The Information Trail

by Elizabeth Judd

To capitalize on B2B e-payments, banks must learn how to process information that will be valuable for their customers.

Bankers joke that electronic bill presentment and payment is the great application of tomorrow — and always will be. Given the history of false starts and inflated promises in the e-payments arena, the ribbing is deserved.

Yet, no one seriously argues that banks should shun this new frontier. In fact, the new wisdom is that business-to-business e-payments will catch on long before consumers start paying their phone, cable, and credit-card bills online.

The crucial difference between the consumer and B2B markets is incentives: businesses have more reason to go electronic than do consumers. Most individuals don't yet see enough convenience in electronic billing and payment to warrant switching from paper checks. But most businesses, regardless of size, can immediately benefit from eliminating paper-based routines.

Gartner, a Stamford, Conn.-based consulting and research company, estimates that generating and shipping a typical invoice electronically costs a biller $1.65 — versus $5 for paper. Having slashed costs in other areas of the supply chain, businesses are turning more attention to electronic billing and payment.

"The benefits of B2B are going to be huge for corporate America and global companies as well," says Christian Schneider, director of the B2B e-commerce group at Chicago-based ABN AMRO Bank, North America. "There are big dollars in B2B."

Banks hope to tap into that stream of dollars by leveraging their traditional role of settling payments and providing cash management services for corporate customers. It's not a great leap from those activities to electronic invoicing, which can be used to simplify and shorten billing cycles, streamline dispute resolution and adjudication, and furnish richer payment information to businesses. Electronic invoicing also provides a platform for banks to sell a variety of ancillary cash management products.

Major institutions that recently announced plans to get into this business include J.P. Morgan Chase & Co. and Citigroup Inc., both of New York; Wells Fargo & Co., San Francisco; Bank of America Corp., Charlotte; and FleetBoston Financial Corp.

Banks appear well-positioned in corporate EBPP because of their payments expertise and strong capital foundation. Many of the technology companies now flooding the field, by contrast, are newer to the game and must rely on volatile venture capital.

B2B e-payments pose a big challenge for banks, however, in that the prime opportunities don't reside within the realm of payments, which banks understand, but rather in the world of information, where technology companies possess the dominant expertise.

In a recent survey of 100 non-service companies by Gartner, 90% of respondents identified technology firms as the top candidates for enabling B2B e-payments, compared with only 10% of respondents who thought banks would play a leading role. The two most oft-cited reasons for this dramatic skew were the beliefs that the tech vendors are more technologically competent, and also more aggressive in providing new services.

"Companies will look to banks to manage their cash, but they'll look to other providers to manage the information surrounding payments," says Gartner vice president Avivah Litan, who advises banks to seek technology partners. "The trick for banks is to figure out how to create the right alliances to ensure they remain an integral part of the information flow even when they don't control the entire process."

Such alliances are already taking shape. J.P. Morgan Chase, for example, is working with BCE Emergis, the e-commerce subsidiary of Montreal-based BCE Inc., while FleetBoston has teamed up with Bottomline Technologies, Portsmouth, N.H., and New York City-based Miradiant Global Network Inc.

Diverse Market

In terms of transaction value, the overall B2B payments market dwarfs B2C, according to Needham, Mass.-based TowerGroup: $8.5 trillion of annual invoices and bills compared with $2.6 trillion for B2C. Much of this activity is expected to migrate to the Internet in coming years. TowerGroup predicts $4 trillion in B2B e-payments activity by 2010.

For those serving this market, however, the number of payments is more important than their dollar value. Payments facilitators usually get paid on a per-transaction basis. TowerGroup estimates that con- sumers conduct 15.4 billion payment transactions annually, compared with 14.1 billion bills and invoices paid in the B2B sphere.

The skew between large and small companies also makes the B2B market far more complicated to serve. TowerGroup research director David Medeiros estimates that 5.9 million of the six million or so businesses in the U.S. earn less than $1 million in revenues annually. "The banking needs of a Fortune 500 company dramatically differ from those of a small business, which are more similar to the needs of the consumer," Medeiros says.

More than 90% of all B2B payments are made by check today, with perhaps another 7% occurring over the automated clearinghouse network, a non-Internet system designed primarily to handle large payments. The rest use financial Electronic Data Interchange technology or services such as Fedwire. A company typically needs from $10 million to $50 million in annual revenues to justify using the ACH network.

The point here is that small businesses had no feasible electronic option until EBPP came along. This market segment is therefore significant. Large companies that now use ACH or another form of electronic payment are also prime candidates for switching to EBPP. That's because ACH doesn't begin to carry all the supplemental data that could potentially surround a B2B payment.

In addition to electronic invoicing, for example, many corporations want features such as automatic application of payments to accounts receivables; online payment guarantees; and non-repudiation of transactions, which can be enabled by digital receipts stored in archives. Those on the paying side of a transaction want multi-currency payment management and payment aggregation by invoice and currency.

Kate Barrand, vice president of marketing for Clareon Corp., a B2B Internet payments company based in Portland, Maine, contends that the information flowing with a payment is often as valuable as the payment itself. Say, for example, that a company ships a buyer five widgets at $20 apiece and one of the widgets proves defective. If the buyer simply remits $80 electronically without any information about the defective widget, the payment will undergo "an ugly and costly process of inquiry, back and forth," Barrand says.

Were the buyer to attach a paper explanation, the dispute could perhaps be resolved quickly. But such an explanation cannot accompany an ACH transaction since the network allows only 90 characters of information to flow with a typical record. Although companies can attach addenda records, most banks' legacy systems can't handle this additional information. They therefore have to convert the addenda messages to paper and then fax them to payees, which touches off a volley of billing inquiries and disputes.

Large corporations would likely pay handsomely for technological solutions that allow them to avoid these paper disputes. "Executives understand that if I, the business owner or corporate treasury manager, implement a system and it saves me a great deal of money, then I should be willing to pay some percentage of the savings for this system," says Jupiter Media Metrix's senior analyst James Van Dyke. "Businesses are much more pragmatic and educated than consumers. That's why there's money to be made here."

There is some question, however, as to whether banks will win out over other providers in making that money. While banks can draw upon a wealth of information-processing expertise related to their traditional wholesale lockbox operations, electronic invoicing on the Web adds a whole new level of complexity, according to Gartner's Litan. "You see documents being exchanged that were never exchanged before. It's all about the information leading up to payment, which has not been the business of banks."

Last year's Gartner survey of non-service companies found that 73% of the respondents were building in-house electronic invoicing systems; 18% bought outside software; and 9% had contracted with e-billing vendors. None of the more than 100 companies surveyed was using a bank for e-billing.

In Litan's view, banks risk losing ground to technology companies in the cash management business as more corporate treasury functions migrate to the Web. For that reason, she recommends that banks find some way of getting involved in electronic invoicing, preferably through partnerships with technology firms.

Technical Challenges

However banks approach the business, creating B2B e-payment solutions is considerably more complicated than serving the consumer market. One example of the myriad intricacies banks and their partners must contend with is entitlements, or the issue of precisely who within a corporation is authorized to pay bills.

It's safe to assume that a consumer with a checking account can write checks from that account. In a large corporation, however, only a handful of individuals have the power to release money from the corporate till. San Francisco-based BankServ, one of the major third-party innovators in e-payments, overcomes this difficulty by issuing employees their own digital certificates, each with a set of individualized authorization levels. This is the type of problem any e-payments solution would have to address.

An even more formidable challenge is integrating processes kept separate in the paper-based world. Invoicing, for example, has been one business process, collections a second, settlement a third, and credit a fourth. B2B-enabled banks must learn to survey the big picture rather than treat settlement as an isolated service, says Kenneth Deveaux, a senior vice president and director of B2B e-commerce solutions for FleetBoston.

Consider electronic invoicing. Today, banks have virtually nothing to do with how their corporate clients bill their suppliers. Financial institutions venturing into B2B e-payments, however, are now partnering with software providers to help their corporate customers deliver invoices over the Internet.

FleetBoston, for example, has teamed up with Web specialists Bottomline Technologies and Miradiant. "One way to ensure that we maintain our payments relationship with customers is to participate in invoice handling," says Deveaux.

Most experts agree such alliances are essential, particularly when a major corporate EBPP project might cost from $400 million to $500 million and third parties have already invested tens of millions in figuring out specialized pieces of the payments puzzle. Asking banks to build their own B2B e-payments infrastructure, says BankServ CEO David Kvederis, is like "saying banks should build their own automated teller machines. There's no reason to do it."

The question then becomes: how to partner? One possibility is working with a company such as BankServ, which runs applications on its own site but preserves the look and feel of its individual bank partners' Web endeavors. A second alternative is buying custom software and selling the applications directly. Finally, some banks are partnering with application service providers — companies that host and run various applications at their own data centers.

Although partnering is far and away the most popular option for banks entering the B2B e-payments space, not everyone is enamored of the strategy. Former technology stocks analyst Gary Craft warns that banks are being shortsighted in fiercely protecting their core settlement and deposit functions and then partnering with outsiders who provide everything else. Craft, founder of San Francisco-based Financial DNA, an e-finance information network, says banks need to recognize that the information surrounding the payment is the component that will ultimately earn the revenues.

Craft fears that if an e-pay transaction someday earns a dollar, the bank's settlement role might garner a mere five cents, with the remaining 95 cents divided among the service providers who furnish the interfaces, the developers who translate between software systems, and the companies integrating various financial systems.

"Some banks are relinquishing wonderful economic opportunities to third-party providers," says Craft. "This is a case where the incumbent banks have scored a Pyrrhic victory. They've won the battle to maintain settlements and deposits but lost the war over who gets the 95 cents."

The solution for banks, Craft suggests, is moving into state-of-the-art Web presentation interfaces that can integrate not just settlement information but all information relating to electronic payments. To do that, banks will need to stop protecting their own proprietary systems and instead begin developing open solutions. Craft says he has yet to see a bank pursue such a path.

That's not surprising, since most banks active in B2B e-payments seem to agree with Jupiter's Van Dyke that partnering is the only realistic path to speedy innovation. "If your competitor has a more compelling offering, and the only way to supersede it is to work with a partner, that's what you'd better do," says Van Dyke, who is based in San Francisco. "Certainly, if you can build it on your own, you should do so. But that's a big 'if.' "

All the new entrants flooding the B2B e-payments market notwithstanding, Van Dyke is convinced that banks still enjoy an enviable position, particularly now that dotcom investment has declined and the new entrants no longer look quite so invincible. "The advantage reverts to the established institutions," he says. "In the overall payments space, whether it's business-to-business or business-to-consumer, this is one of those classic areas where the game is the banks' to lose."

Ms. Judd is a freelance writer based in Washington, D.C.

Copyright © 2003 by Banking Strategies, published by BAI.

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