As fans of TV shows like 24 know, transferring money via wire is secure and instantaneous. That means you can grab it and go – which is critical when the bad guys (or gals) are on your tail. Nonetheless, the system has some shortcomings that have frustrated companies that send or receive money via wire transfers.
Chief among these is the fact that today’s wire transfers lack much remittance information. In fact, the remit info often is limited to just several hundred characters – definitely not enough to let a vendor know, for instance, that your payment covers half a dozen invoices, minus a credit that you’re owed. If your company is like most, you end up sending faxes or emails to accompany your payments and provide directions on applying the money. Your vendor then is left with the task of making sure this information makes its way to the appropriate payments. Perhaps it’s not surprising that 94 percent of respondents to a 2006 study conducted by The Federal Reserve Banks and The Clearing House indicated that they found it valuable to include remittance information with payments. In fact, more than half said they would pay more for wires that included remittance information.
Instead, both sides are stuck with a process that is time-consuming and next to impossible to automate.
Of course, corporate treasurers can always opt to send funds electronically via ACH. While ACH payments allow for a greater amount of remittance information to be included with the payment, the funds don’t arrive until the next day, or later.
Changes Coming
The companies queried in the study are getting their wish. Come December, The Clearing House’s CHIPS (Clearing House Inter-bank Payments System) and the Fed’s Fedwire, both networks for high-value payments, are introducing a new remittance format. “With the new format, companies can electronically duplicate all the benefits of a check stub,” says Rossana Salaris, senior vice president, payments products, with The Clearing House.
So, payees will have an extravagant 9,000 characters that they can fill, according to this article in the Journal of Payments Strategy & Systems. That’s enough to include detailed info on up to about 30 invoices, the article notes. For instance, you’ll be able to include the invoice number and amount, the payment date, and any discounts or adjustments that you’ve made. This means that you and your colleagues will be able to dramatically reduce the costs and time consumed by researching the cryptic information on today’s wire transfer payments.
Still, some work is necessary to reap the benefits. First, you’ll want to assess your company’s current processes for making and receiving wire payments, and determine how these could change once the new capabilities are available, Salaris notes. For instance, rather than have employees manually enter remittance information, it will need to be uploaded. This also means that you’ll need to talk with your treasury software providers to determine what modifications to your systems will be required in order to use the new format. If any training on the modified system is needed, you’ll want to figure that into your planning, as well. Finally, you’ll want to contact your banks to get a handle on their time frame for switching to the new remittance format.
Your efforts should pay off. With the new format, you can decide which payment method – wire or ACH – to use “based on the attributes of the payment, and not the payment channel,” Salaris notes. If you’ve got some time, ACH will work just fine and probably cost you less. On the other hand, if the payment needs to be fast, secure, and final, wire probably is the answer. Moreover, you’ll no longer need to worry about the receiver not knowing what the heck he or she has received.