utilities 31

32 Construction Company Results Employee payroll options for underbanked & unbankable o Offered reloadable debit cards for most unbankable employees o Offered a rebound account for most underbanked No checks issued, ATM / debit card issued; funds direct deposited into account & could be withdrawn at ATM or through debit card o Able to convert 40% to one of these two options (~50 checks) Suppliers & utilities options o For most frequent suppliers, able to convert 30% to ACH (~18 checks) o For infrequent suppliers, stuck to check o For utilities, considering setting up direct debit by the biller; pending final decision 32

33 Used Car Dealership Background Family owned, multi-generation Small city, almost 2 hours from large metropolitan city Buys cars / trucks / SUVs from auctions Three lots within small city Offers maintenance & repair services Connects buyers with local banks for financing Uses wire transfers & occasional cashier s checks to purchase cars from auctions Employees are paid via check Nearly all suppliers, vendors, utilities paid by check Expected outcomes Introduce ACH to client who avoids change 33

34 Used Car Dealership Results Did not make sense to convert any wires or cashier s checks to ACH when buying cars from auction money was required at time of purchase Slowly introduced online bill pay to send payments to utilities & select suppliers, vendors Suggested direct deposit of payroll would be well received by employees; waiting for client to make decision 34

35 Church Background Located in suburb of major metropolitan city Estimated 200 members Members accustomed to offerings via check, cash during weekly worship Expected outcomes Church leaders were hoping to increase contributions while making it more efficient 35

36 Church Results Discussed using ACH to debit members for contributions o Members could elect weekly, bi-weekly or monthly schedule Distributed direct debit authorization form to members during weekly worship o Followed up with families & members the following week There was a reluctance to join didn t want the stigma that they weren t contributing when the offering plate was passed o Came up with a little note that said I offered via direct debit * which could be dropped in offering plate * Note Cannot take credit for this idea; I borrowed it from another Treasury Sales Officer (who encouraged its use) 36

37 ACH Fraud Case Study

38 ACH Fraud Case Study Business Client notified bank of 20 individual ACH debits ranging from $700 to $5,000 (total $68,328.11) posting to their account over a period of three months which they did not authorize Notification by business client was beyond the 24-hour return timeframe; however, after further investigation, determined the debits were all WEB SEC WEB SEC have an extended return timeframe of 60 days from settlement date Obtained from client written request to return all ACH debits as unauthorized Returned all ACH debits as R10 o Because the transactions were all WEB, R10 was most appropriate return reason code 38

39 ACH Fraud Case Study The entries were all fraudulent in nature They were online bill payments to a major credit card issuer The business client researched on their side & nothing appeared to raise any concerns of insider fraud Business client wanted to ensure this did not occur again; discussed options with client, including: Closing account Keeping account open & monitoring activity daily via online banking Keeping account open & using ACH positive pay & as applicable, check positive pay 39

40 ACH Fraud Case Study Client opted not to close the account; immediately began monitoring account activity more closely & began using ACH positive pay Had these items been CCD or CTX transactions, the client may have had to bear the loss of these transactions We could have contacted the ODFI for proof of authorization or contact information for the Originator; however, this may not have resolved the potential loss 40

41 Take Action The Small Business Payments Toolkit was developed as a FREE resource for you: USE IT & SHARE IT Reference the toolkit when speaking with small business customers Toolkit updates are in the works: adding new content in

42 Check Out the Resources Pages The Small Business Payments Toolkit has links to additional information on: Glossaries of payment-related terminology Credit & debit cards ACH General resources for small business practitioners Fraud & data security 42

43 Questions 2016 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 43

44 Appendix

45 Comparing Payment Attributes Which payment method best represents each attribute? Highest supplier acceptance 60% 28% 4% 9% Most complete remittance info. 55% 29% 9% 8% Easiest to integrate with AP system 53% 35% 7% 6% Best for avoiding duplicate payments 41% 38% 11% 10% Best data accuracy 37% 38% 8% 17% Best for working capital mgmt. 23% 33% 10% 35% Most convenient 19% 38% 5% 38% Best fraud protection 19% 37% 21% 23% Least costly 8% 57% 9% 27% Best for international payments 4% 11% 79% Check ACH Wires Cards Source: PayStream Advisors, Electronic Payments & Card Solutions in 2015: Perceptions, Realities, & Strategies, Q % 2016 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 45