The Cost of Cash to Businesses

Philip Glickman, Regional Head, Commercial Payment Solutions, Asia Pacific, Mastercard

Philip Glickman, Regional Head, Commercial Payment Solutions, Asia Pacific, Mastercard

In today’s digital economy, cash and checks seem archaic next to electronic payments. Thanks to rapid advancements, digital payments have streamlined the transaction process, greatly improving payment safety and security while also providing a frictionless experience across multiple stakeholders and multi-networks in ways that cash simply can’t.

While some business owners may think these benefits are ‘good-to-have’ instead of ‘must-have’, the key advantage electronic payments have over traditional payments is that they ultimately save money. Findings from a Bank of America Merrill Lynch study reported that processing a single traditional purchase order would cost US $71 more on average than processing a commercial card. Eliminating cash, results in a significant reduction of business operation expenses in the long term.

Compared to digital payments, cash-based payment methods are more vulnerable to fraudulent transactions due to the difficulties businesses have in tracking them. Given such challenges, businesses also distance themselves from opportunities to the potential scale and growth that digital payments provide.

Despite the benefits, businesses in Asia have been slow to adopt B2B payments. Findings from a global study by consulting firm McKinsey & Company revealed that more than 90 percent of organizations in Asia Pacific continue to use cash when making B2B payments.

To help businesses realize the promise of digital payments and outline the key steps needed for businesses to transit from traditional payments electronic ones, we look at the challenges that are hindering the adoption of B2B payment methods, and examine a recent case study on a multi-national supply packing services firm.

What’s Holding Businesses Back?

A key reason for business’s attachment to cash is acceptance. With 85 percent of the world’s transactions still conducted in cash today, businesses are hard pressed to change the way they transact because of cash’s wide acceptance across business networks. Businesses may also be reluctant to start the digitization process simply because they lack the understanding or guidance to implement such changes.

Electronic Transactions Clearly Outpace Cash in Helping Businesses Grow and Scale

They’re also concerned about the investment in time and resources to facilitate an operational change and feel ill-equipped to do so.

Firstly, there is the issue of the supplier network; a key hurdle for many businesses in their journey to digitize payments. Although many companies are keen to pay their suppliers digitally, many suppliers lack the resources and capability to process digital payments. According to a study by Ardent Partners, 46 percent of suppliers believe they cannot afford to convert to electronic payments, 30 percent feel they lack the guidance and capabilities to do so, and 22 percent of suppliers said do not have the managerial structures required to implement the changes needed for electronic payments.

These pain points suggest that digital payment systems cannot be implemented in silos. For digitized payments to have strategic impact on businesses, strong collaboration is needed from key industry partners, and a sound execution plan with clear business goals and objectives. It will also require educating suppliers to help them harness the potential power.

How can Businesses Reap the Benefits of Electronic Transactions?

We recently partnered with a leading card issuer to provide a Virtual Card solution for a local supply packing service firm operating in Australia and New Zealand. Aiming to extend supplier payment terms and eliminate opportunities for payment fraud from its payments process, the supply firm worked closely with its issuer to devise a robust plan, establish the right governance structure and track the progress. To achieve its fraud-elimination goal, the supply firm employed Mastercard in Control and worked together to develop a solution that limited spend to the particular supplier and merchant.

An onboarding program was held to educate the supply packing firm’s own clients on optimizing digital payments. During the program, analysis of the accounts payable data found that nearly 60 percent of suppliers in scope for the initial deployment (suppliers with less than $500,000 spend per annum) were already accepting card payments on the Mastercard network.

With this data, the customer and the issuer developed a program that would help them qualify suitability based on existing payment terms as well as insights from the relevant category managers, significantly improving their working capital strategies. The issuer also developed communication toolkits and reached out to the nominated suppliers to bring them onto the program. To ensure these suppliers were fully on-board, Mastercard and the issuer also provided points of contact to help them address any queries.

This collaboration was a successful one for all stakeholders. The local customer saw an extension of supplier terms of 30 days on average and received positive responses from many of its own suppliers. Its success also encouraged the local customer’s suppliers to start employing the Virtual Card solution for their own suppliers.

Thanks to constant innovation, electronic transactions clearly outpace cash in helping businesses grow and scale. However, strong collaboration and a solid foundation are required to harness its promise. Businesses looking to begin digitizing its payments process should do so sooner, rather than later, in order to harness the cost and time savings that are possible. As Asia Pacific’s technological infrastructure develops, it won’t be long before the widespread adoption of digital B2B payments takes off.