The Problem with B2B Payments
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.
“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.
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!