Payment Automation: Types, Benefits & Best Practices in 2024
Did you know that it takes small-to-midsized companies up to 25 days to complete the processing of a single invoice?
In a world where time is money, businesses and customers alike seek hassle-free payment methods that save time and increase efficiency.
Enter payment automation - a solution that has gained popularity in recent times due to the pandemic and the new competitive landscape. By automating the payment process, businesses and individuals can save time and minimize the risk of errors.
In this article, we'll explore the advantages of payment automation, how it works, and how it can be implemented to simplify payment processes and boost the bottom line for businesses of all sizes. Whether you're a small business owner or a CFO of a large corporation, payment automation along with with AP automation could be the solution you need.
What is Payment Automation?
Payment automation is a system that processes payment-related data and performs actions with minimal human involvement.
The drawbacks associated with manual payment processes have led to the need for payment automation. Common challenges include human error, time-consuming tasks, lack of transparency, security risks, and reduced productivity.
Automating payment processes reduces the risk of errors, speeds up payment processing time, improves transparency, enhances security, and increases productivity. Payment automation is no longer just a luxury for large corporations but is becoming increasingly necessary for businesses of all sizes.
At the individual level, payment automation may involve automatic payment of credit card bills, mortgage payments, loan payments, and savings deposits.
At the business level, payment automation involves using software tools to manage and complete the process of paying vendors. This includes approving payments, sending them through different payment methods such as ACH transfers, checks, wires, and virtual card payments.
Automation accelerates the payment processing time, ensuring that payments are made accurately and on time. The best automated payment services seamlessly integrate these processes, reducing the risk of errors and saving businesses time and money.
How does payment automation work?
Broadly, payment automation can be divided into three main processes:
1. Invoice Processing: Businesses receive invoices from suppliers for products or services received from the latter. The invoice is processed, typically in the AP department, and once passed, is cleared for payment.
Payment automation systems are usually built into a comprehensive AP automation system that encompasses various processes, including invoice capture, coding, review, approval, payment authorization, and payment execution.
2. Payment Approvals: In the payment authorization phase, automation may entail establishing encoding rules within the software to initiate payments.
In a manual process, an AP manager would submit a batch of payments for review by a payment authorizer, who would then determine which payments to release, hold, or reject. However, in the absence of the payment authorizer, the payment release process may be delayed, posing a significant obstacle to manual operations.
With automation, an invoice payment can be approved or declined from any location, whether at the office, home, or on the go. At this stage, the payment authorizer can also decide when to schedule the payment, such as postponing it until the due date to conserve cash or paying early to receive a discount.
3. Payment Execution: During the payment execution phase of the automated process, approved payments are scheduled and transmitted. Once the payment is made, the details are synchronized back to the accounting system, and the invoice is marked as paid. Furthermore, all records of approval, invoice copies, receipts, and payment records are linked to the invoice, allowing anyone who needs to investigate the transaction in the future to find all relevant information in one place.
One of the most common methods of automated payment systems is ACH transfers. The payment process using ACH transfers involves the payee creating a payment order which is received by the originator bank. The originator bank compiles all the POs and sends them to an ACH for processing. The ACH operator then approves and releases the PO amount to the recipient bank. This process allows payment automation services to quickly and accurately process payments without significant human involvement, reducing the risk of errors and improving the overall efficiency of the payment process.
Types of Payment Automation
Payment Automation can come in various forms, each with its unique benefits. Here are some of the most common types of payment automation:
- ACH (Automated Clearing House) Payments: ACH payments are electronic transfers of funds between bank accounts in the United States. They are a cost-effective and reliable way to automate payments, particularly for recurring transactions like payroll or vendor payments. ACH payments are processed in batches, making them more efficient than wire transfers
- Wire Transfers: Wire transfers are a method of transferring funds electronically between banks, typically for large or urgent payments. Wire transfers can be expensive and time-consuming compared to other forms of payment automation, but they are also secure and reliable.
- Credit Card Payments: Credit card payments are a popular form of payment automation, particularly for online transactions. Credit card payments are fast, secure, and widely accepted, making them an ideal option for businesses that need to make purchases quickly.
- Electronic Invoicing: Electronic invoicing, or e-invoicing, is the process of sending invoices electronically, rather than by mail. E-invoicing can save businesses time and money by automating the invoicing process, reducing errors, and improving cash flow. E-invoicing also enables businesses to track payments more efficiently and communicate with their customers in real time.
Benefits of Payment Automation
Here are some of the primary benefits of payment automation:
Automated payment solutions can promote prompt payment for businesses with all levels of transaction volumes. In the case of low invoice volume companies, automated systems were shown to have on-time payments 33% of the time, compared to 24% without automation. Similarly, businesses with moderate invoice volume experienced a similar trend, with 42% of PO invoices paid on time with automation, versus 25% without it.
Greater levels of accuracy
Automating payment processing enhances accuracy by validating invoice data against ERP or accounting systems, eliminating manual processes and paper handoffs that cause errors, and flagging duplicate invoices.
Collaboration between suppliers and internal stakeholders is facilitated, and business intelligence is used to identify problem suppliers. Some technology providers guarantee accuracy. Electronic collaboration enables efficient error resolution compared to manual methods that rely on untracked emails and phone calls. According to "The How, the Why & the ROI of AP Automation" report, 23% of companies experienced a reduction in duplicate invoices as a result of implementing automation.
Automated payment systems offer significant cost benefits to businesses by increasing the capture rate of early-payment discounts and reducing late payment penalties. IOFM benchmarks show that most accounts payable departments capture less than 21 percent of all early-payment discounts, but automation helps clear the way for businesses to pay more of their invoices within the discount period by streamlining the invoice approval cycle. The IOFM report also shows that an accounts payable department that processes 5,000 invoices per month stands to save $55,650 per month using automation.
Payment automation allows accounting professionals to focus on strategic tasks like liquidity planning. It also reduces the need for full-time employees, increasing productivity and profitability. Real-time collaboration on shared documents streamlines processes and eliminates unnecessary delays, making work easier for remote workers. This results in increased convenience, fewer frustrations and disputes, and a more peaceful working environment. Employees can contribute to the ongoing improvement of the accounts payable process, aiding in the continued growth of the business.
Reduces opportunities for fraud
The decentralized manual payment processes pose a significant vulnerability to fraud, as there are multiple entry points for fake invoices to be paid, and limited visibility into who is getting paid for what. However, automation streamlines the process, enabling all invoices to travel through one online system for complete visibility and easy identification of suspicious payments. AP Automation solutions establish automated payment controls, including Segregation of Duties, Dual-Factor Authentication, and Positive Pay Files, which prevent internal fraud and protect against account takeovers. Positive Pay Files transmit a file of issued checks to corresponding banks daily, enabling verification of authorized payments.
Payment Automation Best Practices
Setting up and implementing automated payment services does not automatically ensure that a company will reap its benefits. In order to truly benefit from payment automation, it is essential to follow best practices for its implementation and management. These practices not only help avoid costly mistakes but also ensure long-term success and sustainability for the company's bottom line. By following a few best practices listed below, companies can automate payments with greater efficiency and reduce costs.
- Ensuring compliance with regulations: Businesses should ensure that their payment automation processes comply with all relevant regulations, such as the Payment Card Industry Data Security Standard (PCI DSS), General Data Protection Regulation (GDPR), and Anti-Money Laundering (AML) regulations. Compliance with these regulations can help protect the business from legal and financial risks.
- Verifying payment information: Before initiating a payment, businesses should verify the accuracy of the payment information, such as the recipient's name, bank account number, and routing number. This can help prevent errors and avoid sending payments to the wrong recipient.
- Maintaining security and data privacy: Payment automation processes should be designed with robust security measures to protect against fraud, hacking, and data breaches. This includes implementing encryption, multi-factor authentication, and regular monitoring of access logs. Businesses should also ensure that they comply with data privacy regulations and protect sensitive information, such as bank account details and personal data.
- Regularly reviewing and updating processes: Payment automation processes should be regularly reviewed and updated to ensure that they are still effective and efficient. This includes monitoring for any errors or issues, reviewing workflows and approval processes, and incorporating feedback from stakeholders. By regularly reviewing and updating their payment automation processes, businesses can continuously improve their operations and achieve better results.
Nanonets as part of your payment automation journey
Nanonets has an in-house offering called Flow that automates payables end-to-end. It is a platform ideally suited for small-to-medium businesses that want to automate their AP process in a fully customizable yet scalable way.
With automated import, best-in-class data extraction, flexible approvals and all payment options supported, Flow is ideal for growing companies looking to formalise their finance function.
Nanonets can also help in automating the Accounts Payable process by:
- Importing and consolidating data from multiple sources - email, scanned documents, digital files/images, cloud storage, ERP, API etc.
- Capturing and extracting data intelligently from invoices, receipts, bills, and other financial documents.
- Categorizing and coding transactions based on business rules.
- Setting up automated finance approval workflows to get internal approvals and manage exceptions.
- Making payments across 45+ currencies globally, using ACH, card or wires.
- Reconciling all transactions.
- Integrating seamlessly with ERPs or accounting software such as Quickbooks, Sage, Xero and more.
The automation of the payment process can greatly benefit businesses and their customers. It streamlines payment processing, reduces errors, and offers a wider range of payment options to customers. By adopting payment automation technologies such as AI-powered payment systems, intelligent accounting software, and mobile payment options, businesses can enhance their financial health, increase efficiency, and improve customer satisfaction. By investing in payment automation, businesses can stay ahead of the curve, free up valuable resources, and focus on their core competencies.
As automated payment processing continues to evolve, it will undoubtedly play an increasingly critical role in the success of businesses across all industries.