Taking A Strategic Approach To Invoicing

Invoicing can often be overlooked as just another operation task a business must deal with, but for companies dealing with massive transaction volumes invoicing can present a significant strategic opportunity. Firm 58 CEO Nick Fera sat down with PYMNTS how automated invoicing supports the processes spreadsheets just aren’t equipped to handle.

Invoicing can often be overlooked as just another operation task a business must deal with, but for companies dealing with massive transaction volumes, invoicing can present a significant strategic opportunity. Firm58 CEO Nick Fera sat down with PYMNTS to talk about how automated invoicing supports the processes spreadsheets just aren’t equipped to handle.


PYMNTS: Invoicing can be a very slow process, especially for middle market firms that might lack resources. From your perspective, what specific challenges do organizations face when it comes to invoicing, and what should they be doing to improve their billing process?

NF: Middle market firms do struggle with that, especially those dealing with high transaction volumes. If you can imagine back in the 90s with the evolution of cell phone technology and usage, carriers had to determine how to invoice and bill their customers for usage whether it was at night, on weekends or during the business hours. They had very complex billing processes in place, and it was very difficult to manage based upon the number of subscribers plus the transaction volume that was going on in those cell phones.

Well, in a lot of middle market organizations today, heavy subscriptions or transaction-related types of activities have resulted in the billing process being fast and furious. It tends to be very detailed; it may have all sorts of schedules and discounts, as well as programs for different types of billing and different types of transactions, etc. Staying on top of that on a daily and monthly basis in order to properly, accurately and timely invoice the customer can be a very time-consuming process in and of itself.

Where we find a lot of middle market companies spending time is in Microsoft Excel. Unfortunately, in certain situations, Excel is only as good as the people that are doing it and a lot of times that falls short.

From our perspective, Firm58 is very focused on capital markets, specifically transaction volume for broker dealers. Broker dealers typically work with large institutions, hedge funds, asset management, mutual funds, etc. They conduct transactions in the market on an hourly, sometimes minute-by-minute, basis in order to buy and sell securities on behalf of these parties.

The volumes of transactions they deal with can range into the millions of transactions in a given month. When you have that kind of transaction volume in the fragmentation of markets, it means a single transaction can actually occur and be transacted across many different venues at the same time. For example, moving a million shares of Microsoft can be done on 20 different venues in the U.S., not just the New York Stock Exchange or NASDAQ. Each of those venues could have a different cost for processing that transaction, and the transaction itself may be broken up into a thousand different smaller transactions. Rolling up all of this on a daily or monthly basis, while understanding the actual execution, the related regulatory and SEC fees, cost structure, how much to charge the customer and if money is actually being made or not can be a very difficult process — one that spreadsheets just cannot handle.

Firm58 helps our customers manage and calculate those transaction costs on a daily basis and provides the technology to allow a quicker way to sum up those costs at the end of the month, create proper bills and invoices for their customers and send those invoices out within a day or two of the end of the month. Increasing the speed in which invoices are sent out creates a better chance of our customers receiving payment in a shorter period of time.

From a working capital perspective, our customers are in a better situation. If it takes them 60 or 90 days to send a bill out, they are probably not going to get paid for 90 to 180 days, which is a very tough situation, especially for middle market firms who are struggling these days.


PYMNTS: Firm58 supports broker dealers and trading firms. Do these sectors face more complex billing challenges than other industry segments?

NF: Absolutely. For instance, if you think about an asset manager, they typically charge individuals a certain fee for what they call “assets under management,” which may be 1 percent or 2 percent of the assets managed. It is a relatively easy calculation to perform and then invoice their customers. Broker dealers, on the other hand, usually do one of two things: either charging a flat commissioned rate for every transaction performed or charging a cost-plus model. The cost-plus model requires determining the actual cost of executing the transaction on behalf of that customer and adding a premium, say 20 percent, on top of that. In order to use this pricing model, an understanding of the very detailed, granular level of execution costs related to every one of the transactions performed is necessary. It also involves knowing the detailed and convoluted schedules of all the exchanges and venues where these security transactions on behalf of the customers take place, which is very difficult. The schedules are difficult to read, they are difficult to replicate in technology and sometimes are dependent upon the exchange providing a certain level of detail, which they do not always do.

It can be very hard for a broker dealer or trading firm to understand the exact costs, and if they are unable to do that, they will not be able to use a cost-plus model. And in some cases they may end up charging a flat fee they are not even sure is making them any money. It can be unclear if they are actually making a gross margin on the actual trading activity. Our experience has shown that some middle market firms have actually gone out of business because they don’t understand their cost structure.


PYMNTS: What steps should organizations take before deciding to move from a manual to an automated invoice process?

NF: The first thing for an organization to do is understand their client structure, and the second thing is to make sure their data is in order. Making sure the data is in order and able to be packaged and sent to a provider on a daily or real-time basis is probably the largest implementation key in moving from any manual to automated process.

The data must be right, and organizations will need to understand the transaction, the account the transaction is completed on behalf of and where the transaction was executed. There are many other ancillary things related to the transaction that are important to note as well, such as how it was executed and if liquidity was taken or added in the market. The way the execution was actually placed in the market will determine the exact fee.

If the data is in order and there is a clear understanding of client structure, the organization should have a very good handle on moving to the next step and automating that process with a third-party vendor.


PYMNTS: What are the tangible benefits achieved via automation?

NF: From a client perspective, what they are always trying to do is understand and manage costs, while continuing to grow their business. Billing or invoicing has typically been seen as a very operational sort of activity, but we see it as a strategic activity for two specific reasons.

The first reason is if an organization has a better handle on understanding cost structure and whether or not the fees that are charged to customers are exceeding the amount of expense to execute on behalf of that customer, they will have great insight into which customers are profitable and which are not. This will enable them to make a trade-off in terms of possibly going back to a client and saying, “I need to charge you more because your executions are costing us more, and we are not making any money, and if not I’m going to have to drop your business.” Understanding the costs and profitability on a per customer basis is a very big tangible benefit.

The second reason revolves around the professionalism and client relationship built by offering a more robust and detailed invoicing model. On a daily basis an organization can use automated invoicing to explain to its customers where they are within that month in terms of their trading, costs, expenses and where they might want to move order flow in order to have a lower cost of execution. Providing a bill on a timely basis at the end of the month and a portal interface to access this information shows customers the organization has invested in the customer to provide them with information to make better decisions for their business. In these cases, billing becomes a very strategic component to customer acquisition, customer churn or reducing customer churn and enhancing customer revenue opportunities.

That cost structure and transparency provided to customers, as well as the professionalism of moving from haphazard spreadsheets to professional billing solutions, make a big difference.

If a cell phone carrier sent you a spreadsheet with a bill to show how much you owe, a customer would think it is not very professional and may not trust the data. We are trying to help broker dealers get to a really professional look and feel with their clients so they can keep long-term relationships and enhance ones that need to be enhanced.