B2B payments are not a new opportunity. The payments industry is littered with ambitious business payment solutions that have faltered. Past failures are largely due to an exaggerated focus on buyers (at the expense of suppliers), grandiose network affect expectations, and an incomplete understanding of the complex financial supply chain.

The broader payments industry has an on-again, off-again infatuation with B2B payments but they are currently in vogue. Recent announcements (PayPal’s various B2B APIs, Western Union’s acquisition of Travelex Global Business Payments, Intuit’s PaymentNetwork) and renewed B2B focus among industry players such as NACHA have fueled interest – and investment – in business payment solutions. I’ve been spending a lot of my time explaining what makes B2B payments so special and thought I’d share a few highlights.

Share your B2B payment perspectives –  We’re looking at both big enterprise and small company angles, and at both users (companies) and providers (processors, networks, banks, service providers) as we refine our perspective on the Future of B2B payments. If you have  evidence that the ePayment conversion rate is increasing – that we’ve somehow reached (or are reaching) a “tipping point” in B2B payments – we want to hear it. Learn more here.

When it comes to payments, transactions between businesses are very different than transactions between businesses and consumers. Here I’ve summarized some of the primary differences:

(You can download the image of this cheat sheet graphic here.)

CONSUMERS

• Billed? Consumers may or may not receive a bill from the seller
• Timing? Consumers typically pay at the time services are delivered or goods are purchased
• Pay one or many? Consumers typically pay for one bill at a time
• Pay in full? Consumers usually pay their bill in full
• Remittance? Consumers only provide an explanation of what they are paying for when they write a check to pay recurring bills (e.g. utilities) by mail; typically they tear off a coupon stub from the bottom of their statement and mail it with their check payment.
• Control? Consumers do not have control over payment timing; or rather, they can pay late but there may be consequences!
• Who pays to pay? The seller/merchant bears the cost of the payment, whether the payment is a check processed via a lockbox, a card payment at the point of sale, or cash.
• Electronic or paper? Electronic payment adoption is far greater for consumers, surpassing checks for bill pay back in 2007 and widening the gap each year. At the point of sale debit and credit have become dominant, although cash also remains popular.
• Payments ecosystem participants? Consumer payments are enabled by a wide array of bill presentment and payment solutions, POS merchant services, independent sales operators (ISOs) selling merchant accounts on behalf of banks, and gateway and shopping cart providers that serve the eCommerce market.

BUSINESSES

• Billed? Businesses always receive invoices from suppliers – not “bills” – and often the individual responsible for approving the expense is not the same person that initiates payment. This necessitates a workflow process to ensure invoices are routed to the appropriate approver. It takes weeks for the average company to review and approve vendor bills for payment. Yet, discounts are often available for paying within ten days (see “Timing” below).
• Timing? Suppliers typically grant their customers credit (assuming they believe they are credit worthy).  Payment terms range from 30 to 120 days; although discounts are often available when payment is received within 10 days.
• Pay one or many? Business buyers often pay multiple invoices at a time – as few as half a dozen up to many thousands (think of a consumer packaged goods company selling to Wal-Mart, or AT&T providing phone service to thousands of employees of an energy company).
• Pay in full? Buyers do not necessarily pay the amount of the invoice. They deduct from the invoice amount when the quantity received isn’t the quantity ordered, when goods are damaged during shipment, or when they believe that the price should be different. And occasionally they short pay just because they can due to the relative power of big buyers vs. little suppliers.
• Remittance? Buyers provide an explanation of “what’s this payment for” along with their check payment to aid seller in applying funds against open invoices in accounts receivable (AR). The process of applying payment – cash application – can be tedious and painstaking.  It’s very hard to associate electronic payments (ACH, wire) with unpaid customer invoices because the remittance data doesn’t flow through the payment networks reliably.
• Control? Buyers – particular large ones – exert control over payment timing and method. In recent years accounts payable (AP) departments have become advocates of purchasing cards because they streamline processes and pay an attractive (and addictive) rebate.
• Who pays to pay? The buyer usually bears the cost of the payment – typically costs associated with check processing. Although when payment is affected by a corporate or small business credit card the supplier absorbs the payment cost. This is one reason why many suppliers resist accepting card payment from their large buyers.
• Electronic or paper? The majority of business payments are still made via paper check. Checks will remain the status quo for the time being (refer to this Payments Views post to understand why).
• Payments ecosystem participants? The B2B “financial supply chain” ecosystem is vast – everyone from ERP vendors, commercial banks, billing and collections solution providers, business process outsourcing firms – participate in business payments. Individual industries often have bespoke solution providers, too. Plus there are a wide range of interrelated business processes (pricing and promotions, CRM, ordering, inventory management, etc.) that each have specific providers.

Solution providers that have deep experience in consumer payments often realize too late just how complicated the business payment landscape can be. Meanwhile, businesses are hungry for improved processes and the means to unlock key performance data (by customer, segment, product) that is often tied up in accounting systems inhibiting accurate reporting and forecasting.

If you are working on B2B payment innovations, or contemplating entering this complex but very large market, feel free to reach out to discuss business payments.

Glenbrook Partners Erin McCune and Carol Coye Benson are on a mission to discover if the long-awaited  “tipping point” in B2B payments, signaling a world in which electronic payments are the norm, has finally arrived.  In pursuit of this, we’ll be interviewing solution providers over the coming months – let us know if you’d like to talk to us.  Interested in the B2B payments problem? Read why we think the tipping point may be now, and see our target list of company interview targets.  And look at  “The Problem with B2B” to learn our thoughts on the myths – and realities – of why progress has been slow.

This week I’ve been in Amsterdam for Sibos – the annual international banking conference sponsored by SWIFT. (For those of you who aren’t familiar with SWIFT it is a consortium of worldwide banks that runs a global secure network connecting banks in over 200 countries. Interbank messages to support payments and brokerage trades all travel via SWIFT.) This was my first Sibos and I’m impressed. There were over 9000 attendees from 150 countries, 170 sessions and 175 speakers, including yours truly. The exhibit hall was filled with the most extravagant booths I’ve ever seen – more over-the-top than BAI during the late 90s. It was all very well organized although I can’t believe they didn’t have wifi widely available (it made the Twitter coverage somewhat spotty, but we did our best).

It will take me a few days to digest and synthesize Sibos 2010 but here are some of the key themes and links to some must-see videos:

Cautiously Optimistic

The mood was generally positive. From what I gather the last two conferences were dreadfully gloomy: ’08 was right in the midst of the crisis with executives arriving only to turn around and board return flights to head straight back to the office, and last year in Hong Kong was subdued as a result of belt-tightening, with everyone unsure whether they’d still have a job, plus a Typhoon on the first day! So this year, with things feeling relatively normal the mood was one of relief, with a tinge of optimism.

Don’t get me wrong – there is acute uncertainty in the banking industry. But I was struck by how self-aware and open delegates and speakers were. Regulation, business models, trust in banks and bankers, profitability and even the relevance of the industry were openly questioned and debated.

Globalization (and Localization)

This event underscores the fact that payments are inherently local. Despite the reach of multinational banks, financial technology providers, and collaborative payment networks, most countries rely on domestic payment schemes for the vast majority of transactions. SWIFT was formed as a means to increase the efficiency of the correspondent banking relationships that all banks rely on to support their customers cross-border needs. Yes, SEPA will change things (at least in Europe) but it’s going to take awhile. The most often repeated (and often mispronounced!) word of the week was “interoperability” — recognizing that if we can’t all use the exact same standards, we can at least find ways to translate from one format to another in order to pass transactions and conduct business globally.

As large US and European banks seek continued growth, despite sluggish recovery at home, they turn to emerging markets such as India and China. (The Chinese bank pavilions on the exhibit floor were the largest of all as the Chinese banks demonstrated their importance.) There was a promising panel discussion on banking in India and China with really impressive participants, but sadly three quarters of the session was taken up by prepared introductory remarks and what little debate there was sounded very scripted. I was disappointed. An earlier session, featuring Om Prakash Bhatt, Chairman of the State Bank of india, highlighted the contrast between the developed and developing world, as he described that the biggest challenge facing Indian banks is how to manage rampant growth.

The recently published World Payments Report 2010 demonstrates the resilience of the payments industry, despite the economic crisis, but also underscores regional differences in payment preferences. Growth is strongest in emerging markets — such as China (up 29%), South Africa (up 25%) and Russia (up 66%) — although admittedly from a low base. I wasn’t surprised to hear Bertrand Lavayssiere of Capgemini observe that one of the primary drivers of increased adoption of electronic payment is eCommerce. At Glenbrook we’ve had a deluge of requests from clients wanting to understand payments in emerging markets. Often we advise those clients that they will have to rely on non-bank partners to deliver domestic payment assistance, particularly when it comes to e-commerce in markets where cards are much less popular and people rely on eWallets, local debit card schemes, and even cash.

Regulation

The uncertainty regarding regulation was one of the most dominant themes at the conference. With Sibos in Amsterdam this year SEPA was on the forefront, although regulatory activity in the UK and the US was on the radar, too. The Europeans are acutely sensitive to local interpretations of EU-wide regulation. There was considerable talk of “geographic arbitrage” opportunities opening up as a result. As an American it was a eye-opening to witness the fissures in the supposedly united Europe. Recent economic woes have only underscored the tensions. SEPA – the ongoing effort to consolidate the domestic payment schemes in Europe – is moving ahead very, very slowly. The EU acknowledges that widespread adoption will require a mandated deadline; an open hearing is scheduled for mid-November. Meanwhile, the industry is waiting for pending announcement of mandatory SEPA deadlines and in the midst of the uncertainty not much is happening.

Innovation

Nearly every session mentioned innovation, and the need for banks to up the ante in order to remain relevant and continue to meet shareholder expectations for growth and profit. Throughout the week, it was clear that the banks all seem to know that they need to add value to payments in order to ensure margins, yet they can’t seem to execute. It’s a classic case of analysis paralysis.

Meanwhile, in sharp contrast to all the talk about innovation in the broader conference, there is a mini-conference within Sibos devoted to innovation called Innotribe. I applaud the efforts of Peter Vander Auwera, the leader of SWIFT’s Innotribe effort, who had the vision and put in significant effort to make this second annual Innotribe a reality. He brought together an impressive International group of technology thought leaders and VCs to stir things up. (It was amusing and actually rather nice to see the California/Silicon Valley Sibos attendees in their suits – we clean up well!) SWIFT also enlisted some of the most talented facilitators I’ve ever witnessed. It was really impressive.

Here are a few pictures to give you a sense of the energy and content of the Innotribe sessions:

Cloud computing concepts from Innotribe

Smart Data brainstorming at Innotribe

It was sad, however, when one of the SWIFT employees admitted that they’ve been talking about innovation for three years and haven’t started yet. That’s tough.

With coaching and support six teams worked in 2 hour sessions throughout the conference to develop innovative banking business concepts. They presented their efforts on the last day of the conference and were judged by a panel of bankers and SWIFT board members as well as a team of VCs. The winning concept received 50,000 Euro in start-up funding from SWIFT. I will do a follow-up post featuring more about Innotribe, the contest, and the winning idea.

Mobile

There was a star-studded panel to discuss mobile payments, featuring carriers, handset manufacturers, money transfer companies, and banks. Much of the debate centered on whether or not banks have a role to play in mobile payments – the consensus seems to be yes, but that the role will vary from market to market, depending on the varying degrees of cooperation and relative assets of carriers, banks, and regulators in each country.

Friend-of-Glenbrook Carol Realini, CEO of Obopay observed “If you want to know the potential of mobile go to Kenya. Kenya is the silicon valley of Africa.” Today there are 14 million mobile banking users in Kenya. The astounding success of m-Pesa is widely discussed – at Sibos and at other industry gatherings – but it is hard to emulate in other markets. There was only one (government controlled) carrier, so interoperability was not an issue.

At the conclusion of the debate, the moderator asked the audience whether banks would participate or lead in mobile payments. Nearly the whole room nodded in agreement that banks would participate, but only one person raised their hand to indicate that they believed banks would take a leading role in mobile payment.

Every bank technology firm seemed to have a brand new mobile app and there were even some slick iPad applications on display. At this point, I’d say that consumer mobile banking and payments are table stakes — every self-respecting bank should have a solution available and to be perfectly honest, the mobile banking discussions left me rather bored. However, I was really excited to see some business-oriented eInvoicing and payment mobile solutions. I’ll feature solutions I saw from LUUP, Fundtech, and Edge in more detail next week — the vendors are going to get me some screen prints to share. In the meantime, here’s the team at Fundtech showing off their iPad app:

Rhys Jones & Joe Mazzetti of Fundtech

Cloud Computing

It’s coming – perhaps not as soon as the financial technology vendors think – and is definitely relevant. The challenge for the banks is to evaluate their infrastructure and determine which capabilities are core and which are not and therefore candidates for SaaS. There was an intense debate about private vs public clouds – and whether a private cloud is an oxymoron. FinExtra has a nice video interview with Sean Kelley, Global CIO for Deutsche Asset Management talking about cloud computing and the bank’s use of Amazon and Google, among others.

The Future of Business Payments

On Monday I spoke to a respectably-sized crowd on The Future of Business Payments — the team at SWIFT asked me to be provocative and I did my best. It was a 90 min session and I spent half describing what makes B2B payments unique vs consumer transactions and outlining the challenges that prevent widespread adoption of e-Invoicing and electronic payments for businesses. And then I profiled twelve companies that are operating at the fringes of the B2B payment ecosystem and aren’t on the radar of banks, but should be. Reach out if you want to learn more.

As I listened to the speakers this week debate the relevance of banks and how they need to do a better job of wrapping value around increasingly commoditized payment services, it occurred to me that one of the most effective means to do so is to better support businesses by reliably delivering and synthesizing the data that accompanies payments between buyers and sellers. As large corporate increasingly connect directly to SWIFT, rather than rely on portals provided by banks to obtain payment data, there is an opportunity to focus on SMEs, a category that has been woefully neglected by banks and other business payment providers. As mature economies struggle to emerge from the economic downturn they increasingly look to smaller businesses to lead job creation. Banks can help by providing enhanced small business offerings, liquidly through early payment discount schemes, and perhaps the means to connect with some of the banks large enterprise customers that might be buyers.

[Meanwhile, in San Francisco at the PayPal Xinnovate conference for developers PayPal announced new business payment capabilities (and B2B pricing) -- the irony of the bankers getting anxious about innovation in Amsterdam while simultaneously the PayPal crowd was gathering in SF was not lost on me.]

Best Quotes

• Charles Goodhart, London School of Economics: it’s a difficult time to be a banker, whether you were doing gods work, or just behaving naturally.
• Paul Saffo, in response to one of the Innotribe pitches: “I’m a consumer, I don’t care about banks”
• Judd Holroyde, SVP, Head of Global Product Management & Delivery, Wells Fargo: “Innovation is difficult, but necessary to ensure margins in payments”
• Michael Steinbach, Chairman, Equens: “Banks tend to discuss and discuss and discuss whereas others [Google, PayPal, Apple] tend to act”
• David Sear, Managing Director, Travelex Global Business Payments: ”Banks need to concentrate on the consumer otherwise Apple eats your lunch”
• Lázaro Campos, CEO of SWIFT: “Asia Pacific is growing much faster than ever before, much of that intranet-Asia traffic.”
• Stephen Hester, RBS “We are all in this together. That requires humility and change”
• Carol Realini, CEO Obopay: “The mobile opportunity breaks down as follows: retail $10 Trillion, replacing checks & cash $5 Trillion, eCommerce and mCommerce: $500 Billion, cross-border P2P $400 Billion”
• John Hagel, referring to the Red Queen in Alice in Wonderland, who runs faster and faster to stay in the same place, Hagel commented that . “The financial industry is not even doing that well, it’s running faster and faster, but still sliding further and further behind.”
• Hans Van der Noordaa, CEO Banking Benelux, ING “The biggest mistake banks could make is to think we’ve fixed the trust issue”

Cool Stuff

The Finextra team recorded 33 videos throughout the conference. You can watch them here. I’m indebted to Liz Lumley and Finextra who graciously let me hang out in their booth and recharge my batteries (both literally and figuratively) throughout the conference. Liz also moderated a fantastic panel on social media usage by commercial bankers (as opposed to retail banking applications of social media). This session was simulcast on the web, so you can watch the whole thing here or read a brief recap here.

Official SWIFT conference converge (video, articles, photos) here. I recommend watching at least the Innovation Keynote and the Closing Plenary.

And here are some must-watch videos that made their debut in the Innotribe innovation sessions:

The Financial Reformation

The Future of Money

And now I’m off to explore Amsterdam by bicycle!

Companies of all sizes have adopted accounts payable (AP) automation solutions, yet recent IAPP-TAWPI and Glenbrook research reveals that e-invoicing benefits remain elusive.

Semantics
Electronic invoicing, or e-invoicing, means different things to different people, and much depends on the context. There are solutions that cater to accounts receivable, focused on enabling efficient creation and delivery of electronic invoices. These tools enable suppliers to reduce their billing costs by eliminating print and postage while simultaneously meeting the demand of buyers for electronic invoices, through a variety of delivery mechanisms including EDI, PDF via email, PDF via web portal, etc..

However, and somewhat counter-intuitively, most of the industry does not mean electronic invoice creation when they use the terms e-invoicing or EIPP. What they mean is electronic invoice receipt – solutions for buyers, not suppliers.  These accounts payable solutions are designed to image incoming paper invoices, extract invoice data through optical character recognition, automatically match invoices to purchase orders, provide efficient workflows to route invoices to employees for approval, and, finally, to schedule payments.

e-Invoicing Allure
Sophisticated buyers – large and small companies alike – recognize the benefits of streamlining accounts payable (AP) processes. Eliminating paper invoice processing can speed up approval, prevent manual key entry errors, facilitate accurate accounting entries, and often has the added benefit of ensuring that the same process is adhered to from region to region and department to department. Electronic payment further increases efficiency and decreases payment costs.

Yet for many companies, even early adopters, the e-invoicing benefits realized thus far have been modest. The IAPP-TAWPI survey results presented in Glenbrook’s new research report indicate that invoicing and business payments remain stubbornly paper-centric. There are a number of contributing factors, including limited budget for back office automation, IT complexity, and last but not least, supplier reluctance to submit invoices electronically.

Paper Still Dominates
Despite broad adoption of e-invoicing solutions, paper invoices dominate most AP departments. Only 26% of the companies surveyed fully automated their invoice receipt and approval process, with data captured and loaded into the system of record without manual intervention. Over half (58%) of the companies surveyed continue to manually capture invoice data and have a manual review process. The vast majority of business (of all sizes) report that less than 20% of incoming invoices are eInvoices.

It takes years for an e-invoicing program to gain traction. The majority of survey respondents are relatively new to e-invoicing – more than half started programs in the past twelve months. Of those respondents that started an e-invoicing program in the last year, only 2% report that more than 40% of the invoices received are received electronically. The percentage climbs over time, with 17% of respondents that started a program 3-5 years ago receiving more than 40% electronically, and 26% of those with 6-9 years of experience receiving more than 40% of invoices electronically. Very few of the survey respondents report e-invoicing rates above 60%.

Elusive Benefits
Most companies report that they experience faster transactions and improved processes as a result of eInvoicing – although results are directly proportional to the number of eInvoices received. And manual processing still remains very common, even among those companies that have mature e-invoicing programs. The next most common benefits associated with eInvoicing are greater accuracy (by avoiding manual entry) and improved auditing and compliance.

A striking number of respondents indicated that they had not received any cash flow management benefit at all as a result of e-invoicing. Given that the ability to capture early pay discounts if often a big selling point of AP automation, it was also surprising how few companies reported that they were able to capture more discounts as a result of their e-invoicing program.

Additional Research Topics
The research brief explores e-invoicing motivations and benefits by size of company, industry, and duration of e-invoicing programs. E-invoicing obstacles and methods to increase the level of e-invoicing participation are also covered. The report concludes with Glenbrook’s perspective on e-invoicing and implications for both technology providers and their accounts payable customers.

Purchase the Report

E-Invoicing: The Buyer AP Perspective
A research brief from Glenbrook Partners, in conjunction with IAPP-TAWPI, sponsored by Basware.
$349

Table of Contents

Executive Summary
Introduction
Methodology
Survey Respondents
E-Invoicing Semantics
E-Invoicing
Accounts Payable, a Buyer’s Perspective
The AP Department Today
Multiple Flavors of E-Invoicing
The State of E-Invoicing: As of 2010
Invoice Automation Varies Considerably
Maturity of E-Invoicing Programs
Importance of E-Invoicing Programs
Rationale for E-Invoicing
E-Invoicing Benefits
AP Eager to Increase Level of E-Invoicing
Unclear How to Increase E-Invoicing
Collaborating with Suppliers
Looking Ahead
Implications
Key Considerations for Buyers/Accounts Payable
Key Considerations for AP Solution Providers
Glenbrook Perspective
Upcoming Research from TAWPI & Glenbrook Partners
About IAPP-TAWPI
About Basware
About Glenbrook
About the Authors

List of Figures

Figure 1: Businesses Face a Long Tail of Suppliers
Figure 2: AP Department Size
Figure 3: Typical AP Process Flow
Figure 4: AP Automation Solutions
Figure 5: E-Invoicing Motivations
Figure 6: Level of Automation
Figure 7: Invoices Processed Annually, by Size of Company
Figure 8: Percentage of Invoices Received that are E-Invoices
Figure 9: E-Invoice Receipt Method, by Size of Company
Figure 10: Maturity of E-Invoicing Programs
Figure 11: Importance of E-Invoicing by Size of Company
Figure 12: Rationale for E-Invoicing
Figure 13: E-Invoicing Benefits Achieved
Figure 14: Benefits by Length of E-Invoicing Program
Figure 15: Benefits by Industry
Figure 16: Plans to Increase E-Invoice Volume
Figure 17: Most Effective Methods to Increase E-Invoicing
Figure 18: Obstacles
Figure 19: Supplier Reaction
Figure 20: AP Plans for Technology Projects

Upcoming Research
Accounts payable is leading the way, as it is often far easier to automate than accounts receivable. We’ll address accounts receivable e-invoicing opportunities  – the supplier perspective – in a subsequent report, to be published in early 2011. If you’d like to be alerted when it is available, send an email to me.

Are you planning to attend NACHA Payments 2010 in Seattle April 25-28? If so, let us know. Glenbrook will be there. Erin McCune and Russ Jones are speaking on the emerging world of social payments and the B2B cash payment challenges. Carol Coye Benson and Jay DeWitt will be meeting with vendors and industry leaders. We’d enjoy talking to you, too, so please reach out.

We’ll be presenting the following:

Web 2.0 & The Emergence of Social Payments
Monday, April 26th
8:00 a.m. – 9:00 a.m.

Social e-commerce and virtual currencies are the new frontier of payments. Person-to-person transfers, charity donations, and micropayments for virtual goods are exploding within social networks. In this session Glenbrook provides an overview of social networks: their reach, who participates, how consumers and businesses interact online, and the increasingly influential role the social web plays in guiding purchase decisions, both online and off. Speakers demonstrate how payments within Facebook, MySpace, and Twitter work today and outline probable future social payment scenarios. Finally, speakers examine the social payment business model: who’s profiting from this emerging payment domain? Presenters explain social shopping, affiliate networks, and the importance of developer networks, APIs and widgets, and transactional advertising and examine how established leaders in eCommerce like PayPal, Amazon, Apple, and Google are enabling social payments. Speakers identify the niche social and micropayment players, including PlaySpan, Jambool, Boku, Zong, Zoura and more.

Russ Jones, Partner, Glenbrook Partners
Erin McCune, Partner, Glenbrook Partners

How Coca-Cola Enterprises is Quenching the Thirst for Alternate B2B Payment Solutions
Monday, April 26th
4:30 p.m. – 5:30 p.m.

Enter the arcane world of B2B cash payments. Most direct-store-delivery (DSD) companies collect COD payment from a subset of their customers, typically small retailers and independent grocers. Literally billions of dollars in currency, coins, and checks are collected by DSD route drivers nationwide and have to be counted, reconciled, locally deposited, and centrally applied to open A/R balances. Coca-Cola Enterprises is in the midst of piloting “cashless delivery” alternatives for its 250,000 retail customer locations that currently pay COD. Learn from Glenbrook and Coca-Cola Enterprises how novel applications of consumer bill payment solutions and receivables products have the potential to completely eliminate payment at the time of delivery, increasing route efficiency, improving employee safety, accelerating cash availability, and reducing cash handling costs.

Erin McCune, Partner, Glenbrook Partners
Sharon Petrey, CTP, Corporate Director Treasury, Coca-Cola Enterprises, Inc.

Glenbrook Partner’s Jacqueline Chilton is in Miami this week for the Airline and Travel Payments Summit. She is moderating a panel on localisation at 2pm on Thursday:

Lessons learned: Localised payments are a key part of improving your bottom line in a global ecommerce world. What are the challenges and issues, from implementation to selection – panellist will debate their experiences in delivering for their customers and the bottom line.

- Moderator: Jacqueline Chilton, Partner, Glenbrook
- Katherine Abbott, Vice President & Treasurer, Orbitz Worldwide, Inc.
- Paul McTaggart, Senior Program Manager Global Payments & Risk, Expedia, Inc.
- Klas Bäck, President, Netgiro North America
- James Filsinger, CEO, Moneydirect
- Salomon Quijada, Regional Sales Manager, COPA

If you are at the conference and want to connect, reach out to Jacqueline directly. The rest of us will be enjoying her conference dispatches here on Payments Views.

My colleague Carol Coye Benson and I are attending the Association of Financial Professionals Annual Conference in San Francisco October 4-7. If you are planning to attend and interested in getting together to talk B2B payments (or any other payment topic) let us know!

If you aren’t familiar with the Association of Financial Professionals, they are a global resource and advocate for the finance profession, providing certification, products, education and training for treasury and corporate finance. This year’s conference includes sessions devoted to how corporate finance professionals can:

• Finance the Enterprise
• Invest Cash Effectively
• Better Manage Risks
• Improve Processes

Visit the conference website for more details and registration.

The WSJ reports today that as economic uncertainty persists, large companies are more successful than smaller companies in retaining their cash. They do so by paying their suppliers later – delaying payment out to 120 days or more in some cases – while simultaneously tightening the credit terms they offer their own customers, forcing them to pay sooner. This “corporate Darwinism” relies on the buying power of larger companies and their relative influence over smaller firms.

In these times of limited lending and tightened credit availability on cards and lines of credit, smaller companies are significantly disadvantaged. What makes matters worse, the research shows, is that smaller companies historically pay their suppliers sooner and collect from their customers relatively later than large companies. The credit crisis has exacerbated this trend even further, as this graph from the WSJ illustrates:

(Graphic: WSJ)

What to do?

Electronic payment can ease the pain for companies caught by this squeeze. Accepting credit card payments accelerates funds availability (assuming that the transaction occurs at the time the invoice was originally due, not at 120 days!) and so can ACH direct deposit (at least eliminating the mail time and deposit processing delay, which can be considerable when you consider that smaller companies are typically not lockbox customers). Alternatively, suppliers can offer their customers an early pay discount, typically “2/10 Net 60,” where the paying company can deduct 2% from the invoice total if they pay within 10 days, rather than waiting the 60 days until the payment is due. Large buyers with efficient A/P processes have been known to take the 2% discount on as many invoices as possible, regardless of the supplier’s intention. Some other suppliers are taking matters in their own hands and selling their blue-chip receivables to the highest bidder on The Receivables Exchange. Others are utilizing old-fashioned factoring arrangements to accelerate incoming cash.

Attention payment solution providers: What are you doing to help your mid-size and small customers manage their receivables and payables like the savvy big guys? Don’t wait and watch as your customer base succumbs to evolutionary pressure!

Editor’s Note: This is one of a pair of ACH commentaries that we are publishing today on Payments Views. Be sure to also read Carol Coye Benson’s post “ACH:  Big Questions for the Biggest Network” based on her recent interview with NACHA CEO Jan Estep.

I recently presented to TAWPI’s Payments Capture and Clearing (PCC) Council and had 15 min to address The Future of ACH. Needless to say, I was only able to cover a couple key themes and answer a few questions. So here is an expanded version of my thoughts on this topic:

The enduring allure of ACH is its ubiquity and low cost. All banks are connected and transactions are relatively inexpensive for banks and businesses to process. In addition, the ACH network has been a friend and enabler of alterative payments, inadvertently (at first) or intentionally fostering innovation (later).

Today, after nearly a decade of steady growth, the momentum is decreasing. The ACH network is at a crossroads and key stakeholders are vocally calling for change (e.g. the Federal Reserve’s announcement of same-day settlement) or pursuing alternate strategies (Wells Fargo and BofA’s partnership to form Pariter).

The ACH must proactively address four key trends in order to remain relevant and continue to grow:

1) Shifting volume and new growth drivers – Roughly half of ACH transactions are payments to/from consumers initiated by businesses. Many are direct deposit of payroll and others are for recurring bill payments. They’ve steadily increased in number over the years, but are not a significant growth area (see blue area at bottom of Figure 1 below). As the economy slowly recovers it is not expected to achieve the same growth rates we’ve enjoyed in the last few years, and ACH transaction volume growth has decelerated accordingly.

Transactions from one business to another (B2B) remain a minority and have grown only modestly over time (gray area in Figure 1). Yet there is pent up demand for useful business payment solutions that carry data as well as dollars; I believe this is a key opportunity for ACH (more on that in a moment…).

eChecks have been the primary growth engine for ACH in recent years (red area in Figure 1). Check conversion eChecks, most notably the hockey-stick adoption of ARC, drove new ACH transaction volume in the post Check 21 era. Today, however, native electronic eCheck transactions such as WEB, which is used for transactions initiated online – for example by PayPal or for bill payments over the internet – are growing more quickly than check conversion transaction types (see Figure 2). ARC will remain a key ACH transaction type, contributing sizable volume, but is no longer a significant driver of growth. The other eCheck ACH transactions, POP and BOC, are discrete solutions for converting checks at the point of sale, or a retailer’s back office, but are niche solutions and unlikely to drive growth the way ARC did.

Figure 1: NACHA Transaction Volume by Segment

Figure 2: eCheck Transaction Volume

2) ACH fosters payment innovation – Here at Glenbrook we follow, encourage, and are occasionally mystified, by payment innovation. So called ‘alternative payments’ are at the core of our practice. Many of the new payment schemes use the ACH as a platform for innovation (PayPal being the most well-known, but they are an incumbent now, not an upstart innovator). Everyday it seems that there are new solutions emerging in the ecommerce, point of  sale (POS), and mobile arenas that also rely on ACH.

ACH rules have been modified over time and new transaction types created in order to address the changing payments landscape. And in recent years, NACHA has not only encouraged innovation, but has participated as an innovator. The network has fostered its own payment mechanisms: EBIDS and Secure Vault Payments. By encouraging – or even leading – innovation the ACH network can retain a central role in defining the future of the payments industry.

3) Globalization increases demand for International transactions – Demand for cross border transactions, whether initiated by companies or consumers, is growing. Business of all sizes are now transacting globally, often within their region but also across regions. The Global recession has lessened demand, but this macroeconomic trend that will not go away. In the meantime, explosive growth for global remittance payments from foreign workers to their families at home, while abated by the softened economy, is still a huge market (estimated to be $456 billion by 2010). Nonbank money transfer solutions and private networks have long dominated the global remittance market. However, the payments industry is just now defining new solutions – many leveraging mobile. The US is a primary source of outbound global remittance payments and the ACH network could be a primary origination method for these transactions.

ACH, by its nature, is a domestic payment solution, but as of September 18, 2009 International transactions (to or from the US, via the ACH network) will have their own transaction code IAT. While this change was largely motivated by regulatory oversight it should lead to innovative new product.  Yet, true interoperability between the US ACH and other low value, high volume payment networks worldwide will take many years to come to fruitition. Efforts are underway, most notably InternationalPaymentsFramework.org, and adoption of the XML ISO 200022 standard would be a key step in the right direction. NACHA in conjunction with the Fed should continue efforts to explore global payment interoperability in order to address the payment needs of our increasingly Global economy.

4) Competing with card networks to electronify business transactions – Business to business (B2B) transactions remain stubbornly paper. Businesses continue to initiate nearly 76% of their transactions as paper checks. The ACH network supports detailed remittance data via CTX but only a small subset of business transactions carry the data. Instead, companies send payments via ACH and remittance data via email, fax, EDI, web portals, etc. Until the data and dollars arrive together, in a format that can be easily absorbed and interpreted by accounting packages and ERP systems, businesses will continue to rely on paper checks, sending remittance details in the same envelope, to be processed via lockbox or hand-keyed by receivables clerks.

Companies have indicated that they would gladly pay for a truly robust solution that addressed the A/R cash application headache (Source: NACHA Research). Over the last couple years NACHA has focused on exploring small business payment solutions, an effort that we at Glenbrook applaud, as each large business exchanges transactions with a long tail of suppliers. Supply chain solutions that are focused on large trading partners and their suppliers exist, and work well for tightly knit financial supply chains, but are not going to address the remaining 74% of transactions that are still made with checks.

[B2B payments are the focus of my consulting practice. For more on B2B Payment Myths and Realities, read this post by my colleague Carol Coye Benson and this recap of our recent B2B Payment Workshop in NYC.]

5) Same day ACH clearing In March the Federal Reserve announced that select ACH debit transactions will clear on a same day basis. The rationale provided by the Fed is that the change in clearing timing will make ACH more competitive – particularly with check image exchange transactions. An increasing amount of ACH transaction volume is exchanged outside the ACH network via bilateral arrangements between banks, enabling faster settlement and lower fees. The change is voluntary and goes into effect 2^nd Quarter 2010. It only impacts those transactions that are received by 2:00 pm. The Fed is one of two ACH switches (the other is operated by EPN).

The ACH community is divided as to whether same day clearing is beneficial. An alternate proposal enables receiving banks to retain float on pending transactions by memo posting ACH  received by  8:00 PM and clearing them the following day.

In my humble opinion, the same day payment settlement debate is a distraction.  It may make sense for a subset of transactions – expedited bill payments, urgent business payments, perhaps a same day clearing transaction specifically for mobile P2P transfers – but changes necessary to support ACH network wide same-day settlement would be costly for all parties and there is no clear benefit. (More about Same Day ACH in my colleague Carol Coye Benson’s post based on her interview with NACHA CEO Jan Estep).

The Future of ACH

The ACH community should be focused on leveraging its key assets – ubiquity and low cost – to provide true value-add services that will attract an ever increasing number of native electronic payments. International and B2B payments are vast opportunities that the ACH network can effectively address and charge a modest premium for. But concentrated effort is necessary. Otherwise alternate networks (e.g. Pariter) or alternate payment methods (Wires) or payment schemes (card networks) will address these needs sooner, and relegate the ACH network to being an underlying network for innovation taking place elsewhere.

In determining its next steps, the ACH network needs to balance the expectations and needs of its constituents (see Figure 3). By providing value-add services, reliably, for reasonable prices, with appropriate safeguards to protect consumers and businesses from fraud and bank and processers the ACH network can insure its future as a key enabler of electronic payments, domestically as well as to/from global counterparties.

Figure 3: ACH Network Participants have varying expectations

What are your thoughts on the future of the ACH network?
Let us know in the comments.

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