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Automated Banking Services: The Difference Between Possession and Pass-Through AP Systems

Automated Banking Services: The Difference Between Possession and Pass-Through AP Systems

There are dozens of automated accounts payable (AP) systems available to businesses across the United States. The biggest difference between these systems is how funds for payments are distributed. All payable systems fall into one of two types: possession or pass-through. Automated AP system providers don’t use these labels, so it is up to businesses to identify which type of system they are purchasing.  Here’s an overview of how the systems work and the advantages and disadvantages of each.

How possession systems work

To originate payments in a possession system, the system takes control of a company’s funds. This process begins with the creation of a payment file that is uploaded to a portal or transmitted via a secure file transfer protocol (SFTP) to the automated AP system. Payments are not created until compensating funds are sent to the system provider. This is typically completed through a wire or ACH transaction.

Once the system provider has received compensating funds, they begin producing the payments using the system provider’s account numbers, ACH IDs and virtual card credentials – not the originator’s information.

The automated AP service provider retains possession of these funds throughout the payment process. ACHs will clear very quickly, but it may take several days or weeks for virtual card (vCard) and checks to clear. These funds are held within an account belonging to the automated AP system provider and earns the provider interest and earnings credit. Most service providers do not share this interest with the originating company.

Advantages of possession systems

Since payments in a possession system are debiting the automated AP provider account instead of the originating company’s account, the service provider must provide reports to help with reconciliation. These reports enable the originator to track payments and ensure they arrive at the correct destination. The system provider also produces positive pay files to protect checks from fraud. It is the responsibility of the originator to pull these reports daily to ensure all checks are clearing correctly and to monitor for stale dated or lost items.

Disadvantages of possession systems

The biggest drawback to a possession system is the loss of payment float. Not only does this mean less interest and earnings credit for the originating company, it also limits the originator’s ability to use vCards. Since vCards are passed through Visa or Mastercard networks, they are subject to interchange fees. This often leads to a negotiation between an originator and vendor to convince them to accept a vCard.

Payment float gives an originator an edge during these negotiations. More float will give the originator the ability to pay sooner while maintaining the same payment schedule within their account. Since most possessions systems have no days of float, they tend to weaken an originator’s negotiation position, which decreases the amount of revenue they will earn through vCard transactions.

How pass-through systems work

Unlike possession systems, pass-through systems never take ownership of the funds needed to originate payments and are instead connected directly to an originator’s bank accounts. Payment files can be uploaded via a portal or SFTP. Once received, payments are originated using the originator’s account information, ACH IDs and virtual card credentials. Since the originator retains control of their funds, they also retain any interest or earnings credit earned while payments clear.

Payments generated through a pass-through system clear an originator’s account similarly to payments originated through traditional banking methods. Reconciliation remains the same for ACH and checks under this system. The reconcile methods a company uses prior to implementing an automated AP system remain the same after implementation is complete. The system will also auto-generate positive pay files and upload them into an originator’s positive pay system, eliminating the need for a company to complete this task.

Advantages of pass-through systems

Most pass-through systems provide increased payment float for virtual card payments. Depending on the provider, this float may be a few weeks to over a month. This puts an originator in a stronger position to negotiate vCard acceptance with their vendors and increases the amount of revenue they can earn through their rebate program.

Reconciliation for vCards under this type of system will be like a possession system. Since vCards work similarly to purchasing cards or credit lines, originators need to download reports to know which cards are outstanding and which have been processed.

Disadvantages of pass-through systems

Pass-through systems treat payments similarly to how they are processed without an automated AP solution, and the reconciliation process remains unchanged. Since a possession system takes ownership of a client’s funds, it can provide a simplified reconciliation process. Some clients will treat the compensating wire or ACH as the termination of their AP payments for the specific run instead of reconciling each payment individually. It is important to note that payments sent via a possession system do not immediately clear at the time the file is uploaded. Although most payments will clear in the following few days, there is a chance that some payments could be lost, become victim to fraud, or fail to process correctly. The business will need to keep an eye out for failed payments to ensure their vendors are receiving their payments and correctly update their records to capture returned payments.

The bottom line

Picking the right automated AP system provider requires an in-depth analysis of your business’s needs. If you’re ready to upgrade your business’s system, please contact me or another Bankers Trust Treasury Management officer.

Dan Perez, CTP

Dan Perez, CTP

VP, Senior Commercial Banking Product Manager

Dan Perez is VP, Senior Commercial Banking Product Manager at Bankers Trust where he leads the commercial product team to develop a strategic product vision for the Treasury Management division. Dan has more than 12 years of experience in the banking industry and was recognized in the Corridor Business Journal’s Forty Under 40 class of 2021. He earned his bachelor’s degree and is currently working toward an MBA at the University of Iowa. Dan also holds his Certified Treasury Professional designation.

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