B2B electronic payments: putting wind in the sails.

Despite the formidable incumbent status of the check in business-to-business transactions, its dominance will wane. Various industry, technological and regulatory trends will propel the adoption of e-payments. The economic interests of banks, third-party solution providers and corporations will align--overcoming the "chicken and egg" syndrome of insufficient demand to generate supply and vice versa.

The state of business-to-business payment processing today, however, is a far cry from ideal. Companies continue to pay by check because it works satisfactorily, though not optimally. Accounting and auditing processes have been built around the check and it provides all the remittance detail anyone could want. The only trouble is that paying by check is a paper-based process that, while not "broken", is increasingly cumbersome, expensive and unnecessary. Moreover, it is financially inefficient. Check payment reconciliation is the most painful part, for it can take five to seven business days, which strains the working capital of any company. The only automated part of the process at most midsize to large companies is payment initiation. Even for this element, however, the fact that a proprietary infrastructure tends to dominate makes it less efficient and more expensive than the ideal state in which standards and open systems reign.

Driving Forces

The factors that will blow wind into the business-to-business e-payment sails will come from several directions. At the macro level, industry, technological and regulatory trends will propel the adoption of e-payments (e.g., development of standards and demand for financial transaction transparency and accountability). At the third-party level, banks and solution providers will gradually contribute to facilitating the adoption of e-payments. At the company level, numerous pioneers have already been instrumental in the key areas, such as standards development, and have automated their financial supply chain.

Of all the forces that will blow wind into the e-payments sail, the gale force will come from the development of payment messaging standards. Currently, XML-based standards are just beginning to leave the calm zone and generate a breeze. Over the next decade, they will build up power as corporations, banks and third-party technology providers promote and support their use. Eventually, XML-based standards will become the EDI for the masses. Standards will reign because they offer superior data and information exchange. As has been proved in financial markets (e.g., foreign exchange) and in manufacturing (e.g., just-in-time), rich and fast information access translates into competitive advantage and revenue streams. In cash management, banks and third parties that deliver rich remittance data that can be automatically reconciled along with the payment will win against their competitors.

Standards Development

Several organizations have been tackling standards development. Not surprisingly, they differ in terms of goals and participants. The rise of several influential non-bank dominated organizations signals the fact that banks or bank-led organizations have not met all the financial supply chain needs of corporations, though they have made important payment- and treasury-related inroads. Leading torchbearers for next-generation, XML-based standards for payment-related transactions include TWIST (Treasury Workstation Integration Standards Team), RosettaNet and SWIFT.