For years the payment business promised  —but failed—to remove paperwork from the supply chain. Will NACHA’s new work in B2B and SWIFT’s efforts to “go direct” push paperless over the threshold?

By Lauren Bielski,  senior editor, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it  

NACHA, SWIFT, and individual banks and corporates are taking aim at payments. But transformation, like building Rome, takes more than a day

If a newer form of electronic data interchange (EDI), XML or remote deposit capture (RDC) can’t break the paper habit when it comes to making corporate payments, maybe, the greening of America will finally bring change on. Nobody is certain, but hope abounds.

“Electronification” is one term discussed in payment circles. Loosely, it refers to electronic origination through settlement, or, as a secondary definition, conversion as quickly into the process as possible.

Some experts say corporate creativity in this country might instead be inspired by the overseas (but not-too-distant) efforts around the Single Euro Payments Area, involving the creation of a zone for the Euro in which all-electronic payments are considered domestic.

Not that the U.S. business community will change overnight when it comes to how it manages its finances—it certainly hasn’t yet. Well into events around Web 2.0, supply chain finance still revolves around ample manual workarounds, laser printers, and “the check is in the mail.” Boston-based research firm Aite recently issued a report indicating  70% of the business payment stream was handled by check for a total of $4 billion annually.

“Until recently, the attitude in business-to-business payments here was one of an ‘if it ain’t broke’…” says Cynthia Von Hollen, industry principal, financial services industry, SAP, Newton Square, Penn. “For cultural and practical reasons, executives tend to be attached to traditional, paper-based methods.”

Bruce Parker, vice-president strategic planning, ACI Worldwide, New York, also understands the technical and cultural challenges, but thinks the big blockade with supply chain finance has to do with the unavoidable obstacle of Net-30 pay arrangements. (Certain B2B niches work differently but Net 30 is the norm, because, as Parker explains it, “it takes 30 days in the typical firm to figure out if you got what you ordered and if it meets specifications.”)

“Banks,” Parker says, will be taking on the costly, time consuming and ‘dangerous’ conversion to electronic when the drivers pile up and it pays to manage that risk. But the bank and corporate customer need visibility into corporate cashflows to make that transition.” 

The benefits, at a high level, of a more-automated payment chain are clear: better visibility into cashflows, better risk measurement, and when you are on the paying side of the b2b transaction, the ability to move quicker and benefit from perks like early pay discounts. Banks will attract loyal corporate customers if they can help them cope with a less-than-perfect back office environment.

Von Hollen adds: “It’s only started to change in the last year, perhaps because companies are finally starting to think of the idea of closer to real-time visibility into cashflows as a must-do, not merely a nice-to-do.”

Linda Coven, senior vice-president, head of global cash management, $6.3 billion assets Silicon Valley Bank, Santa Clara, Calif., says the subtle aspects of b2b payments make the transition to electronic flows a slow-and-steady thing.

She points out that, as with every bank, each customer has unique payment flows, strategic priorities around payments timing, and capital spending limitations. (So while all would like a perfectly outfitted enterprise resource planning system and clean links between payments engines and accounting equipment in a perfect world, not everyone is in the position to do it.)

Then there are the payment practices dictated by a given industry. SVB, for instance, deals with vineyards, high-tech firms, and other clients in industries that require international transactions.

“Our client base does a tremendous amount of wire transfers,” says Coven, as an example. While the Federal Reserve and others are looking into greater standardization for cross-border use of ACH, Coven notes that there are some problems with the scheme.

However, her larger point is, there are always complicated business cases to make and not everyone needs the same system or set up.

SWIFT goes direct
In one of the higher profile developments in corporate payments, for instance, SWIFT has garnered significant interest in a new program, SCORE (Standardized Corporates Environment) that gives corporate customers access to the unified messaging hub, SWIFTNet, without the need for bank sponsorship, a traditional practice.  (MA-CUG or Member Administered Closed User Groups, used to be the only linkage option, and it is primarily for cash management.)

In taking a hub that simplifies payment data exchange between banks and corporate customers, in effect, taking one standard avenue and adding lanes while also making the on-ramp both easier to negotiate, SWIFT hopes to drive up automation and cut out traditional check writing. SWIFT recently conducted its second annual Swift For Corporates Day, notes conference organizer, Treasury Strategies, Chicago. Managing Director Monie Lindsey says it was well attended.

NACHA is also renewing its b2b efforts. According to Von Hollen, who sits on NACHA’s Council for Electronic Billing and Payment, the group has been stepping up its efforts to cultivate a plan for “invoice flipping,” taking data sent in an e-bill and repurposing it for use in an a remittance statement.

Paper still rules
Still, these payments-related developments are more like blades of grass surfacing through occasional cracks in the sidewalk than a lush lawn. With ample reengineering and a top-down push from chief financial officers and other C-suite occupants, the 70% figure quoted earlier may dip by 10% in 2010.

“Sixty percent is still a lot of paper checks,” says Esther Pigg, vice-president global product management, Checkfree, Atlanta. Pigg, who sees cautious interest in moving off paper, says she worked for nearly a year researching the corporate treasury and cash management areas for additional e-payment opportunities.

However this complicated service area progresses, banks should begin to rethink their payment strategies and equipment, because how they respond to transitioning payment requirements could dictate their long-term relationships with corporate customers, says Aaron McPherson, research director, payments, Financial Insights, Framingham, Mass.

“Payments are sticky,” McPherson says, offering a simple but powerful verity.  

Remittance challenge
In an era where, on the retail side and in places like Japan anyway, mobile payments are having an “it” moment, it seems strange that something as “slow boat” going as paper checks and invoices should have survived.

“Addressing the handling of remittance data has been the big hitch,” says Financial Insight’s Aaron McPherson. The analyst spoke briefly with ABA BJ about the reemerging subject of electronification. McPherson was in the midst of a related research project and couldn’t share much of his early findings yet, but he did say that it was an extremely important year for banks’ cash management and treasury areas.

“This is the start of a transition,” he says. To computerize payments without a lot of manual data reentry, payers need easy ways to automate remittance data generation, so that the suppliers they are paying can see (and populate accounting programs with) product or service terms—a function that seems as if it ought to be simple but often isn’t, given the variety of discounting or partial pays that routinely go on.

Von Hollen points out that EDI’s simplification—a format called EDI 820—has been floated in the industry since 2005 or so and offers a broader cluster of businesses some of the tools needed for a more electronic workflow.

(The logic is, for big-ticket items anyway, that EDI 820 can expand greater use of e-invoicing, one step required for seamless e-payment, according to experts.)

“Leading banks, banks that are consolidating payments engines and making it easier for their business customers to make payments based on least-cost routing or other rational criteria, will get and keep the business,” McPherson adds.

“Basically corporate customers want banks to compensate for what they lack,” says David Luther, vice-president of solutions development in the global financial services practice at Unisys, Blue Bell, Pa.

Cynthia Von Hollen agrees. “In b2b the banks are the ‘two’,” she says. “They are being asked to be a better pipeline. Firms banks to  figure out how to make the payments given costs and deadlines.”

Legacy always an issue
In the long run, technology on either end of the workflow will have to get better organized.

The banking environment isn’t very streamlined, and has yielded multiple, specialized payment types and engines (e.g., ACH, check conversion, credit) that all coexist—almost as if payments were an amoeba that was continually subdividing.       

And corporate IT processing environment has ample silos and fragmented processes of its own, notes David Luther. While to the outsider it should seem as if the invoicing and payment functions should be tightly coupled within the back office, in the real world they often aren’t, says Luther, who declared an all-electronic b2b, “not yet ready for prime-time.”

He reminds readers that the procurement departments that issue invoices tend to operate far (and in an unconnected way) from accounts payable and receivable departments. Moreover, the data only, gets married in accounting systems that sit elsewhere—often imperfectly. It’s this sort of distributed environment that needs to be transitioned away from without anything breaking.

Meanwhile, fraud management based on positive pay, exceptions processing based on manual efforts, and applying discounts in invoicing and payments based on matching—not to mention playing with float—all put a drag on change. BJ
 

May 08 Digital Magazine

Article on p. 40

[This article was posted on May 1, 2008 on www.ababj.com, the website of ABA Banking Journal, copy right 2008 by the American Bankers Association.]