The movement of B2B payments towards electronic billing is accelerating as businesses find themselves under increasing pressure to look for faster and more secure ways to make payments as part of efforts to cut costs. So why are almost half of US companies still using cheques? Charles Davis reports.
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The relentless search for cost savings in corporate back offices is spurring dramatic growth in electronic business-to-business (B2B) payments. Financial services providers are removing the final, stubborn obstacles standing in the way of fully automating supply chains.
B2B payments have historically lagged consumer adoption of electronic bill payments, but the gap is closing as a host of solutions promise ease of use and rich data flows that address many of the sticking points for businesses.
When it comes to B2B payments, companies in general have been less willing than consumers to access and pay their bills electronically. Even though almost all B2B invoices executed electronically in the US are paid electronically, they still only represent 43% of all B2B payments, according to the latest data from the Federal Reserve Bank.
New data from the Association for Financial Professionals suggests the economic woes of the past few years which created an impetus to cut transaction costs and track cash flow more accurately are prodding businesses to make the switch to electronic payments.
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By GlobalDataWhile consumers have been abandoning cheques for more than a decade, a trend that has accelerated in recent years, they remain ingrained in many companies supply chain processes. The associations data shows US companies on average make 57% of their business payments via paper cheque, down from 74% in 2007.
Despite industry initiatives to allow for more remittance data to be included in wire and automated clearing house payments (ACH), businesses still struggle to install systems to help reconcile payment information and invoices, experts said.
The foreign market
Foreign trade is another major reason for the shift to electronic payments.
Of the 484 respondents to the association’s survey, 78% reported sending at least some of their payments internationally. Contracts with cross-border partners often dictate that businesses use specific payment methods. According to the survey, wire transfers make up about 69% of cross-border payment volumes.
However, corporate clients also face challenges in getting their suppliers, buyers and other trading partners to make more payments electronically. A shift from cheques to electronic payments, including credit cards, ACH and wire transactions, requires changes on their end as well.
Of the survey respondents, 83% cited difficulty persuading their customers and 74% cited difficulty persuading suppliers as a barrier to using electronic payments. Efforts by banks and their technology vendors to provide electronic receivables processing services to corporate customers have helped companies make more payments electronically.
However, many of the services available still require suppliers and buyers to match up remittance information on the back end. The lower rates of electronic B2B payments reflect the added complexity faced by corporate buyers and sellers.
Corporate adoption is heavily dependent on buyer-seller collaboration, business relationships and clearly defined benefits for both parties. Companies must also integrate e-billing and e-payment technologies with legacy systems and processes, something that comes with varying degrees of complexity.
Larger buyers have adopted e-procurement networks while many large suppliers have adopted financial electronic data interchange (FEDI) technologies to achieve cost and operational efficiencies with their major trading partners. However, smaller trading partners whose volumes do not justify investing in FEDI have had to wait for a scalable solution.
Syncada
To move these smaller buyers from manual to electronic methods, businesses can deploy web-based solutions that couple electronic invoice presentation and ACH payment capabilities.
Another option is to join one of several emerging B2B networks, such as Syncada, Visas joint venture B2B project with US Bancorp.
Syncada also competes against American Express AcceptPay product and MasterCards Payment Gateway. There are also B2B payment networks such as Portsmouth, New Hampshire-based Bottomline Technologies Paymode-X and JP Morgan Chase & Cos Order-to-Pay.
Syncada took a major step forward in April, announcing Citibank had joined the network. At its core, the Citi partnership makes Syncada a truly global, multi-bank network. Citis Global Transaction Services business, which spans more than 100 countries and serves over 65,000 clients, will offer the Syncada network as part of Citis working capital and supply chain management solution set.
Syncadas goal is to become the major global network for electronic invoicing, payments and trade financing between businesses, in much the same way that its half-owner Visa is a dominant credit-card transactions network.
Syncadas service sends invoices and handles payments electronically. Banks that offer Syncada to business clients can also package in trade financing. A seller can get what amounts to a short-term loan so they can get money immediately, rather than waiting for the buyer to transfer the money. Syncada makes money by charging banks fees on the transactions.
Syncada CEO Kurt Schneiber said getting control over the supply chain has become more important as manufacturing has diversified and moved into global trading places.
"If you look at what it took to get an order done in 1960 20-plus days to today, when it can be done in minutes all of that has originated in the top end of the market and worked its way down," Schneiber says.
"Money is digits, really, in this space, and yet the time from shipment to payment and from arrival of goods to payment, is still long in many sectors of the economy."
Schneiber says the move toward electronic invoicing and supply chain automation was being driven by corporations seeking a way to combat the sluggish economy and increase their ability to manage capital.
"Syncadas genesis focused on dramatically increasing the transparency of the invoice and purchase order relationship so payments are less expensive," he says.
"It is a financial supply chain, and money follows the movement of goods and services."
The Corporate Executive Boards business barometer, a snapshot of executive opinion about the state of the economy, continues to find an increase in the number of executives who expect rising cost pressures.
Overall, 68% of executives surveyed in the fourth quarter of 2010 expect greater cost pressures (up from 63% in the third quarter). Specifically, 74% of executives surveyed expected higher core input prices and 69% expect higher labour costs (up from 70% and 67% in the third quarter of 2010 respectively).
In addition, half of executives anticipate that energy costs will increase.
The search for cost reduction leads inevitably to the supply chain, one of the great fixed costs in the corporate environment.
George Throckmorton, managing director of advanced payment solutions for NACHA, says that, while the larger corporate players have been able to move payments to electronic alternatives over several years, until recently supply chain data was the sticking point. A host of options now exist even for smaller businesses.
"The pace of change in the corporate payments and data transmission context is truly remarkable," Throckmorton says.
"This is a time in which all of the old excuses for why a business was using a paper cheque are just disappearing. Companies are focused on cash flow and how they can optimize the cash they have, and this is just the first step."
With cash visibility and control more important than ever, and with risk management becoming an increasing part of the corporate treasurer’s job, technology is playing an ever more pivotal role. As its sophistication grows, treasury technology can help treasurers better manage cash, accounts, FX and transaction flows.
Emerging trends
Two powerful trends are shaping the corporate payments market these days: B2B exchanges, quickly moving onto the cloud, and electronic invoice presentment and payment, the corporate equivalent of EBPP.
"Electronification can crash the cash inefficiencies inherent in the system," Schneiber says.
"Even with a low-interest rate environment, the volatility and the uncertainty means you are trying to build in maximum flexibility.
"Treasurers in the corporate sphere have to balance that with the need to maintain stability in the supplier base, and suppliers are having a harder time getting credit, so predictability and stability is key."
GXSs Trading Grid, a cloud-based trading community of more than 400,000 businesses that manages more than 10bn transactions a year, is an example of both trends.
GXS Trading Grid is the largest B2B e-commerce platform in the world, and has more than 2,000 new businesses joining each month, says Steve Keifer, GSX vice-president of product marketing.
Since its launch in 2004, GXS has invested over $250m in building a cloud computing platform for its data centres, a service-oriented architecture for all of its products and a suite of software-as-a-service applications for business users.
GXS Trading Grid is a hosted B2B exchange that acts as a central mapping, routing and clearing mechanism for supply chain transactions. Each supplier and customer only needs to plug itself into the exchange once, to hook up electronically with all the other trading entities on the exchange. This can cut integration costs associated with system-to-system integration dramatically.
Keifer said supply chain automation can be seen as three distinct processes:
- supply chain execution (payments and purchase orders, acknowledgements, transportation documents, invoices, remittances);
- supply chain planning (including inventory levels, manufacturing forecasts, sales forecasts, historical POS data, demand forecasts, product catalogues and price sheets, minority status information and other data); and
- supplier product data (static information about the supplier used for risk management).
By joining the grid, a corporation can introduce itself to a whole new range of tens of thousands of suppliers, complete with all the data needed to make procurement decisions and a make and receive payments through whatever channel they like, from corporate credit cards to ACH to cheques.
"People are trading with more partners and the volume of data exchanged is more robust," Keifer said.
"It is more unstructured than invoices and purchase orders, so it is critical for procurement to be able to perform analysis on vendors in real time."
Supply chain automation is growing so complex that many corporations are turning to GSX to outsource parts or all of its B2B commerce, Keifer says.
"Our outsourcing business is growing 20% annually, where we come in and just take over the whole trading and procurement and supply chain execution process," he adds.
"We see a lot more growth in outsourced solutions, particularly after the disruptions to critical supply chains in the automotive and manufacturing supply chains during the economic crisis of 2008.
"A lot of companies dont want to get burned again, and see value in having us do the supply chain work for them."
Behind the scenes, Keifer says, is a conflict. The company wants all of its accounts to look the same, but the complexity on the back side is massive because there are so many different data flows and country-specific regulations concerning the handling and storage of payments data.
As that complexity grows, supply chain automation will work its way down to smaller businesses, he said.
"We are an 80-20 business," Keifer says.
"The large players are about 80% automated, and then there is the 20% we are chasing. Procurement groups are always outsourcing, increasingly overseas, and if you are a manufacturer, you cant dictate.
"It is a sales and marketing effort, really that allows you to market to a community of vendors."
The good news, he says, is that solutions like GSX Trading Grid are no longer just for the big boys. It is just a matter of what amounts to personal sales efforts at the smaller end of the business continuum. That, of course, is a much more time-intensive effort.
