The Green Sheet Online Edition

September 11, 2023 • Issue 23:09:01

Intermediary account versus direct debit in accounts payable

By Jill Rosenthal
MineralTree

When businesses automate their accounts payable (AP) processes, a number of considerations come into play. How well a solution integrates with existing finance systems and AP workflows, supplier acceptance/onboarding and staff training are all important factors. But one decision that is often overlooked is the payment funding model. Some solutions use intermediary bank accounts, others use direct debit to make supplier payments. There are reasons for both, but the decision can have a big impact on payment timelines, supplier relationships and cash flow.

AP solutions that use intermediary or FBO accounts to make supplier payments are akin to connecting flights. Funds are moved from the business's bank account to the processor's account before making the payment to the supplier. Solutions that use a direct debit method are like direct flights, that is, authorized payments are debited straight from the business's bank account to the supplier via their preferred payment method.

Which is right for your business?

There are four core factors to consider when deciding whether to use an intermediary account or direct debit funding model:

1. Cash flow impact: Intermediary account models debit money out of the user's bank account before payments are sent to suppliers. This may occur once a batch of payments has been authorized in the system. Some providers require the FBO account to be pre-funded, often at the beginning of the month. This can make cash forecasting more predictable.

   Solutions that use direct debit take funds from the business's account only when payments are made to the supplier. Timing varies by payment method, for example: ACH payments are debited once the ACH credit is initiated (see tinyurl.com/2tut98y4); check payments are debited when the supplier cashes the check; virtual card payments are debited when the vendor processes the card (see https://tinyurl.com/y84c5yyz). This approach allows businesses to hold onto their cash longer compared to the pre-funded intermediary account model described above.

2. Payment timelines: AP automation solutions that use FBO accounts reduce the business's control over when money leaves the FBO account and gets sent to vendors. Accounts debited upon payment authorization typically require those funds to clear before payments are disbursed to suppliers. In some cases, the solution provider is making money on the float.

   With direct debit, there is no fund clearing or float period, and suppliers receive payments more quickly. For instance, ACH payments reach vendors within two business days, while virtual cards can be sent to vendors within one hour of authorization. But that doesn't necessarily mean payments must go out as soon as they're authorized.

   Payment scheduling capabilities give businesses control over which vendors get paid and when, based on available bank cash, invoice due dates and available early-pay discounts.

3. 1:many versus 1:1 reconciliation: With intermediary accounts, accounts are debited in one of two ways: by pre-funding the account or by a lump sum for the entire authorized payment batch. In the latter scenario, if you authorize 12 payments for a total of $25,000, a single ACH debit of $25,000 will be drawn from your account. While this simplifies things for accountants managing AP across multiple clients, it makes it much more difficult to reconcile individual supplier payments in the accounting system.

   Direct debit AP solutions record a debit for each individual supplier payment. This simplifies reconciliation with accounting and is preferred by most accounting teams.

4. Bank flexibility and payment security controls: Intermediary account models draw checks from the provider's FBO account, meaning the business's bank account information isn't on every check going to suppliers. This may offer a greater sense of security, though with obvious drawbacks like slower payment timelines and more difficult reconciliation.

   In addition, businesses using intermediary accounts have no control over which bank the account is with, a seemingly minor detail that becomes critical in the event that funds are frozen, or the bank fails.

   Direct debit AP solutions typically offer positive pay integration with the business's bank of choice, mitigating the risk of B2B check fraud. Some providers also allow businesses to view check images, giving comfort to CFOs and controllers. Lastly, direct debit solutions allow businesses to easily switch banks without any interruption to your payments.

Automating AP processes at any level is a step in the right direction. Businesses do not always have a choice between direct debit and intermediary payment accounts. Newer organizations or those with a poor financial history may only qualify for an intermediary account model that uses a good-funds approach. But for most, the extra steps created by the FBO account model elongate payment timelines, complicate reconciliation, reduce control over funds and potentially jeopardize vendor relationships.

Jill Rosenthal is Vice President of Payment Operations for MineralTree, a Global Payments company. In her role, she leads the teams responsible for optimizing customers' payments and providing value to their vendors. She has spent over 20 years in the payments industry. Prior to MineralTree, Jill spent 14 years at JPMorgan where she held leadership and strategy roles in their commercial payments business. Contact her at linkedin.com/in/jill-rosenthal-966948139.

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