Governments make payments in a variety of ways including cash, checks, and various electronic payment methods. Governments rarely make payments using cash but a government may have one or more petty cash funds for employee reimbursement. In addition, fewer and fewer payments by governments are being made by check as more electronic options have been made available but check payments still exist and have unique control and fraud prevention requirements.
The GFOA recommends that governments have policies and procedures and internal controls in place for each payment method and use electronic means to make payments as often as possible.
Electronic Payment Methods
- Automated clearing house (ACH) – movement of funds in a batch process, which is best for high volume, low dollar transactions such as payroll, expense reimbursement, and routine vendor payments, as the cost per transaction is low relative to other forms of electronic payment.
- Wire transfer – immediate movement of funds between bank accounts with guaranteed settlement, which is most suitable for high dollar transactions because the cost per transaction is high relative to other forms of electronic payment.
- Purchasing (procurement) cards – a credit card transaction designed to reduce the volume of small dollar purchase orders issued, field purchase orders or to eliminate petty cash. Purchasing cards are used at the point of sale, which is convenient for the employee and the customer, and payments are made in aggregate. Vendors that accept the payment will pay a processing fee. There is usually no cost to the government, and the issuing bank may provide a rebate based on transaction volume. In addition, restrictions can be put on the purchasing cards such as a per purchase dollar amount limit, dollar limits per transaction cycle and by MCC (merchant category code).
- Electronic accounts payable – – a credit card transaction, often without physical cards, that allows governments to pay invoices electronically. These payments are made during the normal accounts payable process, but the vendor or government has designated a preference to receive funds via the card instead of checks. As with purchasing cards, the vendor pays a processing fee, and the government may receive a rebate.
- Stored value cards –generally used for payroll to unbanked employees or for rebate/incentive programs. The card is tied to a bank account and is loaded via an ACH transaction. There are costs associated with activation and use of the card.
- ACH debits – withdrawal of funds directly out of the government’s bank account. This type of payment is usually requested by vendors who do repetitive business with the government such as benefit providers who have long term contracts with the government. Generally, a government should have debit blocks in place against ACH debits unless specifically identified by the government as trusted vendors.
- Cryptocurrency – governments should not make payments through cryptocurrency vehicles, due to risk and volatility of that market. Cryptocurrency is “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” (Merriam Webster)
Benefits to using electronic payments including:
- Eliminating the storage, handling, and processing of paper checks.
- Reducing the time spent on reconciliation.
- Eliminating the occurrence of lost or stolen checks and the cost of check reissuance.
- Reducing security risks, including the visibility of information used in check payment fraud.
- Improve the tracking of payments through enterprise resource planning (ERP) systems and integration with banking technologies.
Cash Payment Methods
- Petty cash and change funds should be covered in the government’s cash handling policies and procedures:
- Establish reconciliation process and timeliness
- Establish verification procedures to prevent duplicate payments (petty cash)
Check Payment Methods
- Check usage (if not able to be eliminated) should be minimized.
- Physical security over check stock and check copy retainage should be in place and documented.
- Bank fraud prevention tools should be in place (e.g., positive pay).
- Timely reconciliation and escheatment should be practiced.
- Governments should have protocols in place for electronic and facsimile signatures, and may want to consider use of multiple signatures on checks.
- Governments may also want to consider outsourcing the check writing function to a bank or other third-party provider.
- Board approval date: Friday, September 28, 2018