Payments Views from Glenbrook Partners » Commercial Payments

Glenbrook at NACHA Payments 2010 in Seattle, April 25-28

Erin McCune — Fri, 12 Mar 2010 16:29:51 +0000

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.

Are you at Airline and Travel Payments Summit ATPS2009 in Miami?

Erin McCune — Tue, 01 Dec 2009 15:52:32 +0000

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.

Are You Attending AFP in San Francisco Oct 4-7?

Erin McCune — Wed, 02 Sep 2009 01:44:11 +0000

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:

Visit the conference website for more details and registration.

As Big Companies Squeeze Small Suppliers eB2B Payments Can Help

Erin McCune — Tue, 01 Sep 2009 15:34:47 +0000

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!

The Future of ACH

Erin McCune — Mon, 13 Jul 2009 13:00:50 +0000

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.

A Look at the U.K.’s Faster Payments Service

Carol Coye Benson — Thu, 09 Jul 2009 19:39:58 +0000

Many of us in the United States who follow the continuing evolution of the ACH network have been interested in the United Kingdom’s “Faster Payments” initiative. FP just hit the one-year-since-launch milestone. I spoke with David McFarlane, Company Manager, CHAPS Clearing Company about FP. I was surprised by much of what he said: FP is not what you (or at least I) thought!

To start with, although it is conceptually correct to think of FP as an “ACH on steroids”, the U.K. Banks decided to put FP under the leadership of CHAPS Co, which runs CHAPS, the U.K.’s real time gross settlement network, rather than under Bacs, which runs Direct Debit and Bacs Direct Credit, the U.K’s ACH equivalents.

This would be like putting a new ACH-like payment service in the United States under the stewardship of the Fed (manager of Fedwire) or The Clearing House (manager of CHIPs), rather than NACHA, the manager of the ACH system. Whew! I don’t know enough about the politics of U.K. payments systems to make any other comment here than “interesting”!

About Faster Payments

So what is it? It is a real time, multilateral net settlement system. “Real time” means that each transaction is individually processed through the network – there are no batches. That makes it indeed like our Fedwire. Transactions can be processed any day, any time – it is a 24/7/365 network. Settlement, however, is not gross, but rather net. There are three settlements on every banking day.

FP supports only credit payments: meaning the person (or company) who has the money is “pushing” it to the person (or company) who is getting money. The primary use cases right now are consumer bill payment and smaller value B2B payments. Since launch, there is a cap of £10k per ad-hoc transaction, and £100k per standing order instruction transaction.

The network, like CHAPS and BACs, is interchange free: there is no compensation from bank to bank defined by the network. Bank pricing to their end customers (the consumer and the biller/merchant), of course, is up to the bank. Network pricing to the bank is designed to cover both processing and development costs (up to 2015), and makes it somewhat more expensive, today, than a BACs transaction.

Here’s an interesting side note related to bill payment. A whole layer of processing infrastructure that exists in the United States simply isn’t there in the U.K. I’m referring to the back-end bill payment capabilities provided by CheckFree, MasterCard RPPS, and others in the United States. These entities know how to get a payment to a biller. They are paid not by the biller but by the front-end entity (banks or third parties) who is capturing the bill payment order from the consumer. In the U.K., the billers simply put a bill pay code on each bill, and that is enough for the bank (or third party’s bank) to know how and where to make the payment.

Today, FP transaction volume is running at about 800,000 transactions per day. This compares to 100,000 transactions per day within two weeks of launch. When scaling the proposition around four or five years ago, the then-conceptual project set aspirational intentions of around 400 million transactions in the first year of operation with the capacity to increase to 700 million transactions per year, within a further five years. Or from around 1 million transactions a day to 2 million transactions a day. So the project is almost half way to that initial view, and the feeling is that it is a success.

Getting here required massive development efforts on the part of banks and the switch (which is run by VocaLink, the same entity that processes for Bacs and Link, the UK ATM network), and corresponding efforts in rules-setting, branding (more on that later) and risk management. Frankly, I was expecting to hear that the demand came from billers or merchants. But it sounds like the real driver was a regulatory push, responding to consumer advocacy organizations. The impetus was a Treasury-sponsored report in 2000, followed by a report in 2003 by the Office of Fair Trading (the competition authority) saying, essentially, that interbank clearing of electronic items, then averaging around 3 days, was not fast enough – and pointing fingers at banks as dragging their feet in making improvements.

The decision to make FP a separate payment service – with optional participation by banks (rather than enhancing the core BACs service) was a way of dealing with long-standing criticisms of U.K. payments systems as “moving at the pace of the slowest bank”. (Sound familiar?) Currently, 13 banks are participating in FP, including most of the big ones and a scattering of smaller ones. Some both send and receive; others receive only at this time. Over 90% of transaction accounts are now covered on a receive basis. (There are around 80 financial institutions operating at various levels on an indirect agency basis through the settlement banks).

Brand and Its Discontents

At Glenbrook, we’ve been thinking, talking and writing a lot lately about brand with a capital “B” (think “we take MasterCard” and brand with a small “b” ( think “pay by card”). So it was fascinating for me to see that FP may evolve, over time, to a capital B brand. CHAPs is encouraging banks to use the FP brand and logo, and one possibility under discussion is that billers also use it in communications with consumers. CHAPs is also working with banks to standardize messaging to consumers.

This may be a lesson that U.S. bankers can learn from. Someone needs to simplify the payments systems and their capabilities for consumers. Our banks have been so caught up in their competition with each other that they have resisted efforts to collaborate on new consumer payments brands. Many feel that the strength of the Visa brand (an example of a brand banks did collaborate on), for example, is actually bad, as it (from this point of view) detracts from the strength of the bank’s brand. So who is doing this (using brand to simplify access) in the United States? Well, for one thing, our friends at PayPal. PayPal has successfully positioned a cross-bank brand on top of the U.S. ACH system.

I asked David about consumer confusion with changing payments times. After all, one of the benefits of BACs (and of the ACH in the United States) is the standardized settlement timing. Consumers and other end parties have a common understanding of the timing of payments. David acknowledged that managing this has been challenging at times, but pointed out that the network benefits (speed, certainty) were helping to offset this. Branding and messaging obviously also play a role here.

FP Future Directions

So, where from here for Faster Payments? David discussed several initiatives that are in various stages of consideration or planning.

Debit transactions. I had assumed, incorrectly, that Faster Payments supported debit transactions – this is where the merchant or biller receiving payments initiates a transaction to debit the payee’s account. These are not currently supported by FP. One possibility is that a redirect-to-consumer’s bank approach (such as is being done in the U.S. with NACHA’s Secure Vault Payments) be introduced. This would be easier in the U.K. than in the U.S., because of the greater concentration of the banking industry. But David agreed that bank economics (possible loss of debit card interchange) would be a complicating factor.

Mobile transactions. A very appealing scenario is to use FP as the back end for mobile SMS transactions. This could be for person-to-person payments, or for small business payments (the “pay your nanny” scenario).

Finally, I asked David about whether or not “slower payments” will eventually shut down. He thought that unlikely in the near / mid term – for direct deposit of payroll, particularly, the current system “works really well”, and banks are not apt to devote time or resources to conversions of this process which does not appear to have a high priority. But, as he said “we do have the National Payments Plan to help inform decisions about when things should change.” Hey, where is the U.S. National Payments Plan?

Addenda

David sent the following stories on to me as real-life illustrations of how FP is being successfully used in the U.K.

An SME (a design-and-build consultancy) had problems in goods on site on time from suppliers where there is no account relationship. Whilst on the phone sourcing the required materials the supplier is usually unwilling to commit without funding up front. Whilst on the phone to the supplier the goods are ordered, the supplier is asked for their bank details, a faster payment is submitted and received by the supplier whilst on the call. The supplier can see this on his bank account, delighted with the speed of response the materials arrive on site and on time. Commerce is aided by the new FPS service.

Emergency calls to the Bank of Dad: son has insufficient cash and insufficient funds on his debit card to settle Airport Car Parking Fee. Phones Dad. Dad not wanting to go to the airport submits a Faster Payment from his account to his son’s bank account (different banks). Son on the way out of the airport within 10 minutes!

Another son of another father is in a T-Mobile outlet renewing his contract and phone. Has insufficient funds in his debit card to meet the transaction. Phones Dad. Dad initiated a Faster Payment to son (different banks again). Son walks out having completed all formalities shortly thereafter!

Glenbrook Research: Credit Card Acceptance for B2B Payments

Erin McCune — Sat, 27 Jun 2009 21:19:07 +0000

At Glenbrook we believe that B2B payments are among the most compelling opportunities in the payment industry today. Card acceptance is growing, yet businesses lack the tools to efficiently process transactions.

My colleague Carol Coye Benson and I recently published the findings from a series of interviews with business-to-business suppliers about credit card acceptance that we conducted earlier this year. Our goal for this reasearch was to determine:

Whether they accept card payments from business buyers, how they think about this practice, and if they expect it to grow
How easy it is to apply the incoming card payments using the company’s ERP or accounting package receivables module
The supplier’s awareness of PCI-DSS and their compliance responsibilities
The extent to which they are interested in using Software as a Service (SaaS) ERP and accounting solutions

Our objective was to inform future research, rather than generate statistically valid results, so the sample size was relatively modest. Nevertheless, we believe that our discussions provide meaningful insight to the B2B payment marketplace, particularly with regard to card payments.

Key Findings:

It is difficult to find companies that accept cards for B2B supplier payments. Card payments from consumers are far more prevalent.

Businesses are polarized when it comes to accepting card payments. They are either very positive (“Accelerate cash flow!”) or fiercely resistant (“No way, it’s too expensive!”)

The line between “card present” and “card not present” in the B2B environment is less clear than it is in a C2B environment. Questions of when the payment is initiated, and by whom, complicate participants’ understanding of the use of cards.

It is hard to overestimate the depth of ignorance about card processing on the part of B2B treasury and operations managers. “What’s a gateway?” “How can I even do that?”

Straight-through-processing (STP) of card payments remains an elusive goal. Companies struggle to integrate their systems in order to automatically apply card payments against open invoices in their receivables.

Business-to-business suppliers of all sizes are relatively unaware of PCI compliance. Even companies that accept cards and should be compliant, are not aware.

Small and mid-sized companies have embraced SaaS solutions more than large enterprises. Those that are using SaaS solutions are processing cards “efficiently and seamlessly.”

The research brief includes the full discussion of these findings as well as excerpts from our interviews with small, mid-sized, and large enterprises. We conclude by recommending specific opportunities for payments providers. Please complete this form to download a copy of our Credit Card Acceptance for B2B Payments research brief:

Contact either Carol or myself to share your feedback on these research findings or discuss B2B payments – via card or other tender types.

Key Take-aways from Glenbrook’s B2B Payments Workshop in NYC Last Week

Carol Coye Benson — Mon, 01 Jun 2009 15:06:27 +0000

Last week Glenbrook conducted an “Opportunities in B2B Payments” workshop in New York City. Erin McCune and I led the workshop, which was attended by product strategists from card networks, NACHA, The Clearing House, major banks, processors, software and service providers and payments start-up companies. The group had significant experience in B2B payments and shared a common interest in understanding the “gating factors” that apparently constrain the rate at which B2B payments are moving from checks to electronics. (Today nearly three-quarters of B2B payments remain stubbornly paper check.)

Some of the more interesting discussions during the two-day workshop were around these topics:

What model will succeed when it comes to supplier directories? If a company wants to tell its customers to pay it electronically, will it always have to contact each customer and make bilateral arrangements? Is it reasonable to imagine that there might be a cross-payment system directory? (“pay me with ACH like this, I accept these cards, send wire transfers here”). If so, it seems more likely to succeed if it is self-provided data – but what about data privacy? Could more industry acceptance of UPIC (or a UPIC like structures) enable this concept? One participant suggested that “what we need is a LinkedIn for businesses.”
How can marketplace confusion be reduced? Many companies appear to be bewildered by the numerous different options, and the lack of common terminology for them (exactly what is “EFT”? “buyer initiated payments”?). Could industry collaboration on terminology (what we talked about as “brand with a small ‘b’ ” – see previous post on this topic here) help? How about a standardized set of trade terms specifically referencing EFT payments?
It appears that the work on remittance data standards in both the EDI and XML worlds may start to bear fruit as more companies send, and more accounting packages are equipped to handle, standardized remittance data. Might a company’s preferences for remittance data be lodged as a callable service in a supplier director?
There was broad agreement that the intersection of small business payments and cross border payments represented an interesting opportunity. Will the successful solutions to the payments requirements of small businesses sourcing (or selling) abroad be delivered out of bank-centric payments systems, or, perhaps, by the non-bank eCommerce oriented payments solutions?
Streamlining the procure-to-pay process enables companies to take advantage of early payment discounts, generating significant returns through A/P efficiency. In the current economic climate, these discounts, and more robust dynamic discounting capabilities, have become increasingly important as a means for powerful buyers to sustain their supplier networks.
Funding and IT resources for corporate back-office improvement efforts often remains elusive when competing with the revenue side of the company. Yet, electronic payment and automated receipt of payment-related remittance data, provides a wealth of sales and supply-chain information that can drive increased revenue and reduce costs.

If you are interested in contributing to this discussion, post your comments here or contact either myself or Erin McCune.

And if you are interested in learning more about Glenbrook’s Payments Education program, visit here. In addition to public workshops we offer private classes on site at your location, based on special topics (such as “Opportunties in B2B Payments”) or our core Payments Bootcamp curriculum, or some combination.

BofA: Strong Demand for ePayables and Supply Chain Solutions

Erin McCune — Tue, 07 Apr 2009 01:42:18 +0000

Glenbrook’s Carol Coye Benson and I discussed B2B payments with Kevin Phalen of Bank of America this last week. Kevin is an Integrated Debt and Treasury Solutions Executive and joined the bank nine months ago, having previously held positions at JPMorgan Chase, First Data Corporation, MasterCard International, and Sears Credit.

Not surprisingly, Kevin’s outlook for electronic B2B payments is bullish: but we were interested in his take on the drivers of this optimism. He observes that demand for payables products that allow buyers to consolidate and optimize their outgoing payment processing is quite high among large, sophisticated firms. ERP integration (which we have long felt is the key driver) is also surfacing as top priority among BofA payables customers.

On the card front, where there is new focus on card payments for supplier transactions, the bank is experiencing 100%+ growth on certain products. The winners are those that offer greater control than a traditional ghost card, such as setting the authorization amount and placing transaction level restrictions. He commented that buyer-initiated card payments are less popular because suppliers have less control. Kevin anticipates that over the next ten years business card payments will continue to grow as the industry works to “marry up the transparency of card transactions with the low cost and ease of ACH payments.” He cautions that the card industry needs to focus on the supplier side of the transaction, where interchange sensitivity leads to resistance.

Here at Glenbrook, we are big proponents of the notion of a supplier directory where businesses large and small could post their payment preferences (e.g. “pay me by ACH, send a CTX transaction with XML ISO 20022 formatted remittance, the PO field is mandatory”). Of course, the consolidating bank environment in the United States means that large banks – such as BofA – could create quite an impressive “on-us” directory. BofA’s B2B buyer/seller network has grown from 50,000 participants last July to 75,000 today. We asked Kevin about the potential to expand this to include all of the bank’s large and small business customers – surely millions! Kevin acknowledged the attractiveness of the concept, but (as always, with B2B payments) cautioned that progress might be slow.

We discussed the ongoing struggles with remittance data management. Remittance standards continue to proliferate – STP 820 and ISO 20022 are two more recent examples – yet, as the number of networks and communication options increase, the level of complexity does, too. Kevin observes that as a result of the Obama administration’s stimulus package, the US Government may have an opportunity to drive remittance standardization. After all, it was government mandate of purchase cards in the US, UK, and Australia that led to the wide spread merchant acceptance and subsequent commercial adoption of that emerging business payment product.

Kevin (and his customers) have a keen interest in optimizing international payments. After years of work, he sees SEPA enabled initiatives finally making headway. There are setbacks along the way – as one would expect with a multi-country, multi-payment system, multi-cultural initiative – but within the next two to three years Kevin anticipates that it will be much easier for European buyers and sellers to transact with one another. Asia, on the other hand, is far from harmonized. There are many initiatives underway, yet no one unifying force to manage the complexity.

The global financial crisis is driving adoption of supply chain financial solutions from all of the global banks. Open account trade terms continue to dominate, but as companies face increasing hardship, trust between trading partners is strained. We were fascinated to hear that Kevin notes a re-emergence of letters of credit. Simultaneously, BofA has witnessed an increasing partnership between buyers and sellers, approaching the bank together to find mutually beneficial solutions that share risk, provide enhanced pre-export support, and satisfy the needs of both sides of the transaction.

The Problem with B2B Payments

Carol Coye Benson — Thu, 02 Apr 2009 17:02:25 +0000

It’s springtime, and annual payments statistics are starting to bloom. A good time, perhaps, to consider the state of business-to-business (B2B) payments. NACHA recently released figures showing that ACH CTX transactions grew by 15% in the fourth quarter, compared to the previous year. Earlier, Visa disclosed that their fourth quarter commercial volume was 13% ahead of the prior year. Nice growth numbers, particularly in these challenging times.

But for those of us with long histories in B2B payments, it’s still not enough. We all know that the bulk of B2B transactions are still made by check. An AFP survey at year-end 2007 showed that 74% of business payments were still checks. The NACHA and Visa statistics tell us things are changing – but why isn’t the transition from paper to electronic business payments happening more quickly? After all, almost all corporate surveys show that corporations – on both the paying and receiving side – see the benefits of electronic payments and intend to implement them. Here’s our view of some of the myths and realities about why movement is slow.

THE MYTHS

“It’s too complicated.” A lot is made of the fact that the B2B payments environment is complex. We don’t disagree. There are complex, interwoven processes, systems, and business relationships. There is messy data. But although this accurately describes the business payment environment, it does not explain why checks persist. In many instances, electronic payments can replace checks without greatly increasing complexity or disturbing current practices. These current practices, by the way, often aren’t all that great. The problem is that many people think that migrating to electronic payments will somehow “solve” the whole complex environment. It won’t.

“The hub controls the spoke.” Many discussions about B2B payments revolve around the myth of the all-powerful customer dictating how it will pay its small suppliers (and occasionally, the reverse: a powerful supplier dictating how customers will make payments). Although undeniably true in some cases, it does not describe most situations. Businesses often have tens of thousands (or hundreds of thousands!) of counterparties. It’s a many-to-many world. Businesses trying to standardize their A/R or A/P processes struggle to meet the demands of a single customer or supplier who demands “pay this way”. Expecting that uber-efficient “hubs will lead all businesses to electronic payments is simply wishful thinking. They won’t make it happen; and they aren’t why it’s not happening.

“Banks are dragging their feet.” This argument holds that banks are making so much money from check payments that they are actively resisting conversion to electronics. Common sense and anecdote both refute this. Bank profits from pure check float are eroding in any event with the advent of image clearing. The real money is in winning and maintaining business deposit accounts – which remains the case when payments are made electronically. Smart banks are figuring out that the lockbox opportunity – capturing and transmitting remittance data – is still there with most electronic payments.

THE REAL PROBLEMS

“It’s all about the money.” The float argument, held against banks, applies more accurately to businesses. But people are again missing the point when they insist that this is keeping the practice of checks in place. The real driver, for payers and receivers alike, is the time value of money. Payers want to control the timing of their cash outflow; receivers want to accelerate collection. Electronic payments do not diminish control over timing; they just alter the mechanics somewhat. Card payments for B2B transactions are gaining vogue in part because some suppliers see this as a tool for more rapid and more certain collection of payments due. Whether this is true depends on the model (there are both buyer-initiated and supplier-initiated card payments) and how it used by the initiating party. The lesson for bankers? Talk about how electronic payments tools can be used in conjunction with terms negotiations and payment policies to advance the cash flow interests of your customers.

“Where’s the phone book?” Checks are awfully easy for the payer – all they need is an address. All other solutions require getting payments details – account numbers, card numbers, etc. from your supplier. Once received, this information needs to be safely stored, maintained, and updated. Imagine: all over America, the same data about an individual supplier’s payment preference is being stored in the vendor master files of their thousands of customers. Why can’t a customer simply look up the payments instruction for a vendor? Surely in this age of Internet databases and data security the industry can find a solution. NACHA is working on it, and the card networks have it – sort of. But don’t we need some kind of cross-payment system solution? Why can’t you look up ACME Widget Co. and find out what kind of electronic payments it supports, and how to make them?

“What’s this payment for?” The remittance data problem, sadly, is all too real. Here are the components of the problem. (1) Getting the data from the buyer (remittance data includes listing of the invoices paid, the amount paid for each invoice, explanations for short pays, and justification for discounts and promotional deductions). (2) Associating this data with an inbound payment. (3) Getting this data into digital, system-readable form. (4) Matching the data receivables data and posting the payment against open balances for the customers in A/R. Checks solve the first two problems by simply putting the document in the same envelope as the check. ACH CTX solves the first three problems, but only 4% of ACH B2B transactions use the CTX data-carrying format. How is remittance data handled for those other ACH (and many buyer-initiated card payments)? Usually, by some form of email or fax. The lesson for bankers: there is a problem here to be solved – and your customers might pay you for it!

The fourth component, A/R integration, is a problem of increasing focus. Glenbrook Partner Erin McCune, who works extensively with corporations on payments integration issues, says “it’s hard to over-emphasize the pain that this problem is causing A/R departments across the country. Initiatives such as the EPN STP 820 will help, but the active cooperation of software vendors is critical. I’m pleased to note that many are making attempts to modify their solutions to ensure that electronic payments – both ACH and cards – can be more easily posted by corporations of all sizes.” And toward the end of next year, when robust remittances come to wires, there will be an opportunity to address those incoming payments as well.

Summary

So now that spring is here, what can bankers – and the industry as a whole – do to encourage the growth of electronic payments? Our advice is to concentrate on helping customers solve the real problems, and not to be overwhelmed by the myths. A case, perhaps, of making sure that we don’t miss the forest for the flowers. Let us know what you think!

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