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Better Practice Checklist for Electronic Payment

Overview

This checklist has been developed for managers and staff in Commonwealth agencies with responsibility for paying suppliers electronically. It is provided to assist them improve their agency's performance by highlighting some 'better practice' procedures in electronic payment.

The checklist discusses agency requirements for making e-payment; how to collect suppliers' bank account details; when to confirm supplier bank account details; strategies to encourage suppliers to accept e-payment; when to provide remittance advice to suppliers; and how some agencies are providing remittance advice.

Contact details

For further information, contact the ICT Procurement Team by emailing ictprocurement@finance.gov.au

Information about Commonwealth payment policy generally is available in the Commonwealth Procurement Guidelines. Better practice advice on payment of accounts generally is available in Australian National Audit Office reports. (For details, see Further Information section at the end of the checklist).

Introduction

It is Commonwealth Government policy to pay all suppliers electronically. Agencies are responsible for complying with this policy. To assist agencies, NOIE is providing this checklist on better practice in implementing e-payment. This document draws on the experience of agencies that have successfully implemented e-payment, highlighting the lessons learnt and successful strategies. Agencies should be aware that there are other opportunities for improving their payment performance, for example, by aggregating multiple payments into a single payment to a supplier. While some of these practices can also be adopted in an offline environment, automated financial systems make it easier to implement them.

Policy on e-payment

The Prime Minister's Investing for Growth statement of December 1997 included a commitment to make e-payment the normal means of payment to suppliers by 2000. The Commonwealth Electronic Procurement - Implementation Strategy (April 2000) required agencies to pay all suppliers electronically by the end of 2000. This policy was endorsed again in November 2000, when a clear preference was indicated for suppliers to government who accept electronic payment.

E-payment can be defined as 'payment by direct credit, electronic transfer of credit card details, or some other electronic means, as opposed to payment by cheque or cash'. While this definition includes credit card payments made electronically, most electronic payments by Commonwealth agencies are made by direct credit to a supplier's bank account (sometimes also referred to as electronic funds transfer, or EFT), and this document focuses on that method of payment.

Benefits of e-payment

E-payment benefits both agencies and suppliers. Agencies benefit from reduced costs because it is much cheaper to make a payment by direct credit than by cheque (typically by a multiple of 15 or more). Suppliers benefit because the payment is deposited in their account directly, so that there is no need to go to a bank branch and manually bank the cheque. E-payment also avoids delays due to cheque clearance, with suppliers typically able to access the funds a day after an agency sends a payment instruction to its bank.

Progress made in implementing e-payment

Agencies have been making good progress on e-payment, with NOIE's March 2001 survey of agencies revealing that:

• Almost 60% of agencies pay more than 50% of their suppliers electronically - this was up from 40% in the September 2000 survey;
• 20% of agencies were performing very well, paying more than 90% of their suppliers electronically;
• Larger agencies are doing particularly well - of the top 19 agencies which account for 90% of Commonwealth contract expenditure, almost all were paying more than 50% of their suppliers electronically; and
• 36% of the top 19 agencies were paying more than 90% of suppliers electronically.

The fact that a reasonable proportion of agencies (36% of the largest ones) are paying more than 90% of suppliers electronically means that there are limited structural impediments to e-payment. While variations in supplier base may make it easier for some agencies to implement e-payment than others, agencies should generally be able to achieve this target, with careful and persistent attention to this issue.

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Checkpoints

• What agencies must do to be able to make e-payment

  To make e-payment to a supplier by direct credit, an agency must know the supplier's bank account details, such as the bank number, account number and account name. An agency must therefore obtain this information from a supplier, and provide it to the agency's bank when instructing the bank to make payment to that supplier.

  Remittance advice should also be provided to the supplier where the information accompanying the direct credit is not sufficient to enable the supplier to identify what the payment is for. An agency must find out what format the supplier would prefer to receive the advice in (email, fax or mail) and the relevant address details (email address, fax number, or postal address). The agency must be able to extract the required information to generate remittance advice from its systems, and provide the remittance advice directly to the supplier, or through a third party, such as the agency's bank.

• Collect suppliers' bank account details

  It is simpler to put in place arrangements to collect bank account details at the time that a business relationship is being established with a supplier than when the payment is due. Agencies are therefore encouraged to establish procedures for ensuring this information will be provided by the supplier and available when required to make payment.

  Some agencies state in Request for Tender, purchase order and other documentation provided to suppliers that it is Commonwealth policy to make payment electronically, that suppliers will be required to provide their bank account details to the agency, and that it is a supplier's responsibility to inform an agency of changes to these details. This ensures that suppliers understand that a condition of doing business with the agency is to provide the relevant information. A contract with a supplier should usually specify the supplier's bank account details, or alternatively, a means for providing the correct details. A common requirement is that the account number should be specified on invoices provided by the supplier.

  Obtaining supplier bank account details for existing suppliers can be a major administrative undertaking for an agency. Investing the required effort up front, however, pays dividends later on. In order to comply with the e-payment policy, some agencies wrote to all their suppliers asking them to provide bank account details. Several iterations of this process were required. The typical response rate was 30% in the first pass, but agencies that have been successful in implementing e-payment persevered in this.

  Where a contract does not specify how bank account details are to be provided, an agency should contact the supplier to obtain those details. In these circumstances, some agencies have required the bank account details be provided on the official letterhead of the supplier or on invoices provided by the supplier. Agencies should ensure that bank details are submitted by the supplier in writing, and avoid calling suppliers to obtain bank account details by phone.

  Agencies should ensure they have sound procedures in place for collecting bank account details from suppliers, to reduce the risk of making payment to an inappropriate bank account e.g. through agency error or fraudulent behaviour.

  Where an agency makes a payment to a supplier using an incorrect account as a result of an agency keying error, the agency is legally liable for the payment. Under the contract with the supplier, the agency will still be liable to make the correct payment to the supplier. Although the agency is legally able to recover the payment to the incorrect account, this may be difficult in practice.

• When to confirm supplier bank account details

  In most cases, there is no particular need to confirm the account details provided by a supplier. Where the supplier has allowed an employee to present themselves as having authority to bind the supplier to a particular transaction, and, acting on that apparent authority, an agency has paid funds into an account specified by the employee as part of that transaction, the supplier cannot contest the employee's authority. Where an employee has fraudulently provided incorrect account details as part of the transaction in this situation, the supplier would not be able to recover any further funds from the agency concerned (although the supplier may be able to pursue the employee legally for these funds).

  Confirmation of the details of a supplier's account will be required:

  • where confirmation is required under the terms of the contract to which the payment relates; or
  • where the payment is made in circumstances in which non-confirmation would constitute negligence.

  The types of situations where non-confirmation might be negligent are those situations where agencies should naturally exercise caution, for example:

  • where the supplier is a medium to large business, but the account name indicates that the payment is to be made into a personal account; or
  • where the supplier is local, but the agency is asked to make a payment into an offshore account.

  In these circumstances, the agency should confirm the account details with suitably authorised employees of the supplier, other than the employee who initially provided the details. The account details should be provided in writing, unless the urgency is such that it is necessary for confirmation to be made by way of a telephone call.

  By way of example, the electronic funds transfer (EFT) procedures of the Reserve Bank of Australia (RBA) are outlined in Appendix A. Agencies should be aware that other banking institutions' EFT policies may differ from those of the RBA. Agencies should therefore consult their own banks in relation to information about their EFT policies and procedures.

• Encourage suppliers to accept electronic payment

  Agencies may encounter resistance from some suppliers to e-payment. In some cases suppliers may not wish to accept e-payment because the information accompanying the payment is not sufficient to enable them to identify what the payment is for. The direct credit system allows only a small amount of information to accompany a direct credit payment (typically, only 18 characters of text). This is often enough to identify the payment. For example, where the direct credit is in full payment for an invoice, providing the supplier invoice number will usually allow the supplier to identify the payment. However, where the direct credit is in part payment of an invoice, or in payment of multiple invoices, more information may be needed.

  Some suppliers may also be concerned about the privacy implications of providing their bank account details to government. Where suppliers deal with several agencies, they may find it administratively burdensome to provide bank account, preferred remittance advice format and contact details to each agency.

  Agencies can do a number of things to address supplier concerns. In their communications with suppliers, agencies should note that it is Government policy to pay suppliers electronically. Benefits to suppliers, such as not needing to bank cheques manually or wait days for cheques to clear, may also be emphasised. Agencies can also offer to provide remittance advice, where this is necessary to identify the payment.

• Providing remittance advice to suppliers

  Where the information accompanying a direct credit is not sufficient to identify the payment (particularly, what the payment is for), agencies should provide separate remittance advice, in the medium preferred by the supplier (for example, email, fax, mail). 

  Suppliers should be encouraged to accept electronic advice (email or fax) as the most cost-effective option, and mailing of paper advice should occur only in exceptional circumstances. Agencies should also have administrative procedures in place to ensure that remittance advices sent by email or fax that 'bounce' can be investigated and re-sent. One agency has found that suppliers' email addresses are likely to change more frequently than their fax numbers, and is addressing this issue by configuring its system to send remittance advice by fax as the preferred option, and by email only if a fax number is not available.

  Agencies have adopted a common-sense approach to defining the content of the remittance advice they provide suppliers. The Commonwealth e-procurement strategy proposed that a standard remittance advice (that is, a defined set of data about the payment) be developed, for implementation by all agencies. NOIE scoped the proposal, but did not find significant support for such an initiative among agencies or suppliers. NOIE will monitor the situation, and if the need for a standard remittance advice emerges, will work with agencies and suppliers to develop one.

  Typically, the information required for the remittance advice is found in an agency's financial management information system (FMIS), and the issue becomes one of extracting this information from the FMIS. While some major FMISs are not able to generate remittance advice, this capability may be achieved through upgrades.

• Consider how other agencies are providing remittance advice to suppliers

  The following examples demonstrate some of the ways agencies are providing remittance advice to suppliers.

  Department of Finance and Administration

  The Department of Finance and Administration adjusted its financial system to produce remittance advice at least 3 working days before a payment was made to a supplier. This allowed Finance to assure suppliers that they would receive their remittance advice on the same day as the EFT payments, if not before. Due in part to this simple adjustment, approximately 65% of Finance's suppliers chose the EFT method.

  Finance spent the next two months modifying its financial system to be able to fax remittance advices. Finance's Chief Executive Instructions and Financial Guidelines were amended to prohibit procurement from new suppliers not willing to accept EFT payment. All suppliers were informed of Finance's ability to fax remittance advices and suppliers were invited to adopt the EFT method. This brought the percentage of Finance's suppliers on EFT to 83%. The remaining 17% of suppliers were again asked to accept EFT.

  Currently, 95% of Finance's suppliers are on EFT. This new approach took 9 months to implement. Finance is also able to email its remittance advices automatically. Finance will be reviewing the status of the last 5% of suppliers that have not moved to e-payment.

  AusAid

  In July 2000, AusAid implemented an electronic remittance advice system based on msXfaxAI and Odyssey from the Better Network Services Group (BNS). BNS assisted AusAid in implementing the advice system and continues to provide support and upgrades.

  The advice system notifies suppliers of direct credit information by either email or fax, from AusAid's FMIS payment records. The supplier usually receives this advice before the direct credit payment appears in their bank account.

  The advice system functions on a server through a standard desktop PC with a one-way only interface with AusAid's FMIS. Details of a supplier's bank account details are not included in the advice. The payee is informed through the advice that an amount will be credited to their nominated account together with sufficient detail to identify the payment.

  Management reports are emailed to AusAid's nominated administrators with details of the previous day's activities. Spot checks are also undertaken by AusAid to ensure payments generated by their FMIS correlate with the remittance advice sent.

  AusAid has found the remittance advice system to be extremely reliable, requiring minimal support.

  Some agencies have implemented arrangements which allow them to provide remittance advice on an exception basis, that is, only when the accompanying information does not identify the payment sufficiently. While some agencies provide the remittance advice directly to their suppliers, others have arranged for their bank to provide the advice to payees on their behalf.

• Further information

  Information about Commonwealth payment policy generally is available in the Commonwealth Procurement Guidelines. 

  Information about better practice in payment of accounts is available in the Australian National Audit Office's (ANAO) Audit Report No.52 Payment of Accounts (June 2001), and ANAO Better Practice Guide, Paying Accounts (November 1996).

Appendix A

Reserve Bank of Australia

The Reserve Bank of Australia (RBA) will transfer money solely on the basis of the account number supplied by its customer, provided that the number corresponds with an active account. Although other information including the account name may be collected at the time of the transfer, this information is stored to be used only if the customer seeks verification of the transfer at a later date.

Where a payer agency has been informed by a supplier that it has not received a payment, the RBA will seek verification from the bank to whom the funds have been transferred that the account corresponds to the account name that was specified at the time of the transfer. If the funds were credited to the wrong account, the RBA will then request that the funds be returned.

The bank holding the funds in the wrong account will then seek the account holder's agreement that the incorrectly credited funds be returned. If the owner of the account does not agree to return the funds, the agency would need to consider appropriate action.

If the RBA correctly transfers funds to an account number it has been given by the agency, it will not be legally liable for any error made by the agency or supplier when providing the account number.