Innovative Payment Techniques - Treasury Alliance Group · Innovative Payment Techniques. Page 1 ©2006 ... $.03 per transaction with ARC ... – 1 day settlement for all ACH items

25th Annual Idea Exchange

Mark K. Webster, CPA, CCMPartner

Treasury Alliance Group, LLCSpecialists in Payments and Treasury Consulting

Innovative Payment Techniques

Page 1©2006 – Treasury Alliance Group LLC – All Rights Reserved

Agenda

• Payments in Transition• Key Trends• Closing Thoughts• Q&A

Payments in Transition


Change is good!


Unless you have to pay for it!

1960


The battle for dominance

• Coin and currency were dominant until the middle of the 20th century

• Checks became predominant by the 1960s• Credit cards entered the picture in the ’50s • ACH joined the battle in the ’70s• Debit cards in the ’80s


Changing Payment Patterns

Source: FRB


The Tipping Point


Retail Payment Mix

Sources: Unisys, Global Concepts, Talon


U.S. Retail Payment Volume

0

20

40

60

80

100

120

1979 1995 2000 2010

(bill

ions

)

ElectronicConversionCheck

Sources: FRB, ABA, Global Concepts


Forces behind change

• New Technology• Economics• Channel/Location• Market

demand/acceptance• Need for accurate and

timely remittance information

• Regulatory changes & demands

Key Trends


Key Trends

• Check Conversion


Payee’s Bank (ODFI)

Consumer’s Bank (RDFI)

ElectronicNetwork

Blanket Authorization

OK-all checks

Check presented at POS

MICR Information Captured

Authorization Signed by Consumer

Check and Receipt handed back to consumer

Point of Purchase (POP)


Merchant Consumer’s Bank (RDFI)

ElectronicNetwork

Check presented at Lockbox or

dropbox


Check ImagedConsumer receives

notice in bill

Check Destroyed


Accounts Receivable Check (ARC)


Back Office Conversion (BOC)

Check presented at POS

Merchant Consumer’s Bank (RDFI)

ElectronicNetwork

Checks collected in back office


Check Imaged

Check Destroyed



Why ARC?

• To reduce deposit fees– Most Billers are saving $.01 - $.03 per transaction with ARC– NACHA quotes 35 – 50% reduction in return fees

• To reduce number of returns– NACHA quotes that this has been reported as high as 50% by

current ARC billers– 15 – 20% reduction is a conservative estimate

• Faster notification of returns– 3-4 days after settlement vs. 5-10 for checks

• To reduce operational costs– Reduced labor, equipment, supplies etc.– Reduced errors, overtime, and holdover

• Faster collection– 1 day settlement for all ACH items versus 0-2+ days for checks


Conversion “Challenges”

• Not all checks can be converted!• Choice of payment method moved from payer to

payee• Potential legal issues• Impact on reconciliation/fraud control systems• Ability to get copies of the check

Yes, I KNOW it’s against the rules, but your check IS going to be converted.


Key Trends

• Check Conversion• Check Truncation


Check 21• Legalized substitute checks• Became effective October 2004 for ALL checks• DOES NOT require image processing• Does create foundational framework for image

Fron

t

Bac

k


Intermediary

Paying BankBOFD

Traditional Paper Collection

Check Check Check

Intermediary

Paying BankBOFD

Sub Ck

Substitute Check Collection

ImageCheck

Payment Process

Image

or


Truncation “Challenges”

• Procedure changes – Some of your checks will become substitute checks



• Procedure changes • Service disruptions

– ARP/Positive Pay may be problematic– Statement cycles may be extended– Customer service/problem resolution may take longer– Product changes/enhancements may be delayed



• Procedure changes • Service disruptions• Price changes

– Bank margin pressures may result in attempts to increase prices

– Physical check processing will become more expensive



• Procedure changes • Service disruptions• Price changes• Float impact

– Disbursement float will be reduced– Collection float may be reduced– End result will be pressure on available cash


And let’s not forget check fraud!

Are you expecting this?

Or this?

More importantly, what will your local prosecutor or AG expect??



Consumer’s Bank (RDFI)

ElectronicNetwork

Check presented at POS/Agency

Check Image Captured Images consolidated

and sent to central bank

Remote Deposit Capture

Consumer’s Bank (RDFI)Consumer’s Bank (RDFI)

IMAGE

IRD

ACH


Remote Deposit Capture

Potential Benefits • All items eligible• Minimal retraining• No customer notice needed• Reduce costs associated with courier services• Reduce work involved in deposit preparation• Reduce work in account reconciliation• Later deposit deadlines can expedite posting• Remote deposit capture coupled with image exchange

will eventually improve availability and cash flow


Key Trends

• Check Conversion• Check Truncation• Debit vs. Credit Cards


Card Usage is growing

Source: Nilson Report


Debit is taking over

0

2

4

6

8

10

12

14

16

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03

Debit Cards Credit Cards

Purchases (billions)

Source: Nilson Report, FRB


Signature vs. Pin Debit

Source: ATM & Debit News, Nilson


But don’t forget Wal-Mart

• Signature based debit card interchange fees were reduced by one-third on August 1, 2003

• Beginning January 1, 2004 , merchants may choose which cards to honor

• By or before EOY 2005, banks will need to reissue debit-only cards to distinguish them from credit cards

• And the battle continues…

Even with interchange, cards may be the least cost alternative!


Key Trends

• Check Conversion• Check Truncation• Debit vs. Credit Cards• P Cards


P-Cards Today – The 3 Ps


Procurement Cards

• Widely acknowledged as a “best practice” in purchasing/disbursements

• Gunn Partners study estimates an average savings of $47.75 per transaction based on average procurement cost of $77

• Both MC and Visa are using interchange rates to incent merchants to include detailed (Level III) purchase data with transactions

• Growth in online purchasing makes p-cards even more attractive


Payroll Cards

• Particularly popular among retail and hospitality industries.

• Major employers using them include:– McDonald's– Lowe's – Sears – UPS – FedEx– Cingular Wireless – Blockbuster– Office Depot – Coca-Cola

Source: Wall St. Journal


• More convenient• Easier to use• Saves time/faster• Can get money faster• Instant access to money• Don’t have to have checking account• Easily accessible

Payroll Cards vs. Direct Deposit


Prepaid Cards

• Stored Value Cards• Gift Cards• Campus Cards• Insurance Cards• Incentive Cards• Flexible Spending

Accounts (FSA)• Other???

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000

2003 2004 2005

Prepaid Cards(millions)

Source: American Banker, Mercator


Key Trends

• Check Conversion• Check Truncation• Debit vs. Credit• P Cards• Payment Hubs


Enterprise Payments Hub

Data Management

Shared Services Manager

Bank 1

Bank 2

Bank 3

Bank n

Treasury Workstation

Internet

A/P

A/R

POS

Payroll

Payments Customers Rules

Balancing &

Recon

Returns & Repair

Reporting &

Analytics

Security & Risk Mgmt

Payments HubLeast Cost

Routing Translation MessagingRelease Mgmt


Why Payment Hubs

• Reduced cost• Improved flexibility• Faster response time• Open standards• Fewer exceptions/Improved STP• Improved compliance• Bank independent• Network agnostic

Closing Thoughts


• Payments are more than moving money, they’re also moving and managing information.

• Electronic payments can make the movement of information easier, but may complicate the management of that information if not implemented carefully.

• There will always be new payment methods. Developing a long term implementation and migration strategy is not a one time decision. Rather it is a commitment to your future success and peace of mind.

• Keep your options open. Remember Mencken:“For every complex problem there is an answer that is clear, simple, and wrong.”

Closing Thoughts


Payments – What are your goals?

• Maintain controls/minimize cost• Streamline payments process• Convert payments from paper to electronic• Minimize risk and fraud• Increase customer satisfaction


Questions?


Mark K. Webster, CCM, CPAPartner

Treasury Alliance Group, LLChttp://www.treasuryalliance.com

[email protected](216) 375-4155 (mobile)(216) 932-1678 (office)

For further information:

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Innovative Payment Techniques - Treasury Alliance Group · Innovative Payment Techniques. Page 1 ©2006 ... $.03 per transaction with ARC ... – 1 day settlement for all ACH items