Payments Study

8/7/2019 Payments Study

http://slidepdf.com/reader/full/payments-study 1/24

The RemainingBarriers to ePaymentsand Straight-throughProcessing

Research ConductedOctober 2001–March 2002By The Clearing House

Advancing Payment Solutions Worldwide



1. Introduction 1Objectives 2

Methodology 2

2. Current State of Business Transactionsand Payments 4

3. Key Findings 6

Security is a major concern in moving payments over the Internet 6

Credit “push” is preferred to debit “pull” model 7

The banking information necessary to initiate payments is notalways readily available 8

There is proven interest in receiving remittance informationwith payments rather than separate 9

Integration with accounts payable and accounts receivable systemsis a major barrier to achieving straight-through processing 11

Accounts payable systems can initiate electronic paymentswith remittance information, however few packages and hencecompanies have this capability 11

Accounts receivable integration is critical to automated reconciliation 12

A minimal amount of standard information needs to accompany

payments to facilitate automated reconciliation 12

Float is still a major issue for many companies 15

Many misperceptions still exist… more education and promotion is needed 16

Differences in company size and industry will guide marketing ofelectronic payments 16

4. Value Chain Interview Findings 18

EIPP 18

eMarketplaces 19

Buyer Findings 20

Seller Findings 20

5. Conclusion 21

Contents



1. IntroductionThe Clearing House kicked off the iClearing and Settlement (iC&S) project in

February 2001 with the full commitment of its owner banks:The Bank of New York,

ABN AMRO,Bank of America,Deutsche Bank, HSBC, Citigroup,Wells Fargo,Bank

One, JP Morgan Chase,Wachovia,and Fleet.The overall goal of the iC&S project is

to facilitate the automation of electronic payment and remittance information from

payment origination (accounts payable) to account posting (accounts receivable);a

concept that is known in the industry as straight-through processing (STP).

In attempting to achieve this ambitious goal,The Clearing House took a research

based approach to get a better understanding of why businesses are not using elec-

tronic payments and remittances more, as well as,how the various players in the B2B

value chain are effecting and/or influencing the payment process.The Remaining

Barriers to ePayments and Straight-through Processing is a summary of the market

research conducted by The Clearing House.

The iC&S project will result in payment system improvements that will include both

system enhancements and business practices that will satisfy many of the company

needs identified in the research. Consistent with the mission of The Clearing House,

the iC&S suite of enhancements is intended to augment,not replace, the banks’

related service offerings.Features and services will be defined, developed and imple-

mented modularly as the iC&S project determines a need for additional payment

system services.

The first feature, or Phase I of iC&S, was the development of the Universal Payment

Identification Code (UPIC). The UPIC is a unique number assigned to a company’s

bank account, which masks confidential banking information while facilitating elec-

tronic payments.UPICs help to overcome one of the barriers to ePayments in that

they give companies the ability to freely distribute their banking information in order

to promote the receipt ofACH credit payments.The Clearing House completed the

development of the UPIC system in February 2002 and UPICs are now available to

all financial institutions which are members of the Electronic Payments Network

(EPN).

The Clearing House began the requirements definition effort for Phase II on October

1,2001.For six months, extensive research regarding current business practices and

processes for electronic transactions was conducted concluding in early March 2002.

The preliminary findings and conclusions relating to these activities are presented in

subsequent sections of this document.

1



ObjectivesThe iC&S project has been research based, focusing on identifying barriers to

increased use of electronic payments, digging deeper into known barriers, and testing

possible solutions. The research has been utilized for several purposes: to confirm

and qualify corporate interests in UPICs, to help identify target markets, and

most importantly, to determine The Clearing House’s strategy for Phase II.

Methodology

This section provides an understanding of the various research methods used by the

iC&S team. The market research was conducted in four phases, employing multipletypes of research including:secondary research, a quantitative survey, company

interviews,and focus groups.

Secondary ResearchBefore conducting any primary research, recent secondary research papers, surveys,

studies,etc.were reviewed in order to gain a base understanding of what information

was already known about the payments industry.

Survey

From this base,a quantitative survey reaching 155 companies with annual revenues of$10 million and above was created and administered in October 2001.The objective

of the survey was to determine current business practices and attitudes regarding

electronic payments and remittance information as well as collect reactions to several

new payment concepts.

Value Chain InterviewsThe next phase of the research focused on facilitating straight through processing

of payments and related information. Since the processing of payments and related

information involves multiple parties and vendors throughout the financial supply

chain, targeted interviews were conducted with companies who hold a stake in the

payments process.This included marketplace enablers, e-marketplaces,Enterprise

Resource Planning (ERP) providers,Electronic Invoice Presentment and Payment

(EIPP) providers, and The Clearing House owner banks.

The interview process was used to provide a forum for information exchange

between the iC&S team and B2B value chain participants. The interviews gained an

understanding of their role in the financial supply chain, obtained their point of view

as to the problems with the current process,and discussed possible solutions.The list

of B2B value chain participants interviewed is contained in the figure below.2



Figure AINTERVIEW CATEGORIES, NEEDS AND COMPANIES

Focus GroupsThe last portion of the research focused on the end users, talking to those in charge

of company finances,accounts payable and receivable,in an attempt to dig deeper

into the various barriers to using more electronic payments. Nine focus groups were

conducted in cities across the country including:Los Angeles,San Francisco,

Chicago, Dallas,Atlanta, and New York. Three focus groups were held for each

revenue tier: Small Business ($1-10MM),Middle Market ($10 –250MM),and Large

Corporate ($250 MM +).3

Research NeedCategory Interviewee(s)

¥ Understand how current applications

are facilitating procurement, invoicing,

and payment for goods and services

¥ Buyer, Seller, and

Marketplace Application

Providers

¥ Ariba

¥ Commerce One

¥ Understand buyer and seller accounts

payable and accounts receivableprocesses

¥ Enterprise Resource

Planning (ERP) ApplicationProviders

¥ Oracle

¥ SAP

¥ Evaluate current invoice and payment

providers in the electronic payments

and invoicing arena

¥ Electronic Invoice

Presentment and Payment

Providers

¥ BCE Emergis

¥ Bottomline Tech.

¥ Xign Corporation

¥ Understand how marketplaces

facilitate B2B Commerce

¥ Marketplace Operators ¥ Covisint

¥ Pantellos

¥ Assess translation features and

functionality of middleware applications

¥ Middleware Application

Providers¥ webMethods

¥ Understand barriers to electronic

payments and remittances and

determine corporate needs

¥ Large Corporations¥ Ameren

¥ General Motors

¥ Exxon

¥ Obtain bank perspective on initial

Phase II findings and components.¥ Financial Institutions

¥ Member Banks

Category

• Buyer, Seller, andMarketplaceApplication Providers

• Enterprise Resource

Planning (ERP)Application Providers

• Electronic InvoicePresentment andPayment Providers

• Large Corporations

• MiddlewareApplication Providers

• MarketplaceOperators

• Financial Institutions

Research Need

• Understand how currentapplications are facilitatingprocurement, invoicing, andpayment for goods and services

• Understand buyer and seller

accounts payable and accountsreceivable processes

• Evaluate current invoice andpayment providers in theelectronic payments andinvoicing arena

• Understand barriers toelectronic payments andremittances and determinecorporate needs

• Assess translation features andfunctionality of middlewareapplications

• Understand how marketplacesfacilitate B2B Commerce

• Obtain bank perspective oninitial Phase II findings andcomponents.

Interviewee(s)

• Ariba• Commerce One

• Oracle

• SAP

• BCE Emergis• Bottomline Tech.• Xign Corporation

• Ameren• General Motors• Exxon

• webMethods

• Covisint• Pantellos

• Member Banks



The iC&S team completed several brainstorming workshops to analyze research find-

ings in the context of the iC&S project. The results of the four phases of research have

been synthesized into conclusions and key findings, which are discussed in detail in

the sections below.There are three sections:the first is a quick look at the current state

of business transactions and payments, the second is overall conclusions and key

research findings,and the last is general findings summary ofvalue chain interviews.

These conclusions form the foundation for the Phase II direction of the iC&S project.

2. Current State of Business

Transactions and PaymentsWhile conducting its research, the iC&S team discovered many variances in business

transactions and payments depending on the size of the company.Business remit-

tance information requirements,payment models and system transaction processes

vary considerably across industries,corporations and, in some cases,across distinct

divisions of a single entity.As a result, the current business transaction and payment

environment is fraught with inefficiency and complexity making progress slow but

offering a huge opportunity to streamline the process.

■ According to a recent study by the Federal Reserve Bank, 3.9 billion business-to-business remittance payments are generated in the United States on an annual

basis. 86% of business-to-business payments are via paper check.

■ Only 14% of business-to-business payments are electronic.Of electronic pay-

ments 70% are ACH based, 17% are FEDI based and 9% are credit card based.

■ According to that same study, there are over 8.5 billion remittance payments from

consumers-to-businesses executed annually by paper check.

■

Across industries,32% ofelectronic payments cannot be applied automatically.If remittance information is sent with an electronic payment, 58% provide ACH-

based information, 17% provide separate data files,14% provide FEDI/EDI-based

information and 11% provide paper-based remittance information.

4



Despite the capability to initiate and receive electronic payments with remittance

information (e.g.CCD+ and CTX data formats), it is clear the vast majority of

businesses continue to rely on the time proven paper check payment process.

Corporations cite many reasons for why they do not originate electronic payments:

1. Seller does not disseminate account information required to make electronic

payments (e.g.invoices do not contain an electronic payment remittance

address).

2. Buyer accounts payable/banking system cannot create electronic

payments (ACH or wire). Many PC-based small and medium sized business

accounting software packages do not have electronic payment initiation orreceipt capabilities.

3. Perception of a loss of float.

4. Buyer cannot provide electronic remittance information.

5. Incompatibility of beneficiary accounts receivable system to handle electronic

payments with remittance information.

6. Conflicting,multiple message formats and a lack of minimum remittance

information standards.

7. Cash management systems available to small and medium sized businesses

have either poor electronic payment capabilities and/or poor integration

facilities to back-end AR/AP systems.

8. Banks may not have the capability to deliver (sufficient) electronic payment

and remittance information.

9. Payment systems lack a proof of payment confirmation for electronic

payments.

10. Execution of trading partner agreements are time consuming and costly.

5



3. Key Findings

The following sections cover the overall conclusions and key research findings,andprovide you with related survey statistics,observations, and focus group excerpts

that led to these findings.

Security is a major concern in movingpayments over the Internet

The Association for Financial Professionals (AFP) conducted a survey on

Electronic Payment Initiatives and the Internet, which addressed many of the

issues iC&S faces.Respondents to the survey were asked about their current use

of the Internet to conduct payments-related functions.About one-third of respondents use the Internet for purchasing and cash management.Significant

increases are forecasted for the use of the Internet in payments-related functions

in the next two years.

The Internet has been a major catalyst of the increase in the amount of electronic

payments originated by providing a channel for various parties in the payment

process to exchange more payment instructions,returns, remittance informa-

tion, etc. What this means however is that bank account information will be

traveling across public Internet lines exposing it to fraud along the way. The

largest percentage (67%) of AFP respondents—Internet users and non-users—rated security concerns as a highly important barrier.While the Internet remains

a catalyst for ePayments growth, the associated security issues remain important

obstacles to future use of the Internet for delivery of payment and remittance

information.

Many companies are at risk ofhaving unauthorized debits posted against their bank

accounts. In the past year there has been an alarming number of fraudulent transac-

tions to support the survey findings.A very relevant legal action arose over fraudulent

debits to a major brokerage firm’s bank account.

The criminal first obtained a credit card under a fake name. Upon

obtaining the card, the criminal established bill payment services

through a third party service provider.This third party payment

provider was advised to pay the criminal’s credit card bill by means of an

ACH debit to a specified bank and account number.The account infor-

mation given identified an account maintained by the major brokerage

firm, not an account under the criminal’s name.How the criminal got a

hold of the account information is unknown but there are plenty of

places your account number appears to the public,such as on checks.6



For six months this criminal charged thousands of dollars to his/her

credit card, which were then paid with electronic ACH debits to the

brokerage firm’s account. A total of 24 debits totaling over $130,000 were

taken illegally from the brokerage’s account before they were noticed and

stopped.The brokerage was reimbursed for the lost funds by their bank

that subsequently sued the bank initiating the debits,however they

incurred additional damages in the form of interest on the lost funds,

attorneys’fees, and other expenses.

If you think you are safe from ACH debit fraud, think again. Even payments associa-

tions have had problems with fraud. The criminal in question was able to initiate and

successfully receive association funds from several large ACH debits using the associ-

ation bank account information. The truth is,electronically debiting someone’s bank

account is rather easy to do, while hunting down the criminal and your stolen funds

is extremely difficult, tedious, and costly.

Credit “push” is preferred to debit “pull” model

Until recently, many organizations had prohibited ACH debits to their accounts and

would not divulge their account information to anyone.Surprisingly, companies are

now allowing ACH debits as a means of payment, however these payments are

mainly limited to regulations,taxes,and customer mandates.As a method of collect-

ing funds,direct debits are looked upon favorably, however,very few companies

indicated that they have asked their trading partners to change to such a payment

method. This message confirms the data in the AFP survey, which showed an interest

in debiting others but not in being debited. Companies rarely use ACH debits for

regular B2B payments for several reasons:

■ Fear of unauthorized debits

■ Mistakes in the amount debited

■ Loss of float

Our survey showed that nearly 38% of large-revenue companies and (8-10%) of

small and mid revenue companies have recently experienced unauthorized debits.

As criminals become more familiar with electronic payment systems the number

of unauthorized debits associated with fraud are expected to go up not down.

Aside from the real risks of being fraudulently debited, many focus group attendees

voiced that they are uncomfortable with the whole idea of someone debiting their7



accounts.Several said they are against the use of direct debits as a payment method

because of the loss ofcontrol.

We philosophically don’t want somebody to have the ability to come in and

debit our account. If there is a problem then you have to run around trying

to fix it.

In business-to-business transactions the debit model exists only for trusted trading

partner relationships or with large suppliers who have essentially forced their way of

doing business.

I don’t have problems if it is an IBM and the systems are really there withbells and whistles that are going to say hey this clown debited us for $2

million for no reason at all. It could be a mistake. It could be a deliberate act.

You watch what is going on in American business right now and there is

even less trust in terms of allowing people to come into [your account]

and [debit].

There was some awareness of the growing European acceptance ofdirect debits,but

by in large companies indicated that if used at all,direct debits have a limited function

in their operations currently and in the future.

I just have a real thing about people coming in and having the ability to

debit my account. Conversely we are trying to push [credit ACHs] on

the payment side.

Their strong preference is clearly for the credit push model.

The banking information necessary to initiatepayments is not always readily available

A minority of the companies interviewed or involved in the focus groups are current-

ly providing trading partners with their bank account number and asking to pay

and/or or be paid electronically. These more progressive companies are usually larger

and more sophisticated, often using EDI, account controls and having leverage to

force smaller companies to implement their payment requirements. In these circum-

stances the necessary banking information is given out, but in general the banking

information is not provided to give the vendor an option to pay electronically.

8



Few companies actively place banking information on invoices or in payment

instructions in an attempt to encourage electronic payments.This makes no sense

as most companies said they would like to receive more ePayments. Many companies

have security concerns about giving out their bank account number.

One middle market focus group was asked if giving out their bank account number is

an issue for them. Seven out of the eight said it was.

The larger companies who are already paying and receiving electronically responded

that they already give out their account number and are comfortable doing so because

they have debit blocks on their accounts or other protective measures.When you start

to look at middle market and smaller companies a concern for security arises wherepeople may not be employing protective measures.

A change in behavior is necessary to insure all companies have the option and infor-

mation necessary to make payments electronically.

There is proven interest in receiving remittanceinformation with payments rather than separate

Within the payments industry there is a general consensus that businesses would like

to receive remittance information electronically in the same stream as the payment.Having two streams requires a re-association process,causes confusion, increases the

risk of loss, and is more time consuming.The iC&S project was started with this

assumption or premise in mind; however, this had to be validated.

In the AFP survey, the number one barrier to receiving electronic payments was that

companies don’t receive the same remittance information as they do with checks,

causing difficulties in reconciliation. The survey found that almost 70% oforganiza-

tions use some type of electronic transmission, however this consists of bank trans-

mission, fax, email, and VANs. The information and payment instructions are often

split and transmitted separately.VANs and EDI are the only format that can integratewith accounts receivable systems for automated reconciliation and those are usually

used by large corporates who have huge volumes to justify the cost.

When money is received without remittance information, whether paper or electronic

it causes exceptions and manual intervention for accounts receivable personnel trying

to reconcile the payment. Many companies are simply unwilling to receive electronic

payments without remittance information.

9



The initial survey tested the concept of integrating payment information with the

payment and providing it in the same stream rather than separate.Overall, 65% of

companies expressed an interest in integrating payment information with electronic

payments.

Figure B

RECEIVING INFORMATION WITH PAYMENTS

This sentiment was reverberated several times in focus groups and in interviews.

I’ve got 20 people applying cash from the checks. If it was all-electronic and the sys-

tems talked to each other you could eliminate those bodies.

By providing remittance information in the actual payment you are increasing hit

rates and decreasing the amount of time and money spent reconciling “unidentified”

payments.Companies have sited this is a major value-add to their accounts receivable

operation.

10

8%

42%

24%

15%

36%

32%

15%

44%

25%

100%

80%

60%

40%

20%

0%$10 MM <$250 MM $250 MM < 500 MM $500 MM or Larger

(n=50) (n=53) (n=52)

8 to 10 Very Probably to Certain

5 to 7 Likely to Very Likely3 to 4 Neutral

0 to 2 Low

24%

42%

8%

26%

32%

36%

15%

17%

25%

44%

15%

15%



Integration with accounts payable and accountsreceivable systems is a major barrier to achievingstraight-through processing

The AFP survey states that lack of integration between electronic payments and

accounting systems was the barrier identified by the largest percent of respondents

(78%). This need for integration with accounting packages to ease reconciliation is

real,and more and more intermediaries are entering with products and value added

services to address the issue. Financial EDI was created many years ago to solve this

problem. Standards were introduced and products were created,however,it has seen a

very slow adoption, limited to the largest corporations, mainly due to high start-up

and maintenance costs.

More recently products such as Surepay,Clareon, and Bottomline have appeared on

the market attempting to solve some of the problems associated with supplying and

receiving information rich payments.These solutions are providing the facility to cre-

ate and handle information and the integration to accounts payable and receivable

systems to access remittance detail and facilitate automatic reconciliation. These solu-

tions exist because there is a gap in the payment process and a demand for efficient

payments and accounting.

Accounts payable systems can initiate electronicpayments with remittance information, however fewpackages and hence companies have this capability

Most accounts payable packages do not have sufficient abilities to initiate electronic

payment instructions with information and send them to banks.The largest vendors

such as SAP and Oracle have electronic payment capabilities and can integrate the

accounts payable with banking services,however it is often a customized integration

rather than standardized. This capability drops offas you move out of the very large

corporate segment with small business accounting systems having no electronic

payment functionality. Furthermore, the integration with the banking services is not

always provided or is expensive to implement. The A/P systems need to not only

generate electronic payments,but also fully utilize the 820 CTX, CCD+ payment

information standard currently available.

A common theme in most middle market and small business focus groups was that

their accounts payable systems were setup to generate checks not electronic pay-

ments.Most mentioned that they have a separate more manual process for initiating

electronic payments.Wires are generally ”phoned in”because the PC interfaces11



cannot be cost justified if they do not have large volume.ACHs are usually done

through a desktop or web cash management system that does not integrate with their

accounts payable system.Companies do not have cash management software that

fully utilizes the available 820 CTX,CCD+ payment information standard, prevent-

ing them from adding remittance details. This is a major barrier because it essentially

is easier for their staff to print checks, while electronic payments is often a new,

additional and less controlled process.

Accounts receivable integration is criticalto automated reconciliation

System integration issues exist on the other side ofthe financial supply chain as well.The impor-

tance ofreceiving remittance information along with payments was discussed earlier,but in order

to automate the reconciliation process accounts receivable systems need to be integrated into a

company's cash management system. Businesses have cited problems with multiple standard

data formats and a lack ofintegration between electronic payment systems and accounting sys-

tems.Frequently there is an incompatibility ofbeneficiary system to handle any additional remit-

tance information ifit were provided.The data supplied by the buyer needs to be in a standard

format,the receivables system must be able to accept the information from their bank and the

system should apply the payment through matching with supplied information fields.

The larger corporations usually had this capability or used EDI to achieve reasonable

hit rates.Fewer companies in the middle market and small business had this capabili-

ty, and the ones who did were forced to comply by larger companies.Without one

dominant standard, even within EDI,companies are burdened with multiple pay-

ment and remittance data standards compliance.Companies have to do customized

systems work to accept electronic payments and take advantage of electronic remit-

tance information.Again with many proprietary systems out there this barrier can be

a significant deterrent from accepting electronic payments.

A minimal amount of standard information needsto accompany payments to facilitate automatedreconciliation

Even when companies are capable of receiving and reconciling electronic payments

and information they rarely have enough quality electronic data to automate their

ledger reconciliation.According to our survey, approximately 1/7 of all payment

remittances is electronic and includes enough information for automated

reconciliation.12



Figure CRECEIVING USABLE REMITTANCE INFORMATION

One of our checks can cover over 100 different invoices.We have charge

backs for advertising,allowances,etc. I wouldn’t get any of that informa-

tion to my knowledge if it were done electronically. I wouldn’t even know

how to conduct my business.

The amount of information that each company requires for reconciliation varies with

industry but there is a minimal set of information that would satisfy the majority of

businesses that currently get little to no remittance information. The focus groups andcorporate interviews asked about the minimal pieces of information required for rec-

onciliation. The short list below summarizes their responses in order of importance:

1. Customer account number or name

2. All invoice numbers

3. Amounts of each invoice

4. Amounts being paid on each invoice

5. Discount or dispute reasons per invoice13

0% 20% 40% 60% 80% 100%

$10 MM <$250 MM(n=50)

$250 MM < 500 MM(n=53)

$500 MM or Larger(n=52)

58% (n=29) 62% 50%

66% (n= 35) 48% 56%

64% (n=33) 53% 60%

of Those Who ReceiveRemittance DataReceiving Remittance Data

Average % of Data ReceivedElectronically

Data is Sufficientfor AutomatedReconciliation



Additional remittance information requirements are industry specific and should be

defined among trading partners.People in the focus groups maintained that the

information fields must be standard, simple, and flexible.

All I would need is an invoice number and the amount and I can track who

the customer is and what that specific job was. That would be sufficient. I

think the extra information for disputes is good too.

Current standard processes and requirements vary across and within industries,ven-

dors and B2B value chain participants. However, minimum remittance information

requirements should be industry, vendor and participant independent.As a result,

corporations would like standard data formats for electronic payment and remittance

information across banks and B2B value chain participants.

So where should this information come from? The minimum relevant remittance

information currently resides in buyer accounts payable systems and must originate

from the buyer (payer) organization.Relevant remittance information is the result of

completing the “okay to pay”process by the buyer.As a result, exception information

(e.g. short pay) resides in the account payable or dispute management systems of the

buyer.Intermediaries may not always capture details of the “okay to pay”process;as

a result, the best source of remittance information is the buyer’s account payable

system.

The initial concern of companies when presented with the possibility ofadditional

payment information fields in an electronic ACH or wire payment, is that their trad-

ing partners will not fill in the information if its not automatically filled by the accoun

payable system. Upon further probing, however, it was discovered that most companie

are in fact willing to fill out the necessary remittance information on an electronic

payment if they have a standard payment format that includes clearly defined fields.

What is the motivation for your customers to fill out electronic remittance

information?

– Avoid a phone call back.

– Avoid late charges or being put on credit hold.

– Don’t have to look up why your invoice is wrong the following month

because you were credited wrong.

It is important that companies be credited properly for their payments,which moti-

vates them to remit payment properly. This will save their accounts payable staff the

time spent taking calls from suppliers investigating past payments.Additionally, it14



would avoid receiving incorrect future invoices from suppliers that include previously

paid charges.

If I am not going to pay the entire amount of the invoice, I am going to tell them

why I am not going to pay it.If I don’t,they will continue to bill me the extra.

Float is still a major issue for many companies

Companies have been very slow in migrating to electronic payments partly due to the

perceived loss of float. The AFP survey showed 47% of respondents rated the loss of

disbursement float as a barrier of moderate or high importance.While the AFP saw

this as a reduction from previous levels, the focus groups found that is still top of

mind with the majority of companies.Opinions on float are very industry specific

but float definitely effects daily decisions on payment types and dates in the majority

of companies.

I like the idea of float. It is really hard for me to give it up. With the float I

can send out a check and it may not clear for four or five days. So that has

always been a thing with me because float is very significant and we have a

lot of money out.

Companies that were especially tied to float had some characteristic upon which thismotivation was based, such as having high dollar transactions and/or balances so the

float, can be significant. There were a few companies that had converted to a philoso-

phy of efficiency and they relayed their insight as to how they got past the float

issue.

Success stories in attempts to turn receipts of checks into receipt of electronic pay-

ments usually included an incentive for paying electronically.One of the incentives

mentioned frequently was splitting the benefits of the float by giving a small

discount of 1-2% for paying on time. Companies have also used payments to

negotiate a closer trading relationship giving companies incentive to pay electron-ically and on time.

What happens if they ask you to pay electronically? If it is a relationship, of

course we will do it. You have to negotiate the terms. If it is 2/10 you are

hopefully changing it to a 2/14 or something like that to make up for it

It is clear that companies many times need an incentive to pay electronically.

From their point of view they lose the float and might have to make system

changes so they want something in return, either more business or better terms.15



Many misperceptions still exist… more educationand promotion is needed

The benefits of using electronic payments are generally understood but there are

many misperceptions and gaps in knowledge of ACH, wire,and other bank services

that often cloud judgment on using electronic payments.

The focus groups highlighted the many misperceptions in the market and they are

not necessarily limited to small business.The list below highlights the more impor-

tant misconceptions heard that affected people’s intentions to use electronic pay-

ments.

■ The importance of float versus cost and efficiency

■ The low cost of checks versus ACH

■ Once an ACH is initiated it cannot be returned

■ There are no confirmations or trace numbers for electronic payments

■ Pre-notes are required for every transaction

Lack of end user awareness of the defined payment information fields and ACH

origination tools is very apparent. Not one person mentioned the fact that current

ACH CTX formats have defined fields for most of the information being discussed.

There is clearly little to no promotion of the information capabilities ofACH and

wires.Therefore,companies need to be educated on electronic payment capabilities

and to be provided with the tools to move towards straight-through processing

(STP). Banks should be positioning themselves in assist their customers in reaching

this next level of efficiency in financial transactions.

I have never had anybody call me or send me anything in the mail. There

isn’t a big movement to promote [electronic payments]. If I had someone

knock on my door every week maybe I would become more knowledgeable

and go from there.

Differences in company size and industry will guidemarketing of electronic payments

There are many different payment/ remittance requirements across and within indus-

tries.Consequently, any standard or solution needs to be flexible in handling current

and future processes,and remain industry independent to drive adoption.16



Some industries, such as financial services have characteristics that lend themselves to

electronic payments, such as sophisticated systems,while others such as construction

are hindered by the nature of their business to require signatures.Companies in the

focus groups expressed that some of their smaller customers are not sophisticated

enough for electronic payments and would most likely not comply with any requests

for electronic payments. Larger companies are more likely to be using electronic

payments and Electronic Data Interchange (EDI).

The focus groups provided insight into which industries and company sizes might be

more prepared and interested in electronic payments products. The research did not

cover all industries or provide an in-depth knowledge of their characteristics,howev-

er the chart below organizes the observations regarding which markets should be

targeted for ePayments.

17

Figure D

TARGET MARKETS FOR ELECTRONIC PAYMENTS

S o

p h i s t i c a t i o n

/ R e v e n u e

S i z e

High Sophistication / Large Corp

Medium Sophistication / Middle Market

Low Sophistication / Small Biz

ProfessionalUtitlities

Service RelatedMedia

Finance

PublishingComputersHealth CareConstruction

TravelAgriculture

RetailAuto & Manufacture



4. Value Chain Interview FindingsThe following sections summarize the observations and findings from the value

chain interview process.With all the attention given over the past two years to elec-

tronic invoice presentment and payment (EIPP) and e-marketplaces, The Clearing

House decided to investigate any progress made in those areas.

EIPP

To gauge the impact EIPP will have in the next few years, respondents were asked

their intentions towards this new solution. 60% of large corporates and 75% of mid-

dle market said they do not use or intend to use an EIPP service.

Figure E

EIPP ADOPTION

This approximately matches the AFP data, which found that only 36% of respondents

plan to use Internet billing while 55% of respondents plan to make purchases over the

Internet. In the interviews it appeared that few EIPP vendors have gained much trac-

tion with corporates,but several have established relationships with banks.There def-

initely is interest in electronic billing products and EIPP vendors will be a prominent

player in any work on payment information standards or transmission.

18

27%

12%100%

80%

60%

40%

20%

0%

$10 MM <$250 MM $250 MM <$500 MM $500 MM or Larger(n=50) (n=53) (n=52)

Users

Non-Users/Intend to Use

Non-Users/Non-Intenders

12%

12%

76%

21%

21%

58%

12%

27%

61%



There are several models for invoice presentment and payment, most of which are

seller centric where the seller hosts and controls the application. The seller centric

model uses the direct debit model as the form of payment. For EIPP vendors the

direct debit model is easier to implement since they must only connect to a single

gateway bank to process the payments.As was discussed earlier the direct debit

model is not the preferred form of electronic payment and will restrict participation

in EIPP solutions.Companies using EIPP services for presentment, are rarely using

the electronic payment functionality.

Major EIPP vendors are beginning to shift their business focus towards buyers,

where the buyer would host and control the EIPP application. In addition, buyers are

exerting more transaction leverage to make suppliers comply and enroll in buyer-

hosted EIPP applications.

EIPP and other intermediaries are facilitating remittance information transmission

outside the bank channel,and separate from the actual payment instruction.

Accordingly,EIPP and intermediaries are providing ERP and legacy integration

tools to pull remittance information from sources such as accounts payable systems.

eMarketplaces

Turning to marketplaces,the predictions of profound changes in the way business is

transacted with the introduction of marketplaces and the estimates for transaction

volumes going through them have fallen short. During the peak of the Internet

economy, corporations were racing to develop eMarketplaces to provide supply and

financial chain services.Accordingly, financial solution providers entered the B2B

Internet arena to provide one-stop financial service solutions,such as Financial

Settlement Matrix and Financial Services Engine.

The picture has changed with many public marketplaces folding and a move towards

private supply-chain focused marketplaces. In interviews, eMarketplaces and mar-ketplace enablers said that they have given little time or effort to automating the

payment piece of the transaction. The eMarketplaces are in a survival mode, re-

focusing their core business by facilitating collaborative commerce among trading

partners.Furthermore, the major initiatives for eMarketplace financial solutions

have been put aside.

19



Buyer FindingsGenerally,payments continue to be dominated by paper checks while the electronic

debit payment model is the most widely accepted electronic payment process by trad-

ing partners with established, trusted relationships.Where trusted relationships exist,

the majority of the payments are triggered from non-invoice documents (e.g.evaluat-

ed receipts, advanced shipping notices,etc.) rather than from traditional invoices.

Relevant remittance information originates from the buyer (paper) organization and

is typically exchanged outside of the payment instruction.

Buyers who are using electronic payments frequently transmit remittance informa-

tion through intermediary enablers or via VAN EDI to ensure remittance informationis delivered to trading partners.Buyers view intermediaries and VAN EDI as a more

viable and cost effective remittance information delivery channel than banks.

Interviewees cite the burden associated with compliance to a wide variety of standard

data formats across banks as a reason for use of alternative information delivery

channels. Buyers are burdened with complying with multiple standard data formats

in bundling payment information with corresponding remittance, and the associated

costs in sending full remittance detail. Full remittance information includes the origi-

nal remittance information and the corresponding exception detail.Lastly, B2B buy-

ers place a low priority on driving efficiency in the payment initiation process and

place a high priority on driving efficiency in the “okay to pay”process.

In the case of seller hosted and controlled EIPP services,buyers viewing electronic

invoices rarely use associated electronic payment functionality. This is due to con-

cerns about the debit model,lack of education about the benefits ofelectronic pay-

ments and/or the buyer inability to initiate electronic payments. Buyers have shown

that they are more comfortable with the credit model for payment transactions.

Seller Findings

The iC&S team found B2B sellers share similar concerns with their buyer counter-

parts.When sellers receive remittance information with electronic payments, they are

burdened with translating multiple payment and remittance information standards.

The main seller concern is receiving electronic payments without the corresponding

remittance information to properly apply payments in the accounts receivable system

Sellers would also like exception detail as part of the remittance information. In the

20



case where remittance information is provided via a lockbox file (i.e.BAI), sellers are

identifying customers from the check MICR line—not the customer account number

or invoice number. Lastly, sellers expressed an interest in having visibility to incoming

payment and remittance information.

5. ConclusionAs mentioned in the introduction, the result of the iC&S project will be payment

system improvements that will include both system enhancements and business prac-

tices that will address the barriers to electronic payments identified by this research.

One of those barriers was that the information necessary for initiating an electronic

payment (i.e. bank routing and account numbers) is rarely made available because of

security reasons. The first feature, or Phase I of the iC&S project, was the develop-

ment of the Universal Payment Identification Code (UPIC), which helps to overcome

this barrier. The UPIC is a unique number assigned to a company’s bank account,

which masks confidential banking information while facilitating electronic payments.

UPICs make companies feel very comfortable distributing their banking informa-

tion, allowing them to promote the receipt of electronic credit payments.UPICs are

now available to all financial institutions,which are members of the Electronic

Payments Network (EPN).

In Phase II of the iC&S project,The Clearing House is focusing on three

components,which address additional barriers identified by this research:

■ Increase UPIC Adoption through Targeted Applications and Markets (e.g. UPIC

for home banking)

■ Promote Improved Electronic Payment Initiation and Receipt Capabilities

in Accounting Software and Cash Management Systems

■ Define Standardized Remittance Information Requirements for STP

21



For more information or questions please contact:

Press Banks and Companies

Chip Savidge Chris Nautiyal

Communications Director Director of iC&S

(201) 319-5478 (201) 319-5515

[email protected] [email protected]

Advancing Payment Solutions Worldwide

Payments Study

Documents

Transcript of Payments Study