B2B Electronic Payments: Putting Wind in the Sails
Despite the formidable incumbent status of the check in business-to-business transactions, its dominance will wane. Various industry, technological and regulatory trends will propel the adoption of e-payments. The economic interests of banks, third-party solution providers and corporations will align – overcoming the ‘chicken and egg’ syndrome of insufficient demand to generate supply and vice versa.
The state of business-to-business payment processing today, however, is a far cry from ideal (see figure 1). Companies continue to pay by check because it works satisfactorily, though not optimally (see figure 2). Accounting and auditing processes have been built around the check and it provides all the remittance detail anyone could want. The only trouble is that paying by check is a paper-based process that, while not “broken”, is increasingly cumbersome, expensive and unnecessary. Moreover, it is financially inefficient. Check payment reconciliation is the most painful part for it can take five to seven business days, which strains the working capital of any company. The only automated part of the process at most mid-size to large companies is payment initiation. Even for this element, however, the fact that a proprietary infrastructure tends to dominate makes it less efficient and more expensive than the ideal state in which standards and open systems reign.
The factors that will blow wind into the business-to-business e-payment sails will come from several directions. At the macro level, industry, technological and regulatory trends will propel the adoption of e-payments (e.g. development of standards and demand for financial transaction transparency and accountability). At the third-party level, banks and solution providers will gradually contribute to facilitating the adoption of e-payments. At the company level, numerous pioneers have already been instrumental in the key areas, such as standards development, and have automated their financial supply chain.
Of all the forces that will blow wind into the e-payments sail, the gale force will come from the development of payment messaging standards. Currently, XML-based standards are just beginning to leave the calm zone and generate a breeze. Over the next decade, they will build up power as corporations, banks and third-party technology providers promote and support their use. Eventually, XML-based standards will become the EDI for the masses. Standards will reign because they offer superior data and information exchange. As has been proved in financial markets (e.g. foreign exchange) and in manufacturing (e.g. just-in-time), rich and fast information access translates into competitive advantage and revenue streams. In cash management, banks and third parties that deliver rich remittance data that can be automatically reconciled along with the payment will win against their competitors.
Several organizations have been tackling standards development. Not surprisingly, they differ in terms of goals and participants. The rise of several influential non-bank dominated organizations signals the fact that banks or bank-led organizations have not met all the financial supply chain needs of corporations, though they have made important payment- and treasury-related inroads. Leading torchbearers for next-generation, XML-based standards for payment-related transactions include TWIST (Treasury Workstation Integration Standards Team), RosettaNet and SWIFT.
In the realm of remittance-related standards and transport protocols, RosettaNet stands out as a pioneer. TWIST and RosettaNet have proved to be effective and nimble, successfully bringing together representatives of all interested parties-from financial institutions to corporations and technology providers-and lead the charge to fulfill their member corporations’ needs.
Although the “win-wins” of standards ensure their development and adoption, stakeholders with proprietary systems face risks and potential. Hence, the development and implementation path is unsurprisingly arduous and at times contentious. Banks in particular have much to lose if they do not figure out how to harness the potential wins and mitigate the potential losses. Companies, in contrast, have everything to gain and hence are striving to influence developments in payment systems more than they ever have in the past. Global corporations (which stand to gain the most) are already beginning to generate a demand-pull that banks are hard-pressed to ignore. Therein lies the key to adoption: economic gains for all participants that assure demand and supply align.
As already demonstrated the role that banks and technology providers play in the implementation of standards is crucial to the adoption of e-payments. Until the activities that precede payment are automated, e-payment is unlikely. As confirmed by several surveys, the prerequisite for the migration to e-payments is automation of the financial supply chain, in particular electronification of rich remittance data (i.e. detail comparable to what EDI formats provide). Hence, these players are linchpins to adoption.
The dynamics on the “supply-side” are complex, however, and do involve players with different motives, resource levels, technological capabilities and appetites for risk. Banks have historically owned the payment business, but have tended to take a myopic view, focusing more on the payment piece and less on the data piece and caring more about short-run revenues to the detriment of long-run opportunities. Third parties have been gradually providing the data piece, but the major ERP/accounting vendors have been slow to invest in solutions because of perceived lukewarm demand. The tide has been shifting as evidenced by the incorporation of SWIFTNet (SWIFT’s internet protocol-based messaging platform) by several leading solution providers. These initiatives and others like them will help build the critical electronic bridge between accounting/ERP systems and payment systems.
When it comes to e-payments adoption, companies (the “demand-side”) are scattered along the spectrum from the apathetic to the evangelistic. Evangelistic firms tend to have an electronification champion at the “C” level (e.g. chief operating officer or chief financial officer). This champion just gets it, from the hard dollar savings (reduction in FTE) to the soft-dollar gains (lower days-sales-outstanding which reduces working capital costs). Overall, several trends combined will sway companies to embark on financial supply chain automation projects. Currently, the companies that have taken steps to automate the financial supply chain and adopt e-payments have been motivated by hard cost savings. Not surprisingly, these costs are much easier to calculate than financial efficiency gains and therefore are easily attributable to the actions of a particular department (e.g. accounts payable).
While e-payments are not likely to take business-to-business transactions by storm, the wind in their sails will pick up over the next five years. Celent anticipates that the aforementioned trends will push business-to-business adoption of e-payments up to 58 per cent of total volume by 2010 (see figure 3). Beyond that, the winds will continue to push adoption to levels near those attained in Europe.
