MARK J. COTTELEER, CHRISTOPHER A. COTTELEER, and ANDREW PROCHNOW
CUTTING CHECKS: CHALLENGES AND CHOICES IN
B2B E-PAYMENTS Open network e-payment systems are the future of corporate payments, assuming they address the challenges of integration, security, and remittance standards.
Changes in the marketplace for business-to-business (B2B) payments increasingly demand executives’ attention. Growing numbers of e-payments, decreasing paper check volumes, and new legislation in the U.S. are the main motivators. Businesses are beginning to realize they must add new payment options to a process still dominated by paper checks, wire transfers, and automated clearinghouse (ACH) transactions. What started in the 1990s as a consumer push for e-payments has influenced new thinking in the B2B market. Financial institutions and businesses alike must closely monitor this trend because current payment options fall short of changing business expectations. For banks, ignoring market demand could result in disenfranchised customers and decreasing revenue and profit.
56
June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM
For businesses, failure to adopt new payment options could result in lost value, as well as lost customers. The future of electronic banking depends on the development and adoption of new technologies. The promise of e-payment technologies has been that they ease payment and lower transaction costs [11]. This promise is being realized in the area of elec-
B2B Transactions (billions)
By
tronic B2B payments. Here, we investigate the B2B more efficiently because electronic check images can e-payments industry and the technologies that will be transmitted electronically. Although Check 21 shape the future of B2B transactions. technologies may be a minor process enhancement, Historically, the paper check has served as the key they still rely on manual intervention and provide litsettlement method for financial transactions between tle in terms of the cost of processing a payment to the businesses in the U.S. market. However, evolving tech- extent provided by a true e-payment process. True nologies have created new e-payment systems conpossibilities within the tinue to evolve as an Cards Other 1% payments supply chain. attractive solution EDI ACH 1% 2% 10% To date, the fastest-growbecause they allow Checks ing sector of the electronic bundling of payments 86% bill payment market with related transaction is business-to-consumer data, along with integra(B2C) transactions. For tion of accounting and instance, 2003 marked the enterprise resources planfirst year that the majority ning systems. This means (53%) of in-store conthat businesses expend sumer payments were fewer financial and ACH Checks EDI Cards other conducted electronically, human resources processaccording to a 2005–2006 ing payments, reconciling study of consumer-paypayments with invoices, ment preferences by the Figure 1. B2B payment methods and entering information into databases. (2001) [9]. American Bankers AssociAccording to a 2000 study conducted by the ation and Dove ConsultNational Automated Clearing House Association, 1 (6/07)in the U.S. pay from $2 to $5 to create and ing. Similarly, from 2001 to 2003,Cotteleer automatic figcompanies e-payments and online bill payments increased from deliver a single paper-based invoice. Another $10 is 17% to 29% of the consumer bill payment mix [3]. spent on the other side of the transaction for processBusinesses have been less aggressive in their adoption of ing and payment [4]. Estimates suggest that a typical e-payments. As of 2001, 86% of B2B payments in the large business, sending approximately 792,000 U.S. were still executed through paper checks, with the invoices per year, can save nearly $5 million per year by remaining 14% using a eliminating costs related variety of e-payment to processing paper pay45 options (see Figure 1) ments [9]. In light of 40 35 [10], a percentage that has these potential savings, 30 changed little in the ensubusiness executives are 25 ing years. starting to recognize the 20 electronic 15 payments Industry research into value of moving to an e10 check e-payment trends sugpayment solution [12]. payments 5 gests a near-term increase The result is that approxi0 2002 2010 in B2B e-payment volmately 61% of all B2B Year ume [5]. The rationale payments in the U.S. are behind this transformaforecast to be conducted tion lies with improve- Figure 2. Projected growth in B2B electronically by 2010 (see Figure 2) [5]. e-payments (2002–2010) [5]. ments in e-payment cost, Four main challenges confront businesses interested timeliness, and reporting in adopting e-payment processes: systems integration; accuracy relative to paper checks. The 2004 Check fig the2absence Cotteleer (6/07) of remittance standards; security; and Clearing for the 21st Century Act, also known as uncertainty in the return on investment; in addition, “Check 21,” is indicative of the changing business candidate technologies must be considered in light of mind-set regarding e-payments. Check 21 legalized their ability to deliver value in multiple dimensions. the substitute check, or a check printed from an elecSystems integration. The most daunting barrier tronic image of the original check. The legislation to the adoption of e-payments is a lack of integration allows financial institutions to process payments across the many systems needed to support the process
COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6
57
MARK J. COTTELEER, CHRISTOPHER A. COTTELEER, and ANDREW PROCHNOW
CUTTING CHECKS: CHALLENGES AND CHOICES IN
B2B E-PAYMENTS Open network e-payment systems are the future of corporate payments, assuming they address the challenges of integration, security, and remittance standards.
Changes in the marketplace for business-to-business (B2B) payments increasingly demand executives’ attention. Growing numbers of e-payments, decreasing paper check volumes, and new legislation in the U.S. are the main motivators. Businesses are beginning to realize they must add new payment options to a process still dominated by paper checks, wire transfers, and automated clearinghouse (ACH) transactions. What started in the 1990s as a consumer push for e-payments has influenced new thinking in the B2B market. Financial institutions and businesses alike must closely monitor this trend because current payment options fall short of changing business expectations. For banks, ignoring market demand could result in disenfranchised customers and decreasing revenue and profit.
56
June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM
For businesses, failure to adopt new payment options could result in lost value, as well as lost customers. The future of electronic banking depends on the development and adoption of new technologies. The promise of e-payment technologies has been that they ease payment and lower transaction costs [11]. This promise is being realized in the area of elec-
B2B Transactions (billions)
By
tronic B2B payments. Here, we investigate the B2B more efficiently because electronic check images can e-payments industry and the technologies that will be transmitted electronically. Although Check 21 shape the future of B2B transactions. technologies may be a minor process enhancement, Historically, the paper check has served as the key they still rely on manual intervention and provide litsettlement method for financial transactions between tle in terms of the cost of processing a payment to the businesses in the U.S. market. However, evolving tech- extent provided by a true e-payment process. True nologies have created new e-payment systems conpossibilities within the tinue to evolve as an Cards Other 1% payments supply chain. attractive solution EDI ACH 1% 2% 10% To date, the fastest-growbecause they allow Checks ing sector of the electronic bundling of payments 86% bill payment market with related transaction is business-to-consumer data, along with integra(B2C) transactions. For tion of accounting and instance, 2003 marked the enterprise resources planfirst year that the majority ning systems. This means (53%) of in-store conthat businesses expend sumer payments were fewer financial and ACH Checks EDI Cards other conducted electronically, human resources processaccording to a 2005–2006 ing payments, reconciling study of consumer-paypayments with invoices, ment preferences by the Figure 1. B2B payment methods and entering information into databases. (2001) [9]. American Bankers AssociAccording to a 2000 study conducted by the ation and Dove ConsultNational Automated Clearing House Association, 1 (6/07)in the U.S. pay from $2 to $5 to create and ing. Similarly, from 2001 to 2003,Cotteleer automatic figcompanies e-payments and online bill payments increased from deliver a single paper-based invoice. Another $10 is 17% to 29% of the consumer bill payment mix [3]. spent on the other side of the transaction for processBusinesses have been less aggressive in their adoption of ing and payment [4]. Estimates suggest that a typical e-payments. As of 2001, 86% of B2B payments in the large business, sending approximately 792,000 U.S. were still executed through paper checks, with the invoices per year, can save nearly $5 million per year by remaining 14% using a eliminating costs related variety of e-payment to processing paper pay45 options (see Figure 1) ments [9]. In light of 40 35 [10], a percentage that has these potential savings, 30 changed little in the ensubusiness executives are 25 ing years. starting to recognize the 20 electronic 15 payments Industry research into value of moving to an e10 check e-payment trends sugpayment solution [12]. payments 5 gests a near-term increase The result is that approxi0 2002 2010 in B2B e-payment volmately 61% of all B2B Year ume [5]. The rationale payments in the U.S. are behind this transformaforecast to be conducted tion lies with improve- Figure 2. Projected growth in B2B electronically by 2010 (see Figure 2) [5]. e-payments (2002–2010) [5]. ments in e-payment cost, Four main challenges confront businesses interested timeliness, and reporting in adopting e-payment processes: systems integration; accuracy relative to paper checks. The 2004 Check fig the2absence Cotteleer (6/07) of remittance standards; security; and Clearing for the 21st Century Act, also known as uncertainty in the return on investment; in addition, “Check 21,” is indicative of the changing business candidate technologies must be considered in light of mind-set regarding e-payments. Check 21 legalized their ability to deliver value in multiple dimensions. the substitute check, or a check printed from an elecSystems integration. The most daunting barrier tronic image of the original check. The legislation to the adoption of e-payments is a lack of integration allows financial institutions to process payments across the many systems needed to support the process
COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6
57
[1]. B2B payments involve up to five distinct components: • The buyer purchases goods and services; • The buyer’s financial institution provides banking services to the buyer; • The supplier provides goods and services; • The supplier’s financial institution provides banking services to the supplier; and • The Federal Reserve or other check-clearing institution facilitates the check-sorting process.
Paper-Based Payment Environment Stage 2
Stage 3
Supplier Business
Supplier Bank
1. Deposits check in Supplier Bank 2. Reconciles payment with invoice 3. Manually enters data into ERP system
1. Credits Supplier bank account 2. Ships check to Federal Reserve or other checkclearing entity
Stage 1
Buyer Business 1. Receives invoice from Supplier 2. Writes and ships check to Supplier 3. Manually enters data into ERP system
Stage 4
Stage 6
Stage 5
Check Clearing Entity 1. Sorts Checks 2. Forwards check to Buyer Bank
Buyer Bank
Buyer Business
1. Debits Buyer bank account 2. Forwards processed check to Buyer
1. Manually enters data into ERP system
Electronic Payment Environment Continuous Exchange of Funds and Information
Buyer Business 1. Sends purchase order electronically 2. Receives invoice electronically 3. Sends payment electronically on desired date 4. Transaction information is automatically uploaded and stored in local systems 5. Status of payments and cash position are transparent
E-Payment Provider 1. Provides secure payment environment 2. Automatically transfers funds between accounts
Supplier Business 1. Sends invoice electronically 2. Receives payment and remittance data together for improved reconciliation 3. Transaction data is automatically uploaded and stored in local systems 4. Status of payments can be viewed for improved cash management ability 5. Receivables may be financed
information associated with both paper- and ACH-based payments, invoices, and receipts, the related guidelines do not exist in the world of e-payments. Consequently, different types of e-payment systems have evolved to integrate and support three levels of transaction information: Level 1. Standard purchase information, including merchant name, transaction amount, and date; Level 2. Summary detail, including point-of-sale codes, sales tax amounts, and accounting codes; and Level 3. Line-item purchase detail, including sales quantities, product codes, product descrip-
Figure 3 outlines the traditional B2B check-clearing process in which a buyer writes a check that subsequently flows through Figure 3. Life cycle of a B2B tions, and shipping data. the supplier, the supplier’s payment. bank, the Federal Reserve CotteleerEarly fig 3 adopters (6/07) of e-payment technologies still com(or other check-clearing institution), the buyer’s bank, and finally back to the plain that inconsistencies in remittance standards have buyer. This process is supported by human intervention resulted, in some cases, in the corruption of important throughout the supply chain, including manual entry of remittance data, including invoice numbers, and other information, including payment amounts and payer check amounts and associated transaction data. Shifting payment processes to an electronic format identification [8]. As e-payments become more widely accepted, niche requires an IT infrastructure to route payments and related data through an integrated network. Using such players in the e-payment industry must coordinate and end-to-end infrastructure poses a significant adoption agree to facilitate efficient networks. E-payment users challenge because users’ technological sophistication want information formatted so it can be processed with regard to the payment supply chain is so varied. “straight through” to internal systems. Recently, the Creating uniformity in the e-payment infrastructure is Clearing House Payments Company, the first and further complicated by the fact that the standards of largest U.S. payments clearinghouse, released a plan to the Federal Reserve infrastructure apply to Fed prod- help catalyze standards convergence. Collaborating ucts but not to products outside the Fed’s domain. with bank owners and payment technology vendors, it Therefore, building the infrastructure necessary to adapted the traditional EDI 820 file—the standard securely and reliably transmit e-payments and related EDI payment file format—trimming it down to 10 transaction information among a large group of diverse essential fields. Before this modification, EDI 820 files users is a significant obstacle and expense. However, the included hundreds of fields, creating problems for result of an improved payment network, as in Figure 3, some trading partners if senders used too many or too is a streamlined process supporting the continuous few of them. The simplified e-payment network 820 format was approved by the American National Stanexchange of information and funds. Remittance standards. Complicating these challenges dards Institute (www.ansi.org) and is today broadly is a lack of even minimum standards pertaining to e- accepted by industry participants. This coordinated payment data. Although the Federal Reserve has long effort or one like it should hasten the acceptance of epromulgated standards to guide the type and format of payment systems [12]. 58
June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM
Security. Since B2B transactions involve multiple parties, they flow across diverse technology architectures. Each party in an electronic transaction is subject to the security procedures of other members in its financial supply chain. Arguably, paper-based payments are subject to similar security challenges, though they are well understood and have long been accounted for. An added complication with e-payments is that they are potentially subject to a larger pool of anonymous attacks. Consequently, existing security tools (such as encryption technology) may need to be supplemented by third-party vendors to protect information as it passes across diverse networks. Improving business confidence in B2B e-payments might be achieved by building B2B payment solutions into financial networks already operating with a high degree of security. Value proposition uncertainty. E-payment networks (like other networks) are subject to “network externalities,” so the value of participation is contingent on the size of the network itself; that is, the greater the number of participants, the more valuable the network is to each participant. Given that the technical aspects of epayment networks are still evolving, it has been difficult for potential participants to estimate the value of joining and assess the appropriate level and speed of the related investment. Investment decisions in this context are influenced by businesses’ perceptions of the likelihood of agreement on the issues related to standards and integration [7]. The value proposition of e-payment networks is further clouded by the realization that connecting accounts for only a portion of the total cost. After the initial capital investment, businesses must invest significant financial and human resources in training employees to use the system. Moreover, banks and businesses cannot simply abandon their old check-processing infrastructure, as not all B2B transactions immediately migrate to e-payments. Businesses thus have an incentive to wait for others to go first, watching as they build the value of the network prior to joining or waiting to join until they are compelled to do so by competition or regulation [7]. Value dimensions. In addition to surmounting key adoption challenges, businesses must also consider epayment technologies in light of their ability to deliver across multiple dimensions of value. A clear understanding of the value drivers of e-payments enable participating businesses to better address challenges to e-payment adoption. In 2004, Charter Consulting, a management consulting firm, surveyed businesses across multiple U.S. industries, ranking 10 attributes based on their perceived value to B2B e-payment users [2]; in order of importance, they were: Offer direct savings vs. paper-based check processing. The
direct cost per transaction decreases for e-payments compared to paper payments; Facilitate reconciliation and dispute management. Finding and retrieving data is simplified in e-payment systems; Provide global coverage. Payments can be sent and received outside the U.S. market; Improve control of payment timing and cash flow. Payment is initiated and sent at precisely the time the business intends; Increase visibility of cash requirements. Payees can see scheduled payments and anticipate cash flow; Reduce fraud and credit loss potential. Payments are sent through a secure and reliable global network; Possess remittance data. The system is able to handle Level 3 remittance data; Offer low implementation costs. Up-front investment is relatively minor for all users, and costs are clearly defined; Integrate data and payment information. Payments are bundled with transaction data for simplified integration into accounting systems; and Offer a flexible fee schedule. Transaction fees are negotiable. E-PAYMENT OPTIONS Three notable e-payment technologies promise to simultaneously address key adoption challenges, accelerate B2B e-payment adoption, and deliver across multiple value dimensions:
• ACH-based bank proprietary e-payment platforms; • Enhanced purchasing card technology; and • Open network systems. For businesses, they offer potential financial, human resources and time savings, along with streamlined processes that have long been promised from revolutionary payment systems. Financial institutions will find that providing them to business customers can strengthen their product portfolios, provide an opportunity to expand relationships with existing customers, and attract new customers who seek e-payment efficiencies (see Table 1). ACH-BASED BANK PLATFORMS ACH-based transactions (such as for direct deposit of employee salaries) have existed in one form or another since the early 1970s. Bank proprietary systems are epayment solutions built on the ACH network. In the past decade, banks have invested heavily in developing software packages that have improved the functionality of B2B ACH transactions. They now combine financial processing and electronic data warehousing capaCOMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6
59
[1]. B2B payments involve up to five distinct components: • The buyer purchases goods and services; • The buyer’s financial institution provides banking services to the buyer; • The supplier provides goods and services; • The supplier’s financial institution provides banking services to the supplier; and • The Federal Reserve or other check-clearing institution facilitates the check-sorting process.
Paper-Based Payment Environment Stage 2
Stage 3
Supplier Business
Supplier Bank
1. Deposits check in Supplier Bank 2. Reconciles payment with invoice 3. Manually enters data into ERP system
1. Credits Supplier bank account 2. Ships check to Federal Reserve or other checkclearing entity
Stage 1
Buyer Business 1. Receives invoice from Supplier 2. Writes and ships check to Supplier 3. Manually enters data into ERP system
Stage 4
Stage 6
Stage 5
Check Clearing Entity 1. Sorts Checks 2. Forwards check to Buyer Bank
Buyer Bank
Buyer Business
1. Debits Buyer bank account 2. Forwards processed check to Buyer
1. Manually enters data into ERP system
Electronic Payment Environment Continuous Exchange of Funds and Information
Buyer Business 1. Sends purchase order electronically 2. Receives invoice electronically 3. Sends payment electronically on desired date 4. Transaction information is automatically uploaded and stored in local systems 5. Status of payments and cash position are transparent
E-Payment Provider 1. Provides secure payment environment 2. Automatically transfers funds between accounts
Supplier Business 1. Sends invoice electronically 2. Receives payment and remittance data together for improved reconciliation 3. Transaction data is automatically uploaded and stored in local systems 4. Status of payments can be viewed for improved cash management ability 5. Receivables may be financed
information associated with both paper- and ACH-based payments, invoices, and receipts, the related guidelines do not exist in the world of e-payments. Consequently, different types of e-payment systems have evolved to integrate and support three levels of transaction information: Level 1. Standard purchase information, including merchant name, transaction amount, and date; Level 2. Summary detail, including point-of-sale codes, sales tax amounts, and accounting codes; and Level 3. Line-item purchase detail, including sales quantities, product codes, product descrip-
Figure 3 outlines the traditional B2B check-clearing process in which a buyer writes a check that subsequently flows through Figure 3. Life cycle of a B2B tions, and shipping data. the supplier, the supplier’s payment. bank, the Federal Reserve CotteleerEarly fig 3 adopters (6/07) of e-payment technologies still com(or other check-clearing institution), the buyer’s bank, and finally back to the plain that inconsistencies in remittance standards have buyer. This process is supported by human intervention resulted, in some cases, in the corruption of important throughout the supply chain, including manual entry of remittance data, including invoice numbers, and other information, including payment amounts and payer check amounts and associated transaction data. Shifting payment processes to an electronic format identification [8]. As e-payments become more widely accepted, niche requires an IT infrastructure to route payments and related data through an integrated network. Using such players in the e-payment industry must coordinate and end-to-end infrastructure poses a significant adoption agree to facilitate efficient networks. E-payment users challenge because users’ technological sophistication want information formatted so it can be processed with regard to the payment supply chain is so varied. “straight through” to internal systems. Recently, the Creating uniformity in the e-payment infrastructure is Clearing House Payments Company, the first and further complicated by the fact that the standards of largest U.S. payments clearinghouse, released a plan to the Federal Reserve infrastructure apply to Fed prod- help catalyze standards convergence. Collaborating ucts but not to products outside the Fed’s domain. with bank owners and payment technology vendors, it Therefore, building the infrastructure necessary to adapted the traditional EDI 820 file—the standard securely and reliably transmit e-payments and related EDI payment file format—trimming it down to 10 transaction information among a large group of diverse essential fields. Before this modification, EDI 820 files users is a significant obstacle and expense. However, the included hundreds of fields, creating problems for result of an improved payment network, as in Figure 3, some trading partners if senders used too many or too is a streamlined process supporting the continuous few of them. The simplified e-payment network 820 format was approved by the American National Stanexchange of information and funds. Remittance standards. Complicating these challenges dards Institute (www.ansi.org) and is today broadly is a lack of even minimum standards pertaining to e- accepted by industry participants. This coordinated payment data. Although the Federal Reserve has long effort or one like it should hasten the acceptance of epromulgated standards to guide the type and format of payment systems [12]. 58
June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM
Security. Since B2B transactions involve multiple parties, they flow across diverse technology architectures. Each party in an electronic transaction is subject to the security procedures of other members in its financial supply chain. Arguably, paper-based payments are subject to similar security challenges, though they are well understood and have long been accounted for. An added complication with e-payments is that they are potentially subject to a larger pool of anonymous attacks. Consequently, existing security tools (such as encryption technology) may need to be supplemented by third-party vendors to protect information as it passes across diverse networks. Improving business confidence in B2B e-payments might be achieved by building B2B payment solutions into financial networks already operating with a high degree of security. Value proposition uncertainty. E-payment networks (like other networks) are subject to “network externalities,” so the value of participation is contingent on the size of the network itself; that is, the greater the number of participants, the more valuable the network is to each participant. Given that the technical aspects of epayment networks are still evolving, it has been difficult for potential participants to estimate the value of joining and assess the appropriate level and speed of the related investment. Investment decisions in this context are influenced by businesses’ perceptions of the likelihood of agreement on the issues related to standards and integration [7]. The value proposition of e-payment networks is further clouded by the realization that connecting accounts for only a portion of the total cost. After the initial capital investment, businesses must invest significant financial and human resources in training employees to use the system. Moreover, banks and businesses cannot simply abandon their old check-processing infrastructure, as not all B2B transactions immediately migrate to e-payments. Businesses thus have an incentive to wait for others to go first, watching as they build the value of the network prior to joining or waiting to join until they are compelled to do so by competition or regulation [7]. Value dimensions. In addition to surmounting key adoption challenges, businesses must also consider epayment technologies in light of their ability to deliver across multiple dimensions of value. A clear understanding of the value drivers of e-payments enable participating businesses to better address challenges to e-payment adoption. In 2004, Charter Consulting, a management consulting firm, surveyed businesses across multiple U.S. industries, ranking 10 attributes based on their perceived value to B2B e-payment users [2]; in order of importance, they were: Offer direct savings vs. paper-based check processing. The
direct cost per transaction decreases for e-payments compared to paper payments; Facilitate reconciliation and dispute management. Finding and retrieving data is simplified in e-payment systems; Provide global coverage. Payments can be sent and received outside the U.S. market; Improve control of payment timing and cash flow. Payment is initiated and sent at precisely the time the business intends; Increase visibility of cash requirements. Payees can see scheduled payments and anticipate cash flow; Reduce fraud and credit loss potential. Payments are sent through a secure and reliable global network; Possess remittance data. The system is able to handle Level 3 remittance data; Offer low implementation costs. Up-front investment is relatively minor for all users, and costs are clearly defined; Integrate data and payment information. Payments are bundled with transaction data for simplified integration into accounting systems; and Offer a flexible fee schedule. Transaction fees are negotiable. E-PAYMENT OPTIONS Three notable e-payment technologies promise to simultaneously address key adoption challenges, accelerate B2B e-payment adoption, and deliver across multiple value dimensions:
• ACH-based bank proprietary e-payment platforms; • Enhanced purchasing card technology; and • Open network systems. For businesses, they offer potential financial, human resources and time savings, along with streamlined processes that have long been promised from revolutionary payment systems. Financial institutions will find that providing them to business customers can strengthen their product portfolios, provide an opportunity to expand relationships with existing customers, and attract new customers who seek e-payment efficiencies (see Table 1). ACH-BASED BANK PLATFORMS ACH-based transactions (such as for direct deposit of employee salaries) have existed in one form or another since the early 1970s. Bank proprietary systems are epayment solutions built on the ACH network. In the past decade, banks have invested heavily in developing software packages that have improved the functionality of B2B ACH transactions. They now combine financial processing and electronic data warehousing capaCOMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6
59
June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM
en k Op wor t m Ne yste S
60
ed nc ha rd En -Ca P
d se Ba H- orm ACPlatf
bilities into one comprehensive service. Buyers and suppliers send complete trade information Product Attributes (including contracts, pricing, X X 1. Offers direct savings over check processing? X orders, receipts, and invoices) to reconciliation and dispute management? Facilitates X X 2. X bank systems; the information is X X 3. Provides global coverage? then stored in a document available to both parties. These platX X 4. Improves control over payment timing and cash flow? X forms seek to provide X X 5. Increases visibility of cash requirements? X comprehensive electronic bill payX X 6. Reduces fraud and credit loss potential? ment and presentment from the X X 7. Possesses remittance data? X beginning to the end of the payX X 8. Offers low implementation costs? ment cycle. X X 9. Integrates data and payment information? X From the standpoint of value Offers a flexible fee schedule? X 10. attribute comparisons, ACHbased payment systems meet Table 1. E-payment collaboration between outside software vendors and many of the requirements identitechnologies and existing p-card issuers to provide businesses with cusfied by B2B transaction particiassociated product tomized end-to-end e-commerce. P-card solutions pants. The importance of these attributes. 2 (6/07) allowCotteleer buyers and table sellers to collaborate within a comattributes is the foundation of hismon environment, streamline payment processes, and torical ACH popularity in facilitating relatively small recurring financial transactions use p-cards for payment. Businesses transmit orders between businesses and consumers. One particularly electronically, view the status of orders and invoices troublesome issue is the relatively high implementation online, control the initiation of payments, and intecosts of ACH-based platforms, particularly for small- grate data into existing financial systems. Enhanced p-cards and medium-size busishare many of the positive nesses. This issue further E-Payment Open ACH-Based Enhanced characteristics of desirable complicates systems-inte- Technology Network Platform P-Card e-payment networks. gration problems. Another Typical Medium to Low to Low Value They are typically Websignificant issue plaguing Transaction High Value Medium Value Value based and relatively easy ACH-based solutions is Typical Recurring or to integrate with legacy that they rely on bilateral Transaction Recurring Non-Recurring Non-Recurring Frequency software and hardware closed networks. This Domestic Network environments. This ease means that businesses Global Network (limited global capabilities) Domestic Network Reach of integration greatly must share sensitive finanreduces the cost and comcial information, in turn Table 2. Optimal e-payment plexity of implementation. Another p-card benefit is increasing the risk of application. reduced potential for fraud and credit loss, due to fraud. Global coverage is Cotteleer table 2 (6/07) enhanced settlement processes. P-card transactions setanother concern with any form of ACH-based payment, as ACH systems are typ- tle through an online “credit gateway” associated with ically built for domestic use in the U.S. Due to the the p-card issuer that allows institutions to exchange foregoing, along with the lack of other desired charac- encrypted information for authorization purposes. teristics, as in Table 1, ACH-based e-payment systems These systems provide a secure environment for payhave not gained significant traction in the B2B e-pay- ments because sensitive account information is not ment market. Despite this, bank proprietary solutions exchanged directly, and transactions are easily traceable are well suited for large corporations and government and challenged when disputes arise. One significant disadvantage of enhanced p-cards is agencies that execute relatively low- to medium-value that interchange fees typically still apply. This means recurring payments within the U.S. (see Table 2). that suppliers may be averse to accepting the enhanced ENHANCED PURCHASING CARDS p-card for medium- to large-value (more than, say, Enhanced purchasing cards, or p-cards, (such as Mas- $1,000) transactions, as fees increase as the dollar value terCard’s e-P3) are e-payment solutions that offer man- of the transaction increases. Given these benefits and agement services for B2B purchasing, presentment, limitations, the enhanced p-card represents a good way and payment. This e-payment strategy is the result of for current users of p-cards and prospective e-payment-
orientated businesses to conduct low-value nonrecurring transactions, as in Table 2. OPEN NETWORK SYSTEMS Open network systems, like Visa’s “Visa Commerce” platform, are rules-based e-payment systems that utilize open, secure, global-settlement networks to process buyer-initiated payments. Open networks interface directly with front-end procurement and accountspayable systems to provide buyers and suppliers alike with a seamless, integrated corporate payment solution. Open networks also enable buyers to initiate and settle payments based on preestablished terms with suppliers. Unlike enhanced p-card and ACH-based platforms, open networks employ a flexible fee schedule, allowing for the minimization of fees for relatively high-dollaramount transactions. In addition, open-network solutions may be easier to integrate with legacy environments. For example, Visa Commerce was designed to integrate with existing procurement applications, regardless of their sophistication. This integration strategy means that financial institutions, buyers, and suppliers that want to use an open network can do so with minimal up-front investment. Finally, open networks typically offer global coverage, a major consideration for moderate-to-large-size firms. Open network payments appear to be best suited for relatively large-value, multiple-invoice directed payments, as they circumvent interchange fees and support robust transaction data. CONCLUSION The volume of e-payment activity has risen steadily since 1979 and shows no sign of slowing down [6]. Motivating this trend has been consumer willingness to submit payments electronically. Increasingly, businesses have sought to improve their understanding of the value of e-payment systems. Studies have begun to illustrate in greater detail the specific value afforded and risk incurred to businesses by e-payment systems [4]. Along these lines, newer e-payment technologies possess attributes (such as systems integration, remittance standards, security, and an uncertain value proposition) that promise to help overcome past obstacles. That will be done through technologies that can be implemented by a greater number of entities (lower up-front investment costs), incorporate improved data capabilities (permitting varying degrees of data remittance), and be built on existing networks (more certain return on investment). Financial institutions and businesses must therefore evaluate their e-payment product portfolios, coordinating and comparing them against organizational needs and goals. Financial institutions offering an appropriate
e-payment product mix can expect to enhance existing client relationships, attract new clients, increase revenue, and decrease costs and the risk of fraud. Businesses that identify and adopt effective e-payment strategies are more likely to realize streamlined business processes and significant bottom-line savings compared to their peer organizations that don’t. Those seeking to implement e-payment technologies must consider not only their emerging technology options but evolving payment needs as well. Although ACHbased systems, enhanced p-cards, and open networks have different characteristics, a business may implement a combination of technologies. However, the long-term goals of an organization, from both a business and process perspective, should be analyzed and agreed upon before a new payment regime is implemented. The future of B2B payments surely resides in an electronic format. Organizations that embrace the flexibility of open network e-payment systems will realize benefits beyond their peers that embrace traditional ACH- and enhanced p-card-based e-payment systems. c References 1. Chakravorti, S. and Davis, E. An electronic supply chain: Will payments follow? Chicago Fed Letter, Special Issue 206a (Sept. 2004); www.chicagofed.org/publications/fedletter/cflseptember2004_206a.pdf. 2. Cotteleer, C. Customer Value Proposition Analysis for Electronic Payment Networks. Tech. Report. Charter Consulting, Chicago (Mar. 2004). 3. Dove Consulting. 2005/2006 Study of Consumer Payment Preferences. Industry Report (Oct. 2005). 4. Edwards, J. The check is still in the mail. Line56 1, 3 (Oct. 2000). 5. eMarketer. Electronic Payments: From Online Bill Payments to Credit Cards—Statistics, Strategies, and Trends. Market Research Report (June 2003). 6. Gerdes, G. and Walton J. The use of checks and other non-cash payments in the U.S. Federal Reserve Bulletin 88, 8 (Aug. 2002), 360–374. 7. Gowrisankaran, G. and Stavins, J. Network externalities and technology adoption: Lessons from electronic payments. RAND Journal of Economics 35, 2 (Aug. 2004), 260–276. 8. Kuykendall, L. E-billing: Some B2B lessons from Deere Unit. The American Banker 169, 104 (June 2004), 16–17. 9. Osterland, A. Digital billing: Show me the savings. CFO Magazine (Apr. 1, 2002), 61–63; www.cfo.com/article.cfm/3004056/c_3046521?f=related. 10. Poje, R. Building on Success in Wholesale Lockbox and Saving the World. Industry Report, Mellon Financial Corp. (Dec. 2003); www.mellon.com/cashmanagement/bestpractices/buildingonsuccess.pdf. 11. Southhard, P. and Siau, K. A survey of online e-banking initiatives. Commun. ACM 47, 10 (Oct. 2004), 99–102. 12. Wade, B. Making electronic B-to-B payments user-friendly. The American Banker 169, 213 (Nov. 2004), 10–11.
Mark J. Cotteleer (
[email protected]) is an assistant professor at the Marquette University College of Business Administration, Milwaukee, WI. Christopher A. Cotteleer (christopher_cotteleer@ techsol.com) is a senior vice president of TSC, Chicago. Andrew Prochnow (
[email protected]) is an equity derivatives trader at Spot Trading, LLC, Chicago.
© 2007 ACM 0001-0782/07/0600 $5.00
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June 2007/Vol. 50, No. 6 COMMUNICATIONS OF THE ACM
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bilities into one comprehensive service. Buyers and suppliers send complete trade information Product Attributes (including contracts, pricing, X X 1. Offers direct savings over check processing? X orders, receipts, and invoices) to reconciliation and dispute management? Facilitates X X 2. X bank systems; the information is X X 3. Provides global coverage? then stored in a document available to both parties. These platX X 4. Improves control over payment timing and cash flow? X forms seek to provide X X 5. Increases visibility of cash requirements? X comprehensive electronic bill payX X 6. Reduces fraud and credit loss potential? ment and presentment from the X X 7. Possesses remittance data? X beginning to the end of the payX X 8. Offers low implementation costs? ment cycle. X X 9. Integrates data and payment information? X From the standpoint of value Offers a flexible fee schedule? X 10. attribute comparisons, ACHbased payment systems meet Table 1. E-payment collaboration between outside software vendors and many of the requirements identitechnologies and existing p-card issuers to provide businesses with cusfied by B2B transaction particiassociated product tomized end-to-end e-commerce. P-card solutions pants. The importance of these attributes. 2 (6/07) allowCotteleer buyers and table sellers to collaborate within a comattributes is the foundation of hismon environment, streamline payment processes, and torical ACH popularity in facilitating relatively small recurring financial transactions use p-cards for payment. Businesses transmit orders between businesses and consumers. One particularly electronically, view the status of orders and invoices troublesome issue is the relatively high implementation online, control the initiation of payments, and intecosts of ACH-based platforms, particularly for small- grate data into existing financial systems. Enhanced p-cards and medium-size busishare many of the positive nesses. This issue further E-Payment Open ACH-Based Enhanced characteristics of desirable complicates systems-inte- Technology Network Platform P-Card e-payment networks. gration problems. Another Typical Medium to Low to Low Value They are typically Websignificant issue plaguing Transaction High Value Medium Value Value based and relatively easy ACH-based solutions is Typical Recurring or to integrate with legacy that they rely on bilateral Transaction Recurring Non-Recurring Non-Recurring Frequency software and hardware closed networks. This Domestic Network environments. This ease means that businesses Global Network (limited global capabilities) Domestic Network Reach of integration greatly must share sensitive finanreduces the cost and comcial information, in turn Table 2. Optimal e-payment plexity of implementation. Another p-card benefit is increasing the risk of application. reduced potential for fraud and credit loss, due to fraud. Global coverage is Cotteleer table 2 (6/07) enhanced settlement processes. P-card transactions setanother concern with any form of ACH-based payment, as ACH systems are typ- tle through an online “credit gateway” associated with ically built for domestic use in the U.S. Due to the the p-card issuer that allows institutions to exchange foregoing, along with the lack of other desired charac- encrypted information for authorization purposes. teristics, as in Table 1, ACH-based e-payment systems These systems provide a secure environment for payhave not gained significant traction in the B2B e-pay- ments because sensitive account information is not ment market. Despite this, bank proprietary solutions exchanged directly, and transactions are easily traceable are well suited for large corporations and government and challenged when disputes arise. One significant disadvantage of enhanced p-cards is agencies that execute relatively low- to medium-value that interchange fees typically still apply. This means recurring payments within the U.S. (see Table 2). that suppliers may be averse to accepting the enhanced ENHANCED PURCHASING CARDS p-card for medium- to large-value (more than, say, Enhanced purchasing cards, or p-cards, (such as Mas- $1,000) transactions, as fees increase as the dollar value terCard’s e-P3) are e-payment solutions that offer man- of the transaction increases. Given these benefits and agement services for B2B purchasing, presentment, limitations, the enhanced p-card represents a good way and payment. This e-payment strategy is the result of for current users of p-cards and prospective e-payment-
orientated businesses to conduct low-value nonrecurring transactions, as in Table 2. OPEN NETWORK SYSTEMS Open network systems, like Visa’s “Visa Commerce” platform, are rules-based e-payment systems that utilize open, secure, global-settlement networks to process buyer-initiated payments. Open networks interface directly with front-end procurement and accountspayable systems to provide buyers and suppliers alike with a seamless, integrated corporate payment solution. Open networks also enable buyers to initiate and settle payments based on preestablished terms with suppliers. Unlike enhanced p-card and ACH-based platforms, open networks employ a flexible fee schedule, allowing for the minimization of fees for relatively high-dollaramount transactions. In addition, open-network solutions may be easier to integrate with legacy environments. For example, Visa Commerce was designed to integrate with existing procurement applications, regardless of their sophistication. This integration strategy means that financial institutions, buyers, and suppliers that want to use an open network can do so with minimal up-front investment. Finally, open networks typically offer global coverage, a major consideration for moderate-to-large-size firms. Open network payments appear to be best suited for relatively large-value, multiple-invoice directed payments, as they circumvent interchange fees and support robust transaction data. CONCLUSION The volume of e-payment activity has risen steadily since 1979 and shows no sign of slowing down [6]. Motivating this trend has been consumer willingness to submit payments electronically. Increasingly, businesses have sought to improve their understanding of the value of e-payment systems. Studies have begun to illustrate in greater detail the specific value afforded and risk incurred to businesses by e-payment systems [4]. Along these lines, newer e-payment technologies possess attributes (such as systems integration, remittance standards, security, and an uncertain value proposition) that promise to help overcome past obstacles. That will be done through technologies that can be implemented by a greater number of entities (lower up-front investment costs), incorporate improved data capabilities (permitting varying degrees of data remittance), and be built on existing networks (more certain return on investment). Financial institutions and businesses must therefore evaluate their e-payment product portfolios, coordinating and comparing them against organizational needs and goals. Financial institutions offering an appropriate
e-payment product mix can expect to enhance existing client relationships, attract new clients, increase revenue, and decrease costs and the risk of fraud. Businesses that identify and adopt effective e-payment strategies are more likely to realize streamlined business processes and significant bottom-line savings compared to their peer organizations that don’t. Those seeking to implement e-payment technologies must consider not only their emerging technology options but evolving payment needs as well. Although ACHbased systems, enhanced p-cards, and open networks have different characteristics, a business may implement a combination of technologies. However, the long-term goals of an organization, from both a business and process perspective, should be analyzed and agreed upon before a new payment regime is implemented. The future of B2B payments surely resides in an electronic format. Organizations that embrace the flexibility of open network e-payment systems will realize benefits beyond their peers that embrace traditional ACH- and enhanced p-card-based e-payment systems. c References 1. Chakravorti, S. and Davis, E. An electronic supply chain: Will payments follow? Chicago Fed Letter, Special Issue 206a (Sept. 2004); www.chicagofed.org/publications/fedletter/cflseptember2004_206a.pdf. 2. Cotteleer, C. Customer Value Proposition Analysis for Electronic Payment Networks. Tech. Report. Charter Consulting, Chicago (Mar. 2004). 3. Dove Consulting. 2005/2006 Study of Consumer Payment Preferences. Industry Report (Oct. 2005). 4. Edwards, J. The check is still in the mail. Line56 1, 3 (Oct. 2000). 5. eMarketer. Electronic Payments: From Online Bill Payments to Credit Cards—Statistics, Strategies, and Trends. Market Research Report (June 2003). 6. Gerdes, G. and Walton J. The use of checks and other non-cash payments in the U.S. Federal Reserve Bulletin 88, 8 (Aug. 2002), 360–374. 7. Gowrisankaran, G. and Stavins, J. Network externalities and technology adoption: Lessons from electronic payments. RAND Journal of Economics 35, 2 (Aug. 2004), 260–276. 8. Kuykendall, L. E-billing: Some B2B lessons from Deere Unit. The American Banker 169, 104 (June 2004), 16–17. 9. Osterland, A. Digital billing: Show me the savings. CFO Magazine (Apr. 1, 2002), 61–63; www.cfo.com/article.cfm/3004056/c_3046521?f=related. 10. Poje, R. Building on Success in Wholesale Lockbox and Saving the World. Industry Report, Mellon Financial Corp. (Dec. 2003); www.mellon.com/cashmanagement/bestpractices/buildingonsuccess.pdf. 11. Southhard, P. and Siau, K. A survey of online e-banking initiatives. Commun. ACM 47, 10 (Oct. 2004), 99–102. 12. Wade, B. Making electronic B-to-B payments user-friendly. The American Banker 169, 213 (Nov. 2004), 10–11.
Mark J. Cotteleer (
[email protected]) is an assistant professor at the Marquette University College of Business Administration, Milwaukee, WI. Christopher A. Cotteleer (christopher_cotteleer@ techsol.com) is a senior vice president of TSC, Chicago. Andrew Prochnow (
[email protected]) is an equity derivatives trader at Spot Trading, LLC, Chicago.
© 2007 ACM 0001-0782/07/0600 $5.00
COMMUNICATIONS OF THE ACM June 2007/Vol. 50, No. 6
61
