Photo appears courtesy of Seattle Municipal Archives. Guest blogging today for the Aurora EDI Alliance is Carlos Rodriguez of DadeSystems. This blog is part two in a three part series on a virtual payment processing solution we are now offering called Lockbox 360.
While still in the course of a long career processing all kinds of payments for all sorts of firms, every now and then a very rewarding project presents itself. Such was the case of a very well-known wine distributor and their payments. And, if I let slip any wine-related double-entendres during the course of the article, you will please forgive this humble writer, as they were purely unintentional slips of the palate.
Also, I want you, the reader, to remember the following saying; “For any activity, it takes 1,000 repetitions to make an expert”.
To paint this picture, we move to sunny California. There, a major bank’s staff busies itself with the work of opening a particular set of envelopes destined for our now-customer, arriving from all over the State to their processing facility in San Francisco. This set of envelopes contains payments arriving by various means; delivery trucks getting checks from small-to-medium size supermarkets, bodegas, restaurants, hotels and all manner of wine consumers, as well as stores, hotel chains, and corporations all stocking their wine coolers and cellars. Just picture the variety (no pun intended), Beaujolais to Half-Moon Bay, Sauvignon Blancs to Sausalito, Syrahs to Santa Barbara, etc.
As usual, some of these customers pay using the original invoice stub containing a nice, carefully mapped listing of all the amounts due from the customer, called their receivables listing. But, MOST toss this nice, convenient and useful document and simply elect to submit a payment using their own remittance document (“I’m paying you for this and this invoice now only”), as printed by their accounting system. Again, and this is important, NOT any coupon or other document given to them, 15,000 plus of the every month, free of charge, by my customer, to help facilitate matching the payment back to its original invoice. Gosh, no; that would be too sensible and convenient.
Some years back, the decision was made to “outsource” the payments to the bank. I worked in banks for decades and I understand the reasons. The customer would have to go to the bank anyway to make the deposit; this saves the trip. It is more important to deposit the funds than to perfectly account for every payment (I know, it sounds loony, but that is the math). For the bank’s part, they get to charge fees for processing the payments, they get to keep and use the customer’s compensating balances and the receivables lending opportunities (cross-sales) it affords the bank. The lender gets a loan (interest income) and the bank gets fees (non-interest income). Sounds ok, so far. Like many good ideas on paper, in practice, much can, and very frequently does, change.
So, now picture what our colleagues at this very major bank have to do to even offer their lockbox services; regardless of the type of document, regardless of the condition of this document, whether or not the payment even belongs to our customer, they have no choice but to blindly process that payment as best they can. Inevitably, and predictably, a large number of these payments, despite their best efforts, simply cannot be processed, for one reason or another. In the industry, we call these “exceptions.”
Rather than mis-post, or posting incorrectly altogether an exception, the bank simply “FedEx’s” the payments to the customer, sometimes posting them to a clearing account, sometimes sending them back to the customer outright. In both cases, an unnecessary and costly delay in depositing the funds is artificially imposed by this inefficient and cumbersome approach to processing payments. It is that pig-headed, that primitive and that straightforward. It is one of the reasons I considered owning stock, not in the bank, but in Fedex. Almost every big bank is doing this and every big bank uses one of the majors to send their lockbox exceptions back.
This is ok when you have the occasional exception. It is alright when you just want to be careful posting this one million dollar payment (some of the checks are that big). What is NOT ok is to receive 10-15 thousand payments and send 40% of them back to your customer as exceptions. YOU have to pay them 100% of a contract, to do 40% of the work yourself? I have thought about it a lot and, yup, that is what it means, in practice, where it counts. Pretty crummy set of affairs.
But, wait, there’s more….
And, for the 60% of the items you do match, it is woefully inadequate to miskey a posting so badly it leads to an adjustment downstream (double the work, double the cost). The bank keys it wrong and the error is discovered at posting, so your staff spends their time correcting the bank’s mistake. Ouch.
And, there is still more. For the 60%, the woeful industry average of miskeying payments (keyed by experts), is one error leading to an adjustment every 275 keystrokes. One payment may contain 10 to 1,000 keystrokes or more. This number of 275 is the natural incidence of human error for this type of activity, a statistically-significant number painstakingly arrived at after keying untold billions of payments, year-after-year. Do the math; there will be a fraction of payments, every day, that will contain errors, under this bank’s older processing model. This and most other banks.
Think about it; our customer had to keep staff to handle the exceptions that the bank could not. Not much of a savings for all the money they paid monthly. Not to mention, our customer missed out on earnings on what worked out to be about $150,000 a month, which is not an insignificant amount of float risk. Some months, it worked out to an estimated loss of about $4,000 in funds availability per business day just in these un-deposited funds, day over day. Who says the decision to have somebody process your payments does not have consequences? Like any other discipline, there is more to processing payments than meets the eye.
Why does this happen? The dirty little secret of the industry is not that dirty at all; it is just HARD to match payments, especially somebody else’s payments. Nobody uses the coupon you give them; for efficiency reasons, it does make sense to pay all your vendors using your accounting system’s own ability to issue remittance list to accompany the payments you issue to them.
But, these payments are so different that there is a natural incidence of them that no processor is able to match, without “The Alpha”. The Alpha is short for “the alphabetic or indexed listing of all your customers”. It is nothing more than your list of receivables. So you know, the state of the industry is to NOT have this one available, as the perception has traditionally held that it would be too costly and too inefficient to try to obtain the receivables list from all your customers (after all, it is a list of all their customers). That is where we are different.
So, every single day, our colleagues at this big bank send out piles of Fedexs to their customer containing all items they could NOT match.
Imagine a system that does sport the rare ability to incorporate, on a daily, routine basis, the receivables file containing the aforementioned “alpha.” Now, we are able to see the work AND see the alpha, which is fully text-searchable. Best yet, by design, operators are only allowed to select from valid receivables entries (or create a new one, for some). By selecting from only valid entries, errors are reduced to an absolute minimum (not eliminated, but reduced to the limits of what is possible).
But, and here is my favorite part. This is the part of the story where the little company again outmaneuvers the larger predator (the big banks with their older methodologies), affording its customers a competitive advantage no predator provides today. At the end of each business day, when all the incoming payments have been matched to their respective receivables line items, a new posting file is produced containing a subset of the self-same data imported in the morning; not a new file, not a corrected file, but a mere fragment of the original file. When IT posts, it posts perfectly.
Let us think about why, and about why this is important. Normally, the bank keys each and every payment. There is no alpha to compare to, so they blindly key (and charge you a very pretty penny for the privilege) each and every incoming payment. Of course, if an item does not meet the contractual norm, you now pay for a Fedex of the item, the work you now have to key in using your staff, plus the inevitable delay in deposited funds (and availability to you). It seems primitive; oh, that’s right. I already said that.
Now, compare it with the new workflow now in use. Payments come in and proceed to match automatically. Then, once the computer has had a crack at the images (it goes first, as it does not sleep, get tired, distracted, does not get flats coming in to work or need to pick up the kids early...it is accurate, reliable, and does not need much health care). A subset, most days a small subset, of the items is “workflowed” to operators (anywhere you like). Each payment combo is met with a list of most likely candidates (or the operator filters and searches in seconds); once its matching receivable record is found, it is selected. No keying. For those of us who have keyed for a living, we would MUCH rather be in charge of a system that learns to key than to key ourselves.
Recall when I asked you to remember that it takes 1,000 repetitions to make an expert? That is what those of us that keyed for a living are; experts, some of my colleagues and coworkers certainly are Grand Masters. Like any human activity, mastery takes practice and repetition. Look around your firm and think about which tasks that person, that colleague of yours, has repeated 1,000 times or much more. That person is an expert at that activity and that expertise is an asset.
Now, lets us think about the economic value, the incremental value of that activity and what it represents to your firm. Ask yourself this; “ Is there any value to my colleague performing the activity 1,001, 1,002 or more times?” The answer is the value to your firm declines with each repetition. That person should move on to a higher and better task, such as supervising new staffers or letting an automated system handle the task. And, for heaven’s sake, who better to run the automated system than your in-house, painstakingly trained expert(s)? After all, who knows the work better than your experts?
And, finally, I wish to address with you, one salient point about all this payment processing. Ask yourself what business are you in? Now, that you have the answer, is that business payment processing? For the few who answer yes, skip this.
For those of you that answered anything else, the realization is that, NO, you are NOT in the payment business. Therefore, you realize you cannot know what all your options are. You realize you are not able to capture the highest efficiencies those that ARE experts are able to capture. You realize you cannot hope to stay abreast of advances in efficiency like the ones described above. I work this field and it is as challenging as yours is to keep abreast of, I know you believe that. You need experts in the field to point the way and this is definitely one of those fields. You need to listen to honest advice and use your common sense. Does it make sense for me to worry if I am processing as efficiently as possible? What is the cost of NOT doing it as efficiently as I can? How can I worry about that when my business demands all my attention?
A simple calculation you probably make every day; what IS the opportunity cost of dealing with payments and NOT your business is; $100/hr? $1,000/hr? $10,000/hr? More? That should give you direction and answers on how to proceed, right?
It flat out did for the wine company and they are very happily processing every day, saving about $10,000/month in bank charges and have the best funds availability they ever enjoyed. It made common sense to them. I hope it does to you and do not settle for wasting your time. Instead, enjoy a good California wine. My happy wine customer and I both thank you for your future business.
Click below to schedule a demo on Lockbox 360, the new virtual payment processing system being offered by the Aurora EDI Alliance.