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April 16, 2021

Introduction

Nowadays, Electronic Funds Transfer (EFT) is one of the popular digital forms of payment in the B2B world. EFT is convenient for processing by the accounts payable department of an organization with almost zero chances for errors. Suppliers also get their payment on time and without any need to visit a bank for depositing a paper cheque, the traditional way of payment. In EFT, the amount gets directly transferred to the supplier’s bank account registered with the procuring company. This type of payment makes life easier both for the buying and supplying companies, and avoids unnecessary follow-ups leading to the smooth flow of business transactions.

Old Is NOT Always Gold

The traditional way of making payments to suppliers is through a cheque, and it is still prevalent in many economies. However, with the advent of digital technologies and internet revolution, businesses have realized that cheque payments are not a sustainable method of payment, as it requires paper which is manufactured by cutting down trees. This is against the ‘Go Green’ concept and the commitment to “Save Nature”. Hence, in order to conserve our environment, using paper to print cheques should be discouraged. More so, a paper cheque is prone to wear and tear during transit. The process of re-issuing a cheque requires lot of documentation and all these lead to a delay in processing the payment.

Digital Solution for Payments

As an alternative to cheques, the B2B world is adopting digital forms of payment, and Electronic Fund Transfer (EFT) is one such mode of digital payments.

Process Flow of the EFT Payment System

For EFT payments, a supplier needs to have a valid and active bank account. The supplier needs to request their customer to register for the EFT payment method. It is important that the supplier provides the correct transit number and bank key number to the customer as a part of the EFT payment registration process. For example, a US-based supplier must have an ABA/Routing number that contains a nine-digit transit number. Similarly, for a Canadian supplier, the bank account should consist of a five-digit transit number and a three-digit bank key.

It is to be noted that banks specify standard EFT formats depending on the country and the currency. Hence, it is important to design the EFT formats carefully as per the guidelines provided by the corresponding banks.

When a supplier delivers goods/services to their customer, they need to be paid for that. For this, the supplier submits an invoice to the customer. There can be multiple channels for submitting an invoice, such as the supplier portal, electronic data interchange (EDI), email, secure file transfer protocol (SFTP), courier, etc. The accounts payable department receives the invoice, validates it, and then processes the invoice through their AP platform. Thereafter, the invoice gets approved based on the customer approval matrix. Once approved at all levels, the invoice is considered as 'Approved' and is ready for 'Payment'.

As a part of the EFT payment processing, organizations have deployed advanced AP solutions. For approved invoices, the payment-processor creates a payment batch for the invoices where the method of payment would be ’EFT’. The payment-processor can create a payment batch for EFT based on the due date, business unit, currency and supplier(s). Once a payment batch is created, the payment-processor can send the payment batch for approval based on the organization’s approval hierarchy. Once the payment batch is approved, an EFT file gets generated. Such EFT files are integrated with the bank for making payments. There are multiple options available for businesses to integrate EFT files with banks. One of the options is through SFTP wherein EFT files are sent to an SFTP location and from that location, the bank picks up the EFT payment file. The bank validates details and disburses payments to suppliers listed in the EFT payment batch.

It is important that the EFT file contains all the mandatory details, such as the unique client ID, EFT file number and date, and the bank details along with the total invoice count, supplier names, and the total amount to be paid.

Once payment is disbursed to the suppliers by the bank, a payment confirmation file is sent to the customer’s designated SFTP location. An automated batch job picks the payment confirmation file and identifies the invoices in the payment confirmation file, and updates payment details, such as the payment reference number and payment date, for the corresponding invoices.

At this point of time, the status of the invoices gets updated to 'paid’, and a remittance advice gets generated. This remittance advice consists of details such as the invoice tagged to the supplier, total amount paid, payment date, and payment batch. This remittance advice is sent to the supplier through an automated email system for their accounting and reconciliation purposes.

Thus, the EFT is a seamless and transparent way of managing end-to-end invoice processing and payment disbursing activities. EFTs are already making significant contribution towards having an environment-friendly and sustainable world around us.

Chinmaya is a Business Analyst with the Platform Solutions Unit at TCS and is associated with TAP™ - TCS’ procurement platform. He has completed his Bachelor of Engineering from Biju Patnaik University of Technology, Odisha, and has an overall experience of 10 years with over 9 years in the ‘Procurement to Pay’ domain. He is currently responsible for implementing new functionalities in procurement as well as the Accounts Payable module aimed at making work easier for customers.

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