B2B Payments in the Networked Age: How to Reduce Risk, Improve Communication, and Transform Your Payments Process

Editor's Notes

• #3: Back in the Seinfeldian ‘90s, many of us probably dealt with symptoms of hip displasia brought on by sitting on wallets like George Costanza or sore shoulders from carrying around so many receipts. Because back then, consumer payments were still pretty old school consisting of cash, check or credit card with the requisite paper receipts as the output. But in the last 20 years, Consumer payments…the methods and means that you and I use to settle transactions every day…has undergone some pretty radical and rapid innovation NEXT SLIDE
• #4: In the last 20 years in our daily lives we have seen the advent of such things as Stored value Loyalty cards (which may be causing similar stresses to our wallets, hips and shoulders as receipts once did), Paypal which opened up a whole world of online payment bypassing traditional bank methods, Square (pictured here) which is enabling small merchants across the globe to accept card payments cheaper and more effectively (and how cool is it to automatically get an email receipt each time?), and now such things as mobile payment led by ApplePay which not only promises to make it more convenient and easy to conclude a transaction at a physical store, but with the idea of account tokenization, is making the transaction a lot more secure. Which, given the news lately of breaches and hacks, is certainly something the market I looking for. So from a consumer payments perspective, this really is a golden age of innovation and rapid change as payment technology catches up and leverages the possibilities of the networked age we live in. NEXT SLIDE
• #5: B2B Payments…not so much. Rather than innovating and moving forward, B2B Payments are stuck in the past. (skim through the stats and end with the paper check stat leading into the anecdote below) According to a 2008 paper by the Federal Reserve Bank of Atlanta, one of the first recorded uses of a paper bank instruction was by one Nasir-i Khosrau, an Iranian merchant traveler to the city of Basra in the early 11th century AD. It’s a safe bet Mr. Khosrau didn’t know he would begin a trend of settling business transactions by paper checks that would sweep across the globe in the coming centuries and still hold sway over more than 50% of B2B payments in the US in 2014! Now, while checks may be a US problem, Europe having moved to pretty much all electronic, the other stats hold true for europe as well because the problem with B2B payment is not simply the intractability of paper checks, but the inability to access and deal with the data that needs to be delivered with B2B payments. NEXT SLIDE
• #6: The fundamental problem with B2B payments is not the paper problem somewhat unique to the US. No, the paper is a symptom of the fundamental root issue with B2B payments. Namely that the information regarding the payment is disconnected from the delivery of goods or services by some period of time. P2P related transactional information is sent back and forth (either in paper, through a portal or electronic and automated through the Ariba Network) and is completed long before payment is executed. When it comes time to execute payment, none of the methods are able to meet the goal of combining funds settlement and rich remittance information in a timely manner. But believe it or not, check comes closest…which is why, in lieu of european style madates for electronic payment, it is still such a large part of US payments. CLICK (advance check payment animation) The advantage of checks is that payers can include pages upon pages of paper remittance information after the perforation. This enables them to identify the specific invoices being paid by a single check along with some other information as necessary. The problem is that because of all that paper they are expensive (from the cost of labor, materials, and postage to the cost of the lockbox processing opening, scanning and electronifying that paper on the supplier end) and offer zero visibility to the supplier regarding the status and timing of that payment, leaving the supplier with high costs and the question of “Where is the payment?” (the check is in the mail!)…and they are of course SLOW! CLICK ACH (US) or electronic methods of payment solve the problem of speed, settling funds typically overnight from the point of execution. However, the level of remittance they can carry is limited typically to 80 characters in the US and 140 Characters in SEPA jurisdictions. And while larger suppliers can often consume this information electronically (limited though it is), most suppliers rely on reports from their bank and have to manually manage reconciling those funds to receivables due. And with the very limited remittance info available, this is often a major pain point, particularly when the single credit is for multiple invoices or if the amount being paid is less than what the supplier invoiced. And for the buyer, paying their suppliers via ACH, while cheaper and holding less fraud risk than paper checks, means that they have to capture, manage and maintain supplier bank account information in their vendor master. Simply holding this sensitive information is risky enough, but they also need to validate that the bank information belongs to who they think it belongs to, lest they pay the wrong entity. CLICK Finally, many suppliers are paid by a card based form of payment, be that traditional Pcard on PO at point of purchase, or upon invoice approval or at invoice due date with buyer initiated payment cards. Regardless of the particular card-based product, the result is the same…relatively quick settlement of funds (within a few days) to the supplier some times with detailed, level 3 information…but at a HUGE premium cost in the form of interchange fees of 2.5% to 3.% or higher. 3 primary payment methods, each with it’s own particular strengths and weaknesses, but none of which solve the fundamental problem of the disconnect between the payment and the information about what is being paid. And all of them contributing to a B2B payment process that is opaque, complex and risky…and stuck in the 20th century! So why is this? With so much innovation on the consumer side of things, why is B2B so far behind? NEXT SLIDE
• #7: Well, a large part of the answer is that, relatively speaking, Consumer payments are simple…(Just speak to it) NEXT SLIDE
• #8: But while consumer payments are relatively simple, B2B payments, for the most part, are not. In a b2b environment goods and services are often delivered weeks or months prior to payment, and multiple invoices are often settled with a single payment. Additionally, some of those invoices may have been adjusted with the final payment being less than the amount originally invoiced due to credit adjustments, discounts, disputes, etc. As a result, detailed remittance information is critical to those receiving payment. Paper checks excel here because there is no limit to the number of pages of descriptive info that can be included after the check perforation (as any vendor receiving reams of consolidated payment info can attest!). Paper checks remain popular with businesses because, even though terribly expensive, rife with fraud, desperately slow to settle, and horribly opaque with regards to forecasting settlement, they do offer a unique advantage from a b2b perspective….they can deliver information. But while the value of the detailed remittance delivered with paper checks is difficult to overstate, there is this little matter of paper checks being terribly expensive, rife with fraud, desperately slow to settle, and horribly opaque! So given the weakness of paper checks and, as we will see in the study results from Ardent Partners, the desire to get off paper checks, why in lieu of european style mandates are 50% or more of B2B payments still made by paper check in the US? Why do suppliers still resist? Well, I think it has a lot to do with what B2B payments have in common with Big Blue, Batman and the Betamax videotape. NEXT SLIDE
• #9: What do Big Blue (IBM), Batman and Betamax have in common with today’s B2B Electronic Payments, particularly in the US? US ACH Payments…94 character addenda…80 usuable characters. (CTX counts for 3% of all US B2B electronic payments…so 97% of B2B ePayments in US are restricted to 80 characters of information). Why 80 characters? It is a very specific number…based on the 80 column IBM punch card patented in 1928 (the same punch cards Batman used to input data into his state of the art for 1963 Bat-Computer) and which was still the dominant standard for data capture at the time that the ACH rules sill governing payment today were established for B2B transactions in 1975, which happened to be the exact same year that Sony introduced the now long-obsolete Betamax video cassette player. NEXT SLIDE
• #10: So in 2015 in the US, with the incredible complexities of business commerce today, and the gigabits of critical data being exchanged by trading partners via business networks, the dominant form of electronic payment in the US relies on rules established in 1975 using 1928 technology that can only transmit 80 characters of data. (Long Pause)….and we wonder why we have problems with B2B payments. Now, proper kudos to the Single European Payments Area and their ability through regulation to essentially eliminate the paper check, but they still haven’t solved the primary problem of connecting the settlement of funds to the rich data required with it. Advanced as they are, the SEPA schema still allows for only 140 characters of data to be included with the payment. And while that is nearly double what ACH allows for in the US, it is still woefully inadequate to the need at hand. In fact, that 140 character number may look familiar because even though better than the US version, (NEXT SLIDE) it’s still no better than a tweet
• #11: I think we would all agree that detailed, rich remittance is at the root of much of the problem for B2B payments. That is why the Federal reserve based here in my hometown of Minneapolis is leading a remittnce coalition task force to figure out how to fix this. That is why in the UK and europe, there is a Richer Remittance initiative underway to do the same there. Because clearly 80 characters, or even a remittance tweet, is not enough. But while that is certainly a core issue with B2B payments, it is not he only problem… NEXT SLIDE