Few treasurers or CFO's could have predicted the full implications of the credit crisis. The impact has left some treasurer's scrambling to maintain liquidity and looking for ways to minimize the long-term damage to their organizations. While traditional sources of working capital may be restricted, the lowest cost, most reliable source of working capital might be right under your nose.
Cash Management Re-examined: How Treasury Tactics Take on a New Meaning in a Difficult Economy - June 2009
Once again, I'd like to welcome you to the PNC Advisory Series, "Cash Management Re-examined:
How Treasury Tactics Take on a New Meaning in a Difficult Economy." And without further delay, I'd like to turn today's Live Meeting over to your first presenter, Beth Vucic. Beth, you have the floor.
Thanks, Adam. Good morning and welcome to another PNC web seminar. I'm Beth Vucic, Vice President and Marketing Manager for PNC's Corporate Banking business. Some of you may have joined us for past webinars. If so, welcome back. We are also very glad to have with us today clients from National City, now part of PNC. Welcome.
For those of you who haven't joined us before, I wanted to quickly remind you that today's seminar is part of the PNC Advisory Series, a series of educational programs and events that are focused on delivering ideas, advice and solutions to companies across the country. You can find information about past and future webinars at PNC.com/joinus.
We continue to choose our topics based on the input we get from our audiences, so at the end of today's session, please provide your feedback through our short survey so that we can keep focusing on the right content for you.
By the way, I should also highlight that today's seminar has been approved for one hour of CTP credit by the Association of Financial Professionals. You'll receive an email after this session for more information.
So about our session today, few treasurers or CFOs could have predicted the full implications of the credit crisis that begin in 2008. The impact of that crisis has left some treasurers struggling to maintain liquidity and looking for ways to minimize the long-term damage to their organizations. With traditional sources of capital being restricted, it's a good time to re-examine a back-to-basis approach to cash management.
In this webinar, two of PNC's leaders in treasury management, Bill Booth and Steve Susnak, will review how you can enhance the efficiency of your cash conversion cycle with improvements to your collections and payables processes and unlock the value of your working capital.
Without any further delay, I'd like to introduce Bill Booth, our first speaker, Senior Vice President, PNC Treasury Management. So let's get started. Bill?
Hi. Good morning, everybody. This is Bill Booth and I'll just tell you a little bit about my background and then I'll introduce Steve Susnak this morning.
I am responsible for PNC's large corporate segment within our treasury management business. So-- and I mention that and I'll tell you a little bit about some other responsibilities, because I'm-- while I hope that we can recognize that there's a very broad audience on the phone from small to large, we want to try to make sure that we're keeping our comments relevant to everybody.
I will say that I do also have some new responsibilities for some of our regional markets, including the National City market in Florida. So I know there's a few folks joining us from Florida this morning. Thank you for joining us.
And part of my background, I did have regional responsibility for some of our middle-market regional territories in Pennsylvania. So hopefully that will help in terms of making sure that we are addressing all aspects, all segments of the market this morning.
So with me is Steve Susnak. Steve?
Hey, thanks, Bill. Good morning, everyone. I am Steve Susnak. I am a segment manager within PNC Treasury Management, focusing primarily on the large segment in between western Pennsylvania and the West Coast and also our national insurance industry segment, which is comprised of large and mid-sized life and property and casualty underwriters.
Thanks, Steve. We want to keep this conversational this morning and we hope that, as Beth pointed out, one of the objectives is to share ideas. We want to try to be thought provoking here this morning and maybe share some tips. For some of you, hopefully a lot of you, a lot of what we're going to talk about may be really confirming some things that you're already doing and that's fine.
The genesis of this topic and based on the interest and the number of folks we have on the line with us this morning, it is an indication of just how important this is, last September I was-- early part of September I was on a client visit with the treasurer of a public utility. The company was a BBB company and on this particular day it just so happened that we were there on the first day that the company learned late in the afternoon that they were not going to be able to completely fund their obligations that day through the commercial paper market.
And PNC happened to be the concentration bank and we were left with about an $18 million overdraft and we sat there kind of, you know, talking about what had just happened. It just-- it struck me, all of the-- you know, all of the issues that were starting to bubble up at that point sort of really came to light when a company, a quality company, couldn't fund itself through the CP market. It was really quite amazing.
So I remember driving home that afternoon thinking to myself the whole way home, you know, this is a huge change in our business. It's not something that I had seen in my 20-plus years in the business and it really represented a remarkable real-life change in events that I knew was going to have serious implications on how we do business every single day.
You know, part of the concern is, wow, this has the potential to be a huge distraction for companies and thinking about what those implications could be for our, you know, ongoing dialogue with companies around projects related to treasury and the concern that, you know, wow, this crunch, this liquidity crunch, could really take people's attention away from some of the good things that we are in dialogue with.
And so around that time, Beth and our team in the marketing department really helped us begin a crusade, if you will, around trying to make sure we were out in the marketplace trying to emphasize just how important really the basics of cash management were. And a couple of podcasts and Steve's been on the road and we've participated in probably 16 regional and/or industry-focused trade shows. We've done four or five newspaper and magazine articles, really trying to remind folks just how important cash management is as part of the-- as part of your mix of sources of working capital, sources of liquidity.
If you think about it, there's really-- there's three things, three key pieces of-- sources of liquidity -- debt, equity and working capital, the impact that your payment process has on your day-to-day business, A/R, A/P and inventory. And if you think about it, in these uncertain times, these sources of working capital really are positioned to be your lowest cost source of liquidity. And that just-- we just can't stress that enough.
Let me just flip to the first page here, as we get started. So it's not just about a matter of being a best practice any more. This is-- planning and managing around the cash flow process is just absolutely essential for survival. Financial executives are getting back to basics.
I mean, we think about this now in this day and age, it's not just companies, it's families. It's virtually every business. The banks have been stress tested. That's a sensitive topic. Hopefully, there won't be too many questions on that, but we are and you, financial professionals, are looking at the impact of much lower demand for product on, in most cases, low revenue. What is the-- you know, how do you balance that lower demand, decrease in revenue against costs that a lot of times are more constant.
As part of our discussion today, we're going to talk about and think about ways to take costs out. And we're not thinking only about banking costs here. We're talking about all the costs that are allied to your payment processing aspects of your business.
Running your enterprise lean and efficiently, this is really a time factor, trying to get leverage information so that you can act and react much sooner in the process. Again, the goal is optimizing enterprise working capital and keeping a close watch on financial performance of the company.
Credit markets, in the third bullet point, are-- continue to be very selective. We have certainly seen a lot of improvement and that's a good thing, but now this week as we head into the uncertainty around what the new regulatory requirements are going to be around our industry and other financial service companies, some that aren't even in the financial services business, we are seeing a reaction for that in the last couple days in the markets in terms of, you know, this uncertainty.
So it remains very, very dynamic. If you just think about, you know, these things that we're talking about have always been important. But if you add to the equation the fact that we've seen this dramatic increase in the cost of capital and now borrowing costs for businesses, if you can get capital, are still, in historical terms, relatively low, but if you think about how spreads have changed in the course of the last six or nine months, it's dramatic.
If you look at an investment grade company, take a-- for an example a pharmaceutical company that needed bridge financing for an acquisition, investment grade company, borrowing at 500 or 600 basis points over LIBOR. Again, on a relative basis, a reasonable cost of funds, perhaps, but the change of that cost to that institution over the course of a relatively short period of time is dramatic and it just emphasizes how important these low-to-no-cost sources of capital are to a company.
And, by the way, as we go through this, Steve and I are-- we'll try our best to answer questions and encourage you to email us as we're online here. We are managing the screens and managing our notes and managing the live meeting technology at the same time here, so bear with us. We do want to try to make this as interactive as the technology will allow.
This slide that we're looking at here, slide four, this business case, this is really around-- this is kind of generally trying to set the stage for the conversation. Again, recognizing that there's a very diverse group of industries represented in the size of the companies listening in on the presentation today, we'll, again, try to be as general as we can here and keep it at a high-enough level.
But if you think about the cash flow value, the business case, the ability to try to evaluate tweaking your payments process in order to bring out extra value is really around this notion of cycle time management. And so we-- as we look at the business, we like to think about the velocity of cash. So we look at ratios-- we look at criteria, ratios like your days sales outstanding or DSO or days payable outstanding.
These are simple measures and there's a lot of different ways to look at them, but they really are good indications of how fast and how efficiently companies are using their working capital resources. So, a lot of the-- a lot of the value proposition around some of the technology, some of the tools that we talk about in our industry and certainly from our perspective at PNC are really-- are designed not only with sort of the traditional measures, reduction of float and, you know, extending payables and fraud and things that are vitally important things. Those have always been there.
We like to think about the business in terms of extending it beyond, for example, on the receivables side, extending the process, the value proposition, beyond just that lockbox and really looking at multi-discipline issues.
So, you know, taking a step back, the A/R process really starts at the sales-- at the point of sale, correct? And it migrates through these various other components.
And a lot of-- a lot of what we talk about with clients and, as we look at these issues now, really beg the question around sort of the traditional structure of finance in a lot of companies. Treasury, for example, you know, based on some of the surveys that we've looked at, has direct control of a lot of these allied functions, A/R and A/P, in probably less than a third of companies.
You know, we are-- our industry and the larger the company gets, the more separation of power issues and separation of control issues come into play and those are important, but we're seeing a breakdown, a healthy breakdown, of those barriers. Sometimes they're direct, where treasury is becoming the-- will have more and more direct accountability for some of these functions, but certainly and, you know, one of the tips I think we want to point out is it's never been more important for treasury to be aligned with the A/R and the A/P folks strategically. I think that is just-- that is vital. It's now important than ever.
So we talk about extending these processes. I'm on the third bullet here. I'm on the third bullet point here and using, just as an example, and this is sort of focused on the A/R side, but looking at invoice generation, for example, as part of the overall A/R process, we talk about that, we know that it's important, we talk about the handling associated with that and backing through the whole process, really helping clients try to identify what we call time traps, the gap in processing effort on the part of your company that could have a-- that could be a variable in terms of that DSO number, for example or days payable outstanding.
And then a lot of the-- a lot of the discussion is really around augmenting ERP systems, your enterprise resource platforms that are driving your G/L and A/R, A/P in a lot of cases. It's very important that, you know-- there's huge investment in these ERP platforms. The bigger the company, the bigger the investment generally and our solutions, provided by the industry, if used properly can begin to transition some of that activity, maybe earlier in the process, bringing some of the technology to the front end of the process in order to help reduce some of these time traps. It's not appropriate in every case, but we see a great opportunity to begin to really blend these technologies.
I'm on the sixth slide here and I'll spend quite a bit of time here. The overall theme, I think, of what we want to talk about as we begin to talk about maybe a few points in a little bit more of a tactical level and that is driving to the notion that if our solutions, our technology, can help a company reduce its clerical or manual involvement around some of these elements of processing, around pieces of your payments process, that can be a time-- that can create a savings, but the ideal isn't necessarily to eliminate resources, although that's possible in some situations. We like to think about it as reducing manual clerical resources and time and transitioning that to being able to increase analytical time and resources.
So in that process and I'll try to keep coming back to this, in that process, sure we might be able to identify some hard FTE reductions in some cases. Again, that's not what we want to emphasize. We want to emphasize sort of the job enrichment, if you will, of helping people migrate from pure cost functions into more value-added functions in the organization. We'll talk about some ways through these things that we can do that.
This first bullet point under receivables, we're talking about this front-end efficiencies again. Just as an example, if you think about invoice design, we often will sit down with a company as a starting point and say, well, let's take a look at your invoices, how do these things look? And, again, this does have a bit of a B2B focus, but we'll try to, hopefully, make some of this relevant to other industries as well.
But if you think about an invoice, you'd be surprised how often we'll find an invoice that might have something very obvious, like two billing addresses on the front. Well, in these times, how easy is it for somebody who's looking to extend their payables a little bit to use the address that is, perhaps, a street address where they know it's not going to go directly to the lockbox?
We find that all the time. And there's an amazing correlation. We've gone in and we'll be reacting to a situation where a client is saying, you know, geeze, I'm noticing what looks like a slowdown in my availability. Well, let's get in and analyze that.
Start with the invoice. You've got two addresses here. Is there a correlation? Absolutely. Somebody is sending you a large check to your street address.
So little tips like that are, I think, very important, again, in this day and age where you're looking at-- you're looking at a dynamic with-- you know, with your customers where they may be inclined to try to take advantage of that opportunity if you're putting it out there for them.
Another thing that we do is we've worked with companies to actually do the invoice printing itself. So there, in that aspect, we're looking at an opportunity to take actual labor and printing expense and mailing cost and bring it into a different scale operation on our shop. There's also some dynamics there where if we have that invoice data, there's some interesting things that we can do with it to help the application process and I'll talk a little bit about that.
The biggest thing that we have seen and that we have tried to-- very hard, to drain-- gain efficiencies out of is this use of image technology around the A/R process. And this extends to both our wholesale capability, our hybrid sort of wholetail capability and into our retail coupon-oriented processing that we do for a consumer-to-business payment model.
We drive this image and we're able to do a lot of things with it that we believe can help enhance efficiency on your side. And I'll just throw a couple of examples out there.
We do a lot of what we call software-assisted keying, where using the image technology we're able to capture very efficiently a lot more data around the invoice and payment process so that we have more fields of information to push back to you as part of the application process. We can do that very efficiently and very accurately.
But more importantly, being able to convert everything at that point that it's received into a digital format allows our clients to exchange that information much more efficiently within their organization. So it's not only important to the application process, but it's important to the client service process. It's important to the credit and collection process in your organizations and being able to distribute that information very, very efficiently is a dynamic that is-- really represented a revolution in A/R processing for our industry and we feel that we are-- we've absolutely been a leader in this space.
Virtual batching -- think about this. If you know that today you're going to have some payments that are going to kick out tonight of your ERP system, say you receive a check without any invoice information, there's a strong likelihood that tonight that's going to kick out and tomorrow you're going to see it on an exception report.
If you can manage that information, that characteristic, all check-only payments and you can drive that into a separate batch and push it to somebody today, maybe you can push it to them, you know, at 11 or 12 a.m., they can begin to research and work that item immediately. They can relieve the DSO associated with that payment today versus waiting for tomorrow. There's a one-day pickup on that item.
If you think about that technology and the ability to distribute those payments by different categories of your customers, different divisions of your company, really the sky-- the-- it's unending the number of ways that this information can be broken down and shared internally. That becomes an incredibly, incredibly powerful tool.
The idea here, being able to automate this posting process, migrate more to an exception-handling environment, is-- it dovetails exactly, right into this notion of being able to reduce your clerical expense and increase your analytical.
The next bullet point here, this notion of a single posting stream, being able to integrate electronic payments. We-- you know, the best thing that you can do from a posting and application standpoint and cost standpoint on a per item basis is to convince your customers to pay you electronically.
The industry is making -- finally -- terrific headway here. The nature of the receivables solution at PNC is really driven around being able to capture all payment types. So the paper items, the overnight work, the-- your ACH payments, your wire transfers and merchant card or credit card payments that you accept through your enterprise and being able to drive that through a single payment stream.
It's good to have it all in one place from a cash standpoint. But think about the value of all that information in one place so that an inquiry comes in, regardless of how that payment was made, your customer service, your credit and collections people have access to that information through a single repository of data and they can access it and they can respond to it. And they can-- you know, from an exception management standpoint, everything is one place-- is in one place, as well.
The next bullet point really addresses the use of credit cards as a collection tool and in Steve's discussion here, as we move forward, we're going to talk a little bit about the economics and you'll come away from that discussion with a much better appreciation for the economics and the value that it creates to pay as a payer using a card to make a payment, but the insight that you'll gain as somebody who is being asked more and more often to accept a payment is going to be very enlightening.
I will say, just from a-- you know, in keeping with an efficiency theme here that when you accept a card payment, perhaps for a strategic payment and those of you in the retail industry are very savvy about your costs around accepting a payment, but from a B2B standpoint, if you accept a payment, the one true value that's probably worth considering is you're going to get exact information. You're going to be able to bring very precise A/R data into your system.
So-- and, as we talk about the benefits, you better get something else. Your-- it is a negotiation tool if someone wants to pay you with a card from a B2B standpoint. The other piece of value add here is they probably can afford to pay you sooner. So that's something to think about as you-- as you're forced by your customers to consider taking a card for payment. There are advantages to it, certainly, from an A/R standpoint.
This notion of being able to share data around the organization really gets into the notion of, again, reducing your clerical and manual costs and being able to migrate these resources to more of an analytical use.
One area that we talk a lot about with our customers is this notion of being able to control the process in such a way that you're actually able to begin to reduce the difference between gross and net sales. And if you think about that, that is a value proposition that drops straight to the bottom line.
The idea there is that by more closely managing your exceptions, you're really able to, then, focus on exceptions that have issues around unauthorized deductions, unauthorized discounts. You're able to pay more close attention to credit issues with your client.
We think -- feel very confident -- that there's a very strong correlation there to being able to narrow the gap between gross and net sales. Again, that is a hard dollar benefit.
Slide six really gets into -- and I'm going to hit on this very high level. I'm not going to spend a lot of time on this.
These are questions that we will explore when we get into a treasury diagnostic scenario with clients and these are good things to think about. And, again, I won't go through all of these. But we're really looking at the financial statement impacts of what you do every day.
You know, treasury has really become a key link between the balance sheet and the income statement, if you think about it. And as you go down this list here and think about some of the questions that this poses, it-- I think will begin to demonstrate the notion that there's really some things that you can do within your organizations to begin to wring out some additional value from the payments process.
One of the tools that we want to talk about a little bit here and this is-- A/R matching is the topic that we talk about here a little bit on slide seven. A/R matching is one of the tools that we have been able to deploy out of our A/R Advantage platform, our lockbox platform, that is in-- it's not as heavily used. It tends to be a more-- a little bit more sophisticated application, but I think it drives home some really, really important points in ways that the information can be used to harness some of the value that we're talking about around, you know, getting to the ability to control that exception information much more carefully, much more analytically.
The-- it's a simple process, basically. What we're doing in this environment is we're taking an open invoice file from our clients and we're matching the incoming payments against it on a very real-time basis. The goal is to increase the hit rate of invoices that can be posted automatically, resulting in an improved cash application rate, the potential to reduce the amount of time that your folks are pursuing exceptions, but we can also build into this process some interesting criteria. We'll talk a little bit more about that.
Now this slide that you're looking at now is designed for two purposes. One, to make sure you're all awake and we will-- I'm not going to go into a huge amount of detail on this. Talk about receiving an open invoice file from a company, I'm trying to highlight here these fields of information -- let me try this again -- on the top.
Your invoice, invoice number, invoice amount, micro information, customer number, customer name -- this is information that is fed to us from your open invoice file. We can take this information daily, weekly, monthly, depending on how often your billing information is updated. And then essentially in this very complicated-looking flow chart, we're bouncing that information off of what's coming in from a payment standpoint.
This does a number of things. It very simply, in its most basic use, it does a great job of catching bank keying errors, because we're actually using your invoice information, your customer information, right directly off your billing file. So certainly it would catch a bank keying error. It also catches any errors that an accounts payable shop might have been responsible for in terms of creating the payment that we're trying to process.
There's a number of different things. I'm going to describe a couple of examples of how this technology has helped us drive much higher application rates and, therefore, presented us with much more actionable and better exception information that your teams can then work.
We've worked with companies to help in a very complex billing environment where they were sending out 12-digit account numbers. There's a limitation on accounts payable systems often where they can only produce invoice numbers that have nine digits, for example. So there was a truncation issue with one of our clients that we used this A/R matching system to provide.
Basically, we create an algorithm in this process that allows us to say, okay, I got nine digits. I have an exception. Can I match that nine digits against the expected 12 digits. If there's a match there on nine digits, then let's add the five that are missing and let's automatically repopulate that information and let's kill this whole bunch, this whole bundle of items that would have misapplied from that front-end application process.
That's one example. Another example -- building an algorithm that looks at exceptions that may be related to a not-for-profit who deducted sales tax. Maybe my billing system wasn't able to discern that that was a tax-exempt entity. So when we billed them, we billed them for the cost of a technology product, for example. We added sales tax. On the payment side, they deducted the sale tax. We don't pay sales tax.
A/R matching gives us the ability to really get into specific business logic around what you're expecting, what we're receiving, pulling back your information, making that match and eliminating that as an exception item that your team has to look at.
The final thing I'll mention here on A/R matching is this notion that if you're sending us this billing file, there's a lot of robust information there. We import all of that into our system so that from a customer service standpoint, when you are working an exception item you now have access to searchable criteria, based not only on the information that we're collecting from the image of the check or the ACH payment or the wire that ultimately was the payment, but we're also able to bring in data associated with your billing file so that now a customer service person or a collections person at your company, you can actually drill into some of your own data as a search field to pull up that information very quickly. That becomes part of the long-term archive and consequently just another tool that helps that exception resolution process be a much more efficient one.
Okay. Here's where the rubber meets the road. These are the metrics that we-- I want to stress, these are potential impacts. These are your financial statement impacts of some of these techniques that we've just highlighted here this morning to your balance sheet-- to your income statement.
A days sales outstanding impact -- it translates to cycle time reduction. We think that can mean one or two days.
This difference, this notion of being able to drive down the difference between gross and net sales, we think that that can represent a meaningful savings. It's noted here, you know, 1% to 5% on returns, reduction of unauthorized allowances or discounts or deductions of anywhere between 2% to 3.5%.
There's a hard dollar cost savings, too, associated with your SG&A. If we can help reduce the number of paper checks, there's a meaningful number that we can redeploy people from those roles that are doing a lot of this manual application. There's a really meaningful savings there, potentially.
We think there's opportunities to lower your carrying cost and also to begin to reduce bad debts.
If you think about it, this notion of being able to more tightly control that difference between gross and net sales, you know, I live on a street where nobody locks their door. So if there's a burglary spree, and I lock my door and my neighbor doesn't, where do you think the burglar is going to go? I mean, that's kind of the notion in a simple analogy.
If you're demonstrating to your customers and your credit and collection folks have very active tools in place to be able to monitor this unauthorized discounts, deductions, more closely, if you're able to focus more on exceptions and less on the application process, we think that there's a huge value translation there.
These are targets. These are not about our-- not about absolute precision in terms of being able to drive to these benefits. Again, these are things we think are attainable and very, very valuable as we talk about some of the concepts.
Steve, anything to add? I'm going to go out here and try to look at some of the questions -- we have a bunch -- before we turn it over to more of a payable-focused discussion.
Yeah, I think actually Bill's accounts payable feeds directly into-- or Bill's accounts receivable feeds directly into my accounts payable. We absolutely want to take a look at a couple of questions. It looks like there's some activity here.
Yeah. There's a great question and this comes up very often and that relates to, I've made this big investment in my PeopleSoft platform. It sounds like a lot of these capabilities are what we're doing anyway. Why-- basically, it looks like, why do I need to deploy these services from a bank or from PNC?
That's a-- that is, actually, a great question. I think if you think about the nature of these solutions that we're describing, there's a certain cycle time to running reports and generating exception information out of an ERP platform. We like to think that if we can push some of these tasks to more of the front end of the process, there's a cycle time gain there. There's the ability to look at things, maybe, today real time in our secure environment that otherwise you'd be looking at tomorrow and that, we think, presents a great deal of value.
Thank you for that question. I'm also-- I'm sensitive to our timing here. I'd like to ask Adam, if you could just remind folks on the line how to submit a question and then we'll launch into Steve's part of the presentation.
Okay, certainly. You can click Q&A to display the pane. Simply type your question in the field next to the ask button and then click ask. Thank you.
Thank you, Adam. I appreciate it. I'm going to go ahead and launch into the payable side of our dialogue today and in the interest of time I'm probably going to move through this fairly quickly. So forgive me.
I really will be focusing primarily here to start on page 10 and really wanting to speed through just some disbursement activity more recently as we go through this unprecedented economic challenge that we've been working through that have either been engaged holistically or individually by folks to try to add value and bring further automation to their back office.
And if you think about these, just kind of quickly, image front-end capture, you may have heard of this as reverse lockbox or invoice or A/P automation. And really this is driven by the fact that we have had experience walking into corporations large and small where they have a group of folks, either centralized or decentralized who are literally sitting there at a fairly high rate of FTE, keying invoices, oftentimes small dollar, repetitive invoices, into their payables system and really not a very effective way of processing this work, starting this very important process. And it's just-- at the end of the day, it's just too expensive.
And although this technology isn't fully baked out just yet, it's begun to be engaged and can be engaged, either stand-alone or holistically, and it's really starting to gain traction. So we'll talk about that a little bit.
The EFT integration, my goodness, for the folks who have been in this business for a long time, regardless of your industry segment or the size of your company, this is something that's been going on for probably more than 20 years and for those of you who remember back in the day the prediction that checks were going to go away, we're going to be a checkless society, you know, all of a sudden, we got to the point a couple years ago where we finally started to see a decrease in the overall number of checks and that continuum towards all-electronic has really continued to gain momentum in a variety of ways, primarily B2B, but in B2C also.
The card as a payables payment method is something that really has taken traction really within the last five years. And not that purchasing cards weren't out there. They have certainly been out there for a long, long time and some folks have used them very effectively. Others not so much and we really like to think of it more as the technology that's out there today to engage card in its various forms to optimize your disbursement mix, whatever it might be, as you move down that continuum from being very check centric to all electronic. And various folks are in different stages of that continuum and we're going to talk about that.
Risk is an enormous point here, obviously. Check fraud and the risk associated with checks and paper transactions is pervasive and grows more sophisticated all the time. For that matter, ACH risk has become much more sophisticated and much more global in its breadth and has really been a dramatic problem for both banks and practitioners alike.
And really, in some ways, there have been some technologies that have been brought to bear, UPIC and others, but it continues to be a challenge that we're working through that has led some folks to consider card-based solutions as an alternative in their payments shop.
The last point there, real-time information and use of the web, really pretty self explanatory. In an environment like we are now with very low interest rates and just the desire and need to have very pristine working capital management, probably more than ever in our history, it's just incredibly important to have the best quality, most usable, efficient information delivered to you on a very regular basis. So that point's fairly self explanatory.
Why don't we go ahead and move on to 11. This really just some fundamental economics. I kind of-- I guess in the A/R side we talked about this at the end. I chose the position at the beginning only because it's pretty straightforward.
In the typical B2B transaction around $2,000, various folks, various terms that you may have with your suppliers and vendors, historic relationships, there are a lot of things that kind of feed into this and these numbers here may not be necessarily exactly indicative of where you are, but, generally speaking, they're market rates that we use as a comparison starting point. And you can certainly fill in your own.
But the point we're trying to communicate here is that wire transfers are a very expensive way of settling with your suppliers and vendors. Checks are still out there, even though they're going down. But Phoenix-Hecht would tell you that they're around $0.63 in bank fees and mailing expense and that was, of course, before the recent postage increase which certainly is not going to be the last one of those we see.
ACH certainly very popular and very effective means of settling your obligations. We've got that in there at $0.12. You may be much higher or much lower than that, depending on your situation, but either way, with that metric, the industry has done a wonderful job and I think the-- just the competitive nature of this business is squeezing every last tenth of a penny out of that, so it's certainly been compressed more recently.
And then the last thing up top there, the card payables settlement. And for some of you folks, this is very generic and something you've been very accustomed to for years, but for those who have not, the card payables settlement is the only one of the transaction media that not only has no bank fees, but engages an interchange fee. So it actually can create a revenue stream back to you as the sponsor of the program, just by using it. And certainly some of you on the phone here, I'm sure, have been able to bear the fruit and leverage that utility to your advantage.
I'm going to go over and slip over to page 12. This is a really busy graphic, but it's really not that complicated. What I wanted to try to communicate here was -- and it really goes back to the question we may have received -- back around Y2K a lot of folks, companies large and small, really buttoned things down and kind of band-aided their systems through Y2K and that whole experience and then as the economy improved in the earlier part of the decade went out and engaged a variety of technologies for enterprise-wide, holistic-based back office solutions, whether it be SAP or Oracle or PeopleSoft or Lawson, a variety of those, Peachtree on the smaller side, and engaged those with the thought process of becoming more efficient and more effective in their payables back office.
And in this particular graphic, you'll see all those payment media that I talk about there are listed on the side. And many of you may very well still be very check centric, but you've taken advantage of some of the newer technologies out there to send a single file or a pipe to your bank provider or providers to take advantage of this technology, maybe even considering getting the check print function out of your back office, which is something that a lot of the experts and our sales consultants would tell you that probably should consider. It is no one's core business, necessarily, and it's a way to really engage some of the newest technology to mitigate the impact of check fraud.
Up on the very top there I had card platform and really, the-- one of the purposes of this graphic is that you don't necessarily, in this tough time you're in where you're being challenged every day to work on the most limited amount of projects and just focus your business as microscopically as you can, you don't have to go out and engage SAP to make holistic solutions to make a meaningful change, necessarily. You can simply consider triggering a switch within your ERP system, which I suspect some of you have done, to add a card file on this, very similar to your check file or to you ACH file.
And really it creates a scenario that you can take advantage of a couple of different card settlement options but really maybe even taking card to the point where it's very much similar to positive pay check disbursement. And we all know the value of mitigating positive pay and pay-line recognition, but this really takes that to a whole 'nother level.
So the message I wanted to communicate here is that you don't necessarily have to re-engineer from ground up to get some value out of this. You can actually take advantage of one-- strategically implement one or two of these pieces and really maybe send the efficiency and the productivity of your payables shop off in a completely different direction.
I want to go over to 13. This is really apologize, so I apologize, but I'll try to, you know, melt this down into tips. As you think about the strategic growth of your business and the procure-to-pay process, distributed cards in the far left column, they've been out there for 15 or more years and they're really probably the most generic way to take advantage of card technology today. You know, small dollar, replacing petty cash, providing the ability to reduce the time and add value to this very somewhat decentralized and arduous process.
It can be involved in MRO -- maintenance repair operations -- some non-PO items and certainly, you know, it helps to make that accounting a little bit better than it has been in the past. And I think these have been engaged very liberally and we don't want to spend a lot of time on that, necessarily, just essentially focusing that it's one piece of the pie. It's one piece of the solution set that can be very important and very valuable to you.
And as you move across to the right, in the point of purchase mindset, ghost cards are out there and this is really 16-digit accounts numbers without the plastic, housed by the vendor. And they have a discretionary maximum, so they're not unlimited, but they're a great way to take advantage for some centralized vendor relationships.
Probably the best example I can provide you would be your corporate travel where you absolutely have an account set up with your corporate travel agency where you'd be able to take advantage of a ghosted card to add a lot of technology and control and behind-the-scenes accounting to that, in the past, somewhat individualistic or really arduous function.
And then, of course, moving over to the right, the point of payment card-based settlement. This is really what Bill had mentioned when he talked about strategic vendors and this is just really an incredible story here at PNC.
I've told this story more than a few times, but forgive me, our manager of accounts payable back in the late part of 2004 had heard of taking advantage of card settlement without having a plastic to settle very large ticket items and she absolutely had no interest in it, didn't believe it at all, thought it was just not a possibility.
Well, she actually was challenged on it and went out and at the point of where PNC prints checks in its accounts payable shop, grabbed a cross section of invoices that were all $100,000 and above and some of them even included right on the invoice that if you'd like to pay us with Visa or MasterCard, give us a call, and reached out to those folks. And to her surprise, she found a great deal of them were more than willing to accept that card payment in that environment, really using no technology other than the fact that it was a ghosted card.
And since that time, the technologies that have been developed out there have been able to enable a large number of strategic vendors to be engaged in this kind of process and really created a lot of value for not only the vendors, but for the sponsors of those programs. And you might say to yourself, well, who would possibly accept this. And if you're involved in it, you already know, but if you're not, you think about marketing, legal fees. Print media is an enormous one. Telecommunications, hardware, software, cleaning services. Even to a certain extent overnight packages.
These are areas that are big ticket items where the A/P shops of corporations, generally large, but certainly some smaller, have been able to take advantage of this technology to really, really add a lot of economic benefit to their back office payables shop and offset a great deal of the cost and the risk that they face in dealing with them.
There are some other benefits, too. Certainly I'd be remiss is not mentioning that it's a SOX-compliant payment process. That's certainly very important in this environment we're in today. And that it improves the transaction risk management and reduces fraud. It is a guaranteed payment that improves the timeliness of payment posting for your vendors and something that they have grown more and more accustomed to over the last five years and, oftentimes, may surprise you how willing and eager they are to engage it.
I'm going to go ahead and turn over to page 13. Excuse me, I'm sorry. Not 13. It would be page 14.
And this really-- what I wanted to do here, very quickly, was take a lot at potential. You're probably sitting there saying to yourself, well, this sounds great, Steve, but what does this really mean to me. And I framed this with the thought process that these numbers are probably consistent with the lower end of what we consider a middle-market company, maybe a company in the size of $100 million to $200 million in gross sales.
And really, you know, many of you have heard about engaging card services over the five years and your bankers come in, knock on your door and say, let's do a vendor match. Or tell me what your gross reported expenses are and we'll get 5% of it carded or 10% or 20% or they'll just throw a number out there.
What we tried to do here was to bring a little science to bear. Our head of strategic sales consulting for PNC, who happens to be as a CPA as part of his background, really sat down and took a look at a cross section of our clients that we've developed vendor spend with over the last four or five years and tried to derive some trends from that. And that's exactly what we're trying to illustrate here by taking this and splitting it out into cost of goods sold and selling, general and administrative expense and using these two accounting metrics to determine what kind of potential you might have as a corporate to get engaged in spend with a card-based program
And, like I said here, there's no-- this is just a gauge. There's no magic here. This is just a model. You can feel free to fill your own numbers in on this, as you see fit, pulling them from your financial statements, or you can reach out to your PNC TMO and we'll do it for you. Because we're doing more and more of this recently and we've found it be a much more accurate and representative way to present to you a legitimate and conservative opportunity for what you might be able to do by engaging cards in your disbursement mix.
It is very domestic centric. This is North America-- excuse me, U.S. based. I don't want to mislead you that this includes any kind of international component. We take out the personnel component, because certainly that is not a cardable event and we have an implied supplier activity you've seen there.
What we've done through our experience and through our many clients is come up with some very consistent rates for card penetration based on both cost of goods sold and the SG&A metrics. And you see those 8% and 16% there. That's completely non-sales, non-production and that comes up where you have the almost $7 million in potential spend for the potential opportunity here.
This is real vendor information, real vendor matches, real programs that we have in place that we've used to develop this.
Now if you're following me here, great, and we're not going to drill down too much deeper on this in the interest of time, but one thing I would mention to you is that next in our series of informational webinars in August will be headed up by our product line manager from card services, Jeff Felser, where he will be partnering with Visa to really drill down on this analysis and really spend a lot of time in detail on how you might make it work for yourself.
Again, you can reserve the right to tag in your PNC TMO if you choose and we'll do it for you or we'll work with you to do it together.
I would just add that-- a couple points. You know, if there's one element of our discussion today that really, you know, represents this notion of using the payments process to-- as a source of working capital, a low-cost source of working capital, think about this line item on here that gets to our extension of payment float.
Since the card payments are processed on a credit card cycle, there's an implication here that there's a period of interest-free financing, if you will. That factors in, depending on the scale of your program, factors into your average weighted cost of capital, has a strong impact.
The other thing I would point out is as we engage our clients with these things, we do take a very sensitive approach to the vendor enrollment piece. We know that accepting a card is not for everybody. We try to take a very thoughtful approach, working with your payables and sourcing team to make sure that we are presenting the solution to the right client, to your right customers and suppliers.
Yeah, thanks, Bill. I couldn't agree more. If you think about the engagement of this kind of technology, it is not for everyone, and anyone who'll mislead you in terms of what the penetration rate of this might be, you really have to be cognizant of that. It is not going to be all things to all people.
One of the things-- because this has become such a strategic initiative at PNC and really our fastest growth engine in the payables side of our business, we've really allocated a great deal of resource and we've learned a lot by doing it the last four or five years and we've been able to allocate the right amount of consulting and resource on the vendor enrollment side to really become much more than just a non-scientific throwing feelers out there to see where we might end up. And that's really been one of the cornerstones of how we've been successful with this, because we've got some great personnel who have been doing it long enough that they can not only do it very well, they speak to some of the same vendors all the time on behalf of various corporations, but they learn a lot and they bring a lot of experience to bear, which really sends us off in a different direction in terms of the various bank providers that you might consider engaging for this.
If you go ahead over to page 15, I really wanted to just annualize the value proposition, with being mindful that this is not something that's going to happen overnight. I've depicted this illustration over a three-year period and seeing what the possible potential might be as you integrate this intermittently into your overall supply chain philosophy over a period of years.
And, again, these are very conservative, but I'll just try to walk through this. If you see that the projected potential grows every year from half-year one all the way up to 100% of what we believe at year three, the interchange revenue share is based on a very market competitive basic points share. Yours may be higher or lower, depending on where you are, but that's also a fairly conservative number.
And the value of the payment float, the extension of float, because as you can glean from this, we're effectively paying your bills over a period of a month and generally we operate on seven-day payment terms. So, on average, we're extending your payment float anywhere from 15 to 22 days. And I went ahead and used 15 days for this particular example and using a value of internal economic capital of 4%. Again, this metric could be used by you to replace that with numbers you see may be more specific to you, but that was also a number we were very comfortable and felt pretty conservative in terms of internal funding cost.
The last line there you see is the reduction in payment execution cost and really that's just hard cost, payment in checks, the positive pay in ERP. There's no soft dollar process savings there and what I mean by that is the people costs. That's just the-- again, a conservative stab at taking a look at what the value proposition in this particular scenario may be and what the annual benefit over the period of the three years would bring to the table.
And, you know, this one here illustrates a total value of you see in year three of about $90,000. We're in a space now where in some of our larger programs, we're out delivering rebate checks of well over $1 million. So these are more than a small blip on the radar screen and, oftentimes, can make the A/P shop somewhat expense free in terms of covering the FTE associated with managing these process.
So, the financial metrics around this are the real value proposition and we can't stress that enough. Some of this stuff you find yourself saying, why wouldn't I do this? And we've heard that more than a few times over the last five years.
I wanted to go ahead and--
Take some questions.
--take a question or two.
Yeah, let me-- I'll read a couple to you, Steve, here. Here's a question that is very common. How do you encourage vendors to accept payment via credit card or purchasing card and overcome their reluctance to incur the associated fees? Obviously, merchants really bear the freight here through the discount fee and interchange that's paid through the payment process.
Great question. Absolutely very relevant to this. We actually work with our clients up front to have some scripting with them with how we're going to approach their vendors. So right from the get-go, the sponsoring company has a lot of control over how we're going to approach these folks.
We've had so much experience with some of them that we kind of have a feel for that already, but based on your direction, we'll go out and reach out to them and let them know that there is another payment vehicle in play for that particular company and that we'd like to explain it to them and how it may work and the fact that it may actually speed up their float and speed up their guaranteed payment versus what they're doing right now.
And in some cases, that's enough right from the get-go, because they're doing it with other companies, for them to go ahead and agree to doing so. Now, not everyone is going to agree. And one of the byproducts of this is, oftentimes, it will end up in the sponsoring company re-entering into dialogue with the vendor on their payment terms or on the historical background of how they're settling with this particular client.
And that can lead you down another direction towards ACH or other payment vehicles that may be something other than checks. Really, the over-arching thing we're trying to accomplish here is if we can't get them on a card program, is to move them away from checks. That's really one of the things that's kind of our last thought.
And I would also answer that by saying that the vendor enrollment process is not a one and done thing. It is a process. We're continuing to enroll vendors for companies who have been in the program for three years, four years, five years. It has been ongoing and really has no end.
So some of the folks who may be saying no day one, six months later or a year later, 18 months later, they may choose to engage in it.
Right. And, in fairness, you may have clients that say yes day one, but then 18 months down the road recognize that that-- come to the realization that that discount cost is a significant challenge for them. So that's why we encourage companies to have this process embedded in their sourcing philosophy, you know, so that as companies go out to, as you go out to bid for a product or a service in the marketplace, you make it clear through your sourcing channels and through your supply chain that we prefer to get paid with a card, make that a criteria. And for certain commodity-oriented suppliers, that may be-- you know, just-- you make that part of the relationship that you have with those companies.
There were several other questions that did speak to that issue of the cost. And I think Steve's hit on this, but I think one of the things that we encourage is that the card is a tool and it gives both parties to the transaction an opportunity, you know, in the payment process. It's a tool. It's a point of negotiation. It's a piece of additional flexibility that you have in your payment mix.
How do you manage those costs accepting a card payment? As I said, now that you guys have a little bit understanding of the economics of it, you know that there's room there. So if I'm negotiating with somebody who wants to pay me with a card, I'm going to say, okay, pay me sooner and at least I begin to recoup some of that from a working capital standpoint.
Absolutely. You know, for some of our best programs, this has become a cultural issue where you earn power to buy services from who you so choose and that's a very competitive marketplace, oftentimes. So some folks-- and it is an aggressive posture. It's not for everyone, but some have chosen to bake right into their request for services that we reserve the right to settle with you in a manner with which we choose and that includes a purchasing card.
And to that end, unless-- it apprises that vendor right from the start. And many of them, most all of them now, especially the more strategic ones, they bake the cost of that interchange fee directly into their cost of services.
So it really-- it's kind of like the example of going to McDonald's today and buying a value meal. If I go in and plop down the $5 in cash, I get the cheese burger, the fries and the Coke. If someone else walks in right behind me and puts down a Visa card, they get the same burger, fries and Coke for the $5. They don't pay any differently.
So that kind of mindset is really much more pervasive today and, some would argue, that if you're not taking advantage of it you're really funding someone else's rebate. So there's some different strategies and more aggressive postures you can take towards this, but it is a dynamic that goes back and forth between the vendor/supplier and the sponsoring company.
And it does create opportunity for taking it in a different direction, regardless of what that might be.
Yeah. And I just quickly want to acknowledge, folks, we are a little bit over the hour and I appreciate you staying on with us and we'll continue to answer some questions here.
But just one point on the card that Steve started to make. I think if you're a retailer -- I know there's a number of retailers on the phone -- you're incurring this merchant cost every day. And this notion of using the card as a payment vehicle for more strategic, higher-value payments actually presents an opportunity to create a natural hedge against some of the merchant expense as a retailer. Just something to keep in the back of your mind.
I did want to mention here and we can get back to a question that, you know, we are a big believer in this, obviously. We use it ourselves and have used it very effectively for a long time and it really gives us a lot of confidence in what we've learned in doing it, working with our vendors, many of whom you share as vendors. And the fact that some of our A/P folks have migrated their way over to be consultants to our clients, so speaking directly to the A/P managers of your shops and telling them what they've learned and sharing that kind of very valuable information that the typical treasury management officer may not have direct access to or have experience with.
Right, right. That's great, great point. Before we close, I wanted to just focus a couple of things on the slide, the next slide here if I may.
I believe it's 17.
Hitting just in general, general points here. And, real quick, you know, we've been focused on collecting cash and disbursing cash and we have to acknowledge that-- and this isn't a session designed to really talk strategically about investing, but as that cash-- there's a lot of cash still in the market, sits with us on our-- you know, in our balance sheet and on yours, we just wanted to point out a couple of things that we think are very timely and important.
Probably the most important thing -- and I won't go through this whole list in respect of the time -- but it's the importance of you staying in touch with the changes to the regulations. This couldn't be more in the news than it is right now. It's vital in your position to try to help make sure that you are connected.
Our folks are getting a lot of updates on regulatory issues. It's important-- you know, there are a couple of milestone issues coming up that are going to be important to track and one is the money market funds guarantee by the Treasury and that's something that expires in the fall, 9/19/09. It will be-- have been in place for exactly a year since it was implemented.
We don't have a lot of insight on what's going to happen with that. I hope that there's enough confidence in the market that it's no longer needed, but money market funds, you know, overnight money markets are an important component for a lot of you in terms of your day-to-day liquidity. So that's going to be something you're going to want to watch.
Unlimited coverage on your non-interest-bearing accounts, that expires 12/31 this year. And the $250,000 FDIC coverage on DDA balances, non-interest-bearing deposits, that expires 12/31/2013.
These are really important to keep track of and one interesting dynamic and this is going to vary by bank to bank to bank, but it's this notion that banks that-- the rate environment is very diverse. It's all low, of course, but it's very diverse at this point in terms of banks' need for deposits. Banks that are paying higher rates, obviously, need deposits.
But there's a dynamic that's present right now at PNC and I would suggest you take a quick look at this and that is, your earnings credit rate for balances that are in your checking account may provide a best and highest use of funds right now in that that earnings rate varies at PNC somewhere between 100 basis points-- or, I'm sorry, yeah, about 1 percentage point and about 35 bps.
Relative to a lot of investment alternatives, that may be something to consider, at least short term, until rates stabilize and it's going to offset the cost of services. Another dynamic is that for most providers, most banks have eliminated the Federal Reserve requirement, so you're now getting that earnings credit rate on 100% of your investable balances as opposed to the 90% that you had for the last 30 years.
So just a quick point, just to mention to you as you think about that money that's parked overnight, parked with your bank.
Okay. We really appreciate everyone sticking with us here. And, you know, if nothing else, we really hope to be able to have you compel some dialogue. Just take the information we've shared with you today, go back to your back office and really talk about some best practices, some things-- internal processes, not with the idea that you need to re-engineer everything, but take a look at your cash gathering and your payables, the activities you're currently doing with your banks, your third-party services, re-examine your cash forecasting.
My goodness, there's probably never ever been a more important time to have just very, very focused cash forecasting than right now. And, as Bill alluded to earlier, liquidity. Liquidity, liquidity, liquidity -- this is something that used to be the kind of thing where you might check it weekly or monthly where now it's several times a day and it's become so, so important in the environment we're in right now.
We really hope you take advantage of that and have some good dialogue with your staff, with your teams, with your associates to see that there might be something out there that you can make a tweak or an adjustment and add some value in this difficult economic time.
That said, Adam, I will go ahead and turn it back over to you.
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