How do Commercial Banks Help in Processing Payments?

Timely payments are very important to any corporation. Only if a corporation is able to keep its word and make on-time payments to vendors, does it get the best terms from these vendors. Traditionally, making timely and correct payments was a big cost for large corporations. This is because these corporations have to process thousands of transactions every week. However, with the advent of technology, payment processing has become simpler.

Commercial banks play a very important role in the development of this payment ecosystem. In this article, we will look at the various roles played by commercial bank which enables them to make timely payments.

1. Help in Automating Payments

   Automation is the buzzword when it comes to payments in corporate banking. Over the years, several ERP systems have been created which can achieve almost complete automation from the side of the corporation.

   Corporations need a banking partner which has an equally technologically advanced system so that they can achieve straight-through processing i.e. completely automated payments processing without any manual inputs. Commercial banks can assist corporations by providing the following services back to the corporations.

   • ERP Connectivity: First and foremost, corporations need commercial banks to have well-developed systems which can read and process automated files that are sent by them. Hence, commercial banks are required to develop interfaces that can read the file output provided by a corporation and then automatically process payments based on that file.

     Since there is a wide variety of ERPs which are used by different corporations, commercial banks need to have the technological capability to interface with all of them. In most cases, banks provide a standard file format in which the corporations have to provide the data. This data can then be used by the bank’s system to securely and automatically process financial transactions on behalf of their client. The ability to automatically process transactions is vital for the business as it helps significantly reduce costs.

   • Data Encryption: Corporations do want to automate their payment processing. However, since it involves giving access to their bank accounts, corporations have traditionally been skeptical regarding automation in this space. However, over time, banks have developed data encryption technologies that can ensure the transmission of payment information with minimal possibility of any kind of hacking or misappropriation of funds. Developing and using technology that can securely transmit information is one of the main functions of a commercial bank.

   • Communicating Status Back to Corporations: Once the payments have been processed by the banks, it is important to ensure that the status is communicated back to the corporations. This is because not all payments will go through. Some of the payments will fail as well as sometimes banks may even detect duplicate payments. All this needs to be put in a file and communicated back to the corporation.

     Once again, a data format needs to be agreed upon with the corporation. This data format is then converted into a report at the corporate end. The end result is that corporations do not require any manual intervention to process and reprocess the payments.

2. Managing International Payments

   A lot of corporations that conduct business with banks are multinational corporations. Even the smaller corporations are engaged in foreign trade to a large extent. Hence, there is a need to make international payments as a regular part of their business. The services provided by commercial banks are very important in such cases. This is because of the fact that international payments can be very expensive because of the transaction charges involved.

   Commercial banks help corporations by helping them manage their foreign exchange needs in the most cost-effective manner possible. They do so by helping corporations hold different accounts in different currencies and then make payments from those accounts instead of converting currencies and paying conversion charges in the process.

3. Generation of Payment Advice

   Commercial banks also help create a seamless communication channel between a corporation and its payees. This is because once they process the payment, they also create a mechanism by which they send email or paper advice to the respective payees. This advice contains details about the amount remitted, the bank accounts they were remitted to, the payment method used for remittance as well as the invoice reference. As a result, the payee is aware of exactly which payment they are receiving.

   Since the payment advice needs to be generated after the payment has been completed, the banks are in the best position to create this. This is an important service that they offer to corporations.

4. Industry-Specific Payment Solutions

   Also, there are many industry-specific payment problems that are faced by corporations. For instance, companies operating in the retail space have very different payment needs from companies operating in the manufacturing space. Commercial banks need to understand these special needs and then provide payment solutions that can help resolve these needs.

The bottom line is that payment processing is a herculean task for corporations all around the world. Commercial banks have created technologies and systems which enable corporations to undertake these tasks in a cost-effective manner. It is for this reason that payment services are the backbone of the commercial banking sector.