By Scott Walls
Third-party settlement service providers will pay you for the privilege of settling your transactions. This BLOG details basic third-party settlement concepts and links to related BLOGs explaining their integration with larger procurement strategies.
Third-party settlement refers to the third-party tools, applications, and services used by procuring organizations to electronically receive payment requests from, approve payment requests to, and transmit payments to suppliers. These tools, applications and services are not to be confused with licensed “eSettlement” applications which simply allow suppliers to electronically transmit invoices to procuring organizations. Both eSettlement applications and third-party settlement services should be part of any procuring organization’s overall procurement strategy (for more on strategies leveraging third-party solutions, see the BLOG entitled Total Supply Integration Paradigm).
Although there are numerous providers of third-party settlement services, they all essentially work in the same manner. The settlement service provider (typically a banking institution) provides the procuring organization with account numbers its suppliers can request payment from using their credit card terminal(s). The actual account numbers are presented to the supplier, either during negotiations or at the point of purchase. At one (or several) point during the year, the third-party settlement service provider issues a small percentage of the overall dollars spent on each account back to the procuring organization in the form of a “rebate”. Rebate percentages typically vary based on volume and card type.
The two obvious benefits of third-party settlement services are the reduction of buyer/supplier administration (complying transactions do not require invoice/payment creation) and the rebate (ranging from 1.3 to over 2%). Both the services and its benefits are essential solutions within the Total Supply Integration Paradigm.
Third-party settlement accounts are continuously evolving, but all accounts fall within one of four types; person-specific, supplier-specific, group-specific, and transaction-specific accounts. Each account type is profiled below:
- Person-Specific – these accounts are the more traditional accounts. Often referred to as p-cards, purchasing cards or procurement cards, these accounts are created to allow select employees to purchase goods and services without going through onerous procurement processes (requests, approvals, orders, invoices, and payments). Employees are given a physical card and use it like a credit card with the bill going to the company. The “bill” comes electronically to the company and each transaction receives a default GL coding (often incorrect, but close or even to a suspense account). Employees must review, and amend if required, every transaction prior to it being able to be recorded in the General Ledger. This review step often creates delays in the reconciliation of p-card transactions. Person-specific accounts were setup for high transaction volume, low dollar, but the administration requirements previously mentioned and the potential for fraud make them less effective.
- Group-Specific – these accounts were created to allow any number of users within the procuring organization to make transactions. Each account issued a physical card which can be used by anyone within the procuring organization/company. They are usually used by a department or procuring organization and reconciled by someone at that level. As with p-cards, these accounts offer some basic controls (MCC code limitations, daily/monthly dollar limits, etc.), but the possibility for fraud and reconciliation issues still exist. Group-specific cards often have an internal set of P&P associated with them.
- Supplier-Specific – these newer accounts have been created to provide a settlement vehicle specific to a given supplier. Like the p-card above, the supplier knows the card number (usually revealed as part of the contracting process) and charges the card using the supplier’s credit card terminal as appropriate per the contracted terms. These accounts rarely issue a physical card. Transactions related to this card typically must provide the bank and the procuring organization with a purchase order number; negating the need for GL coding once transaction comes back to the procuring organization (unless it has changed since the issuance of the purchase order). These represented a dramatic improvement over the person-specific cards, decreasing fraud and administration.
- Transaction/Event-Specific – these are the latest and greatest accounts and they represent a new direction for settlement. They allow for a single transaction or single event (company party, annual electric bill payments, etc.) to be settled via the third-party mechanism. They can now be used in completely different ways such as a blanket order, drawn down, declining dollar order payment vehicle (good for certain amount, over a certain time, until completely drawn down). In addition, they are now being created automatically at the point when the purchase order is created via a programmatic call out to the banking institution. These new vehicles represent a new and exciting shift for electronic settlement.
As mentioned, these accounts and services will continue to evolve. Third-party settlement services, in particular, are one of three new revenue-generating tactics being deployed by best in class organizations. When used correctly, they are resulting in the creation of multi-million dollar revenue streams. As with all tactics, third-party settlement must be heavily integrated with all related business processes, applications, and reporting in order to achieve maximum organizational benefits.
About SRM Plus
SRM+ is a boutique procurement business consulting firm. We provide procuring organizations with the strategic and tactical consulting services required to dramatically reduce operational expenses, create revenue streams (1 million per every 200 million in spend), and decrease their Cost Of Goods Purchased (COGP). Whether defining a strategy, creating measurable objectives, designing / deploying solutions, or creating a continual improvement framework, SRM+ wants to turn your cost centers into cash centers. Visit us at www.srm-plus.com.
