Pros and Cons of Outsourcing AP Payments

pros and cons
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Beth Mongold , Director of Marketing Oct 15, 2021 AP Best Practice

What is Payment Outsourcing?

Payment outsourcing allows your business to contract with a third-party provider who will send payments on your organization’s behalf. It is distinct from outsourcing your Accounts Payable data entry or vendor management. You can limit your outsourcing to payments while still maintaining complete control of your data entry and new vendor approval in-house.

Do you outsource payroll so that you can pay employees electronically? Payment outsourcing is a similar service – but instead of paying your employees, it’s for your vendors!

When you enroll in a payment services program, you still decide who to pay and when, build payment batches within your ERP system, and approve the payments before they can be released by the provider.

Why Would I Outsource My AP Payments?

The recent rise in flexible and long-term remote working arrangements - along with the increased demand for electronic payment types - has presented Accounts Payable professionals with a strong demand to end the reliance on manual processes and systems.

Waiting for executives to sign checks before mailing, managing sensitive bank details for ACH payments and making credit card payments can slow the AP process or even grind it to a halt! Not only is this a strain on your AP clerks, but with so many manual processes in the mix, real-time visibility and control becomes difficult for leadership.

But implementing new processes, technologies, and adapting to new industry standards can push the capacity of even the best AP teams – especially if you’re under pressure to get it done quickly while maintaining business as usual.

Outsourcing AP payments can be a quick and effective solution for companies that want to move towards a paperless Accounts Payable process and streamline workflows without creating a lot of new processes. It can also be a quick way to reduce processing costs and scale your business without adding additional headcount.

Of course, outsourcing payments isn’t the best fit for every organization. Here at Mekorma, we often help clients explore options and identify a path forward for AP optimization based on their own specific goals and needs. This post will cover some of the pros and cons to consider when evaluating AP outsourcing, reaching out to providers, and talking with decision-makers.

The Pros

Payment outsourcing not only relieves your AP team of that final mile of the payment process - it simplifies and streamlines your internal processes, while providing more options and faster payments to your vendors. It can add value to your business and be a significant growth driver.

Let’s look at some of these benefits in turn.

Operational Efficiencies

Outsource providers typically offer services beyond cutting checks and sending electronic payments to your vendors. Most of them will do the legwork of transitioning vendors to ACH or virtual card payments, and perform the outreach needed to update banking information. They’ll also communicate with your vendors if payment issues arise.

This is especially helpful for companies that still pay vendors mostly in paper checks because you won’t have to set up your ERP system to handle multiple payment types. Often ERP systems require a different process and workflow depending on whether you’re generating checks, EFTs, or credit card payments, and it’s time-consuming to juggle each type. Most outsource solutions allow you to send a single payment file to your provider and they take care of the rest.

You won’t have to undergo the time-intensive process of onboarding vendors one-by-one. A full-service provider will generate faster results because they have the systems, technology and human resources devoted to that process. They may even have a list of several hundred thousand vendors whom they know already as well as those vendors’ preferred payment method.

Cost Savings

While outsourcing will have associated costs, these are often less than what you’re paying to generate in-house payments. Typical savings include reduced expenses for supplies - you won’t need as much check stock, postage, envelopes or MICR toner.

You will also benefit from the latest technology a provider can leverage, without needing to directly incur that expense in your own organization! Third party payment providers often provide vendor portals that let your vendors securely manage their own information. The providers invest heavily in security protocols that allows them to be trusted with this sensitive data.

One of the biggest hidden cost savings is fraud prevention. Onboarding vendors to accept electronic payments and managing their bank details requires major effort. Not only do payment partners perform those duties, but they assume the liability for outgoing payments. You can breathe easy knowing that any successful fraud attempts are not on your organization’s bankroll.

Plus… Rebates

As explained above, the costs of outsourcing are usually a savings over processing in-house. However, you can often even get ahead of the game. Some of your vendors will want to be paid by credit card, which is one of the payment methods offered by the outsource provider. These credit cards generate rebate rewards to you, which can be a valuable source of cash. This extra boost often offsets or even surpasses the costs associated with outsourcing!

Grow your Business

Outsourcing with a strategic provider allows your company to maximize efficiencies in your department. The provider will continue to onboard and get your suppliers set up as your business grows, which means your AP team won't be taxed by an increased workload.

Not only will you leverage the provider’s technology, you’ll also have a full-service team that engages with your vendors, takes accountability, and handles payment questions. Your AP team will have more time to upskill & cross-train for growth opportunities, without adding headcount for non-revenue generating activities when AP volume increases.

The Cons

For some business leaders, outsourcing the payment side of your AP process won’t work or is not preferred. The AP team may have to adjust cash management strategies, long-standing vendor relationships, or other unique processes. Here are some concerns we’ve heard in our customer conversations:

No Float

When you outsource, the funds to make vendor payments are withdrawn from your account right away. You can't rely on check float as a cash management strategy and you won’t earn interest on your daily float balance if it’s in an investment account.

Virtual card rebates and early payment discounts are compromised when checks are floating, so there is an opportunity cost associated with that. However, you will need to ensure that your cash balance will consistently be sufficient for any other anticipated expenses when funding payments upfront.

Privacy Concerns

No matter how much of an industry leader or trusted partner a third-party provider proves to be, it is true that you’ll need to sacrifice some amount of privacy when outsourcing your payments. If you are reluctant to allow a third party to contact or handle vendor information, then outsourcing may not be for you.

While you won’t need to share your own banking details with multiple suppliers or assume risk by storing and updating vendor information in-house, you will need to consider the agreements you have with your vendors about their information and whether you can share that with a third-party provider.

Loss of Custom Processes

The reason providers are so efficient is that they've standardized their processes, which means there will be a limit on what they can make exceptions for. If you need remittances to be configurable or want to fund and process payments on the same business day, you will need to ensure a provider can accommodate that. If you have vendors nearby that stop by to pick up checks, you need to be sure that the software you are using to process can still print some of your checks locally for you.

Change in Vendor Communications

Well-established providers will have a full-service support team available to your vendors. However, this will not necessarily be a direct extension or reflection of your own organization's communication style or values.

Outsourcing some of your vendor interactions may feel uncomfortable, especially if you have a lot of vendors who are accustomed to attentiveness from your team. Depending on the types of vendors you have, the relationship may be too strategic to hand-off. Note that if this is limited to just a few strategic vendors, you could consider paying those vendors in-house while outsourcing the remainder and still save your team a lot of work.

For some organizations, outsourcing payments requires extra consideration. However, general AP automation can help a great deal if you have the resources to streamline your processes in-house, along with the IT budget and support needed to update your systems.

inding the right provider for your organization can often help overcome concerns associated with outsourcing. However, being selective when choosing a provider is equally important even if the cons aren't a big concern for you.

Look for independent reviews from companies that have experience with prospective providers. Take time to evaluate ROIs, set expectations and build trust to ensure your business needs, values and goals will be upheld moving forward.

If you process AP with Dynamics GP, Mekorma can help you determine whether payment outsourcing is a good option for your business.

Reach out today for a free assessment

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