business-to-business payment systems: an · pdf file reprinted with permission. mastercard...

Business-to-Business Payment Systems: an Overview

A study by Celent Communications

JOB NUMBER: 2-8842 COLOR: 4C plus 1 spot: PMS 137, PMS 423

2-8842 B2B Payment System3 6/6/02 3:53 PM Page 2

MasterCard International’s eB2B solutions give members the power to develop

new opportunities in cash and check displacement, acceptance,

and international trade.

MasterCard is pleased to provide you with this report from Celent

Communications. This report examines electronic payment systems

and highlights MasterCard SmartLink™* as a solution that will help

accelerate B2B payments into the electronic realm. MasterCard

SmartLink is the MISSING LINK™ in Enterprise Resource Planning

systems, making automated data integration, streamlined

procurement, and expense management a reality.

MasterCard SmartLink has been certified by the SAP Integration

and Certification Center.

*MasterCard SmartLink is the program name in the United States only. Outside of the US, the program is referred to as MasterCard’s ERP Integration Program.



www.celent.com

Reprinted with permission. MasterCard bears no responsibility for the content.

1

Business-to-Business Payment Systems: an Overview

© 2002, Celent Communications. Any reproduction of this report by any means is strictly prohibited.

M A Y 2 0 0 2

By Alenka [email protected]

Celent Communications183 State StreetFifth FloorBoston, MA 02109USA

Tel.: +1.617.573.9450Fax: +1.617.573.9455Email: [email protected]

www.celent.com

MasterCard Internationale-Commerce and e-B2B Center ofExcellence2000 Purchase StreetPurchase, NY 10577USA

Philip PhilliouVice President, e-Business and Emerging Technologies (eB2B)Tel.: +1.914.249.6841Email: [email protected]

Shari KrikorianDirector, e-Business and Emerging Technologies (eB2B)Tel.: +1.914.249.5871Email: [email protected]

www.mastercardbusiness.com

T A B L E O F C O N T E N T S

E X E C U T I V E S U M M A R Y . . . . . . . . . . . . . . . . . 3

B 2 B P A Y M E N T S Y S T E M S . . . . . . . . . . . . . . . 5

T H E P E R S I S T E N T R E I G N O F C H E C K S I N T H E U . S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

E L E C T R O N I C P A Y M E N T V E H I C L E S E X T E N D T H E I R S C O P E . . . . . . . . . . . . . . . . . . 8

A N E L E C T R O N I C P A Y M E N T S O L U T I O N : B E Y O N D B A N K S . . . . . . . . . . 9

T H E F I N A N C I A L S U P P L Y C H A I N ’ S L O N G A N D W I N D I N G R O A D . . . . . . . . . . . . 9

M O V I N G T O A N A U T O B A H N : M U L T I P L E P L A Y E R S O L U T I O N S . . . . . . . . . . . . . . . . . . . . 11

P U T T I N G T H E B Y T E I N T O T H E B 2 B P A Y M E N T P R O C E S S . . . . . . . . . . . . . . . . . . . 1 3

P L A Y E R S P A V I N G T H E E L E C T R O N I C R O A D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

P U R C H A S I N G C A R D E N H A N C E M E N T S : M A S T E R C A R D S M A R T L I N K F O R E R P 14

O T H E R C A T A L Y S T S : C L A R E O N A N D X I G N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

C O N C L U S I O N S . . . . . . . . . . . . . . . . . . . . . . . . . . 2 0

G L O S S A R Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Executive Su

mm

ary


2-8842 B2B Payment System3 6/6/02 3:53 PM

Business-to-Business Payment Systems: an Overview May 2002

© 2002, Celent Communications. Reproduction prohibited. www.celent.com

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E X E C U T I V E S U M M A R Y

Visions of a paperless payment process began in the 1970s. Automated clearing house (ACH) payments, wire transfers, and electronic data interchange (EDI) were expected to change the face of the U.S. payment system. Flash-forward to the 1990s: unlike many European countries, the U.S. continues to use the check as its primary payment vehicle. Not enough financial institutions and businesses have directed their energies toward pursuing the paperless dream. Only the largest corporations have been able to tell their suppliers to “go electronic or go away.” The threat, however, has been relatively idle. Most conduct only a quarter of their business electronically, if that.

So what is different in the 2000s? As evinced by Europe’s embrace of electronic payment channels, the check’s predominance is not impossible to overcome. This report examines the factors and the players that will dislodge the check from business-to-business payment systems (B2B refers to both online and offline deals). Our major conclusions are:

• The striking dominance of the check in the U.S. (82% of total volume of B2B payments and 65% of total value) can be explained by four factors: universal acceptance, legacy systems and processes, lack of an electronic payment standard, and price.

• The greatest impediment to the adoption of electronic payment vehicles lies not with the settlement systems (e.g., ACH) but further upstream. For any electronic payment solution to succeed, it must be integrated into the broader financial supply chain, which begins with invoicing. Consequently, solutions involve not only banks but also software vendors, which are automating the financial supply chain.

• While the Internet has not been the boon to B2B commerce that it was once expected to be, it is a boon to electronic payment systems because it enables one-to-many and many-to-many transactions and encourages message standardization.

• The migration of U.S. B2B payments to electronic channels will be an evolutionary process for there are no revolutions in the wings. While electronic payments will be gradually propelled by bank and non-bank initiatives to automate the financial supply chain, they will not overtake the check in terms of value (US$) until 2008. In terms of volume (number of transactions), the check will continue to reign through the end of this decade.



4

• Among the electronic payment catalysts are: enhanced purchasing cards (e.g., MasterCard SmartLink stands out) and the coupling of ACH payments with rich remittance information (e.g., Clareon and Xign). Together these initiatives will fuel the overall momentum to adopt electronic payments vehicles.

• Ultimately the adoption of electronic payments depends upon the businesses themselves and their willingness to restructure their payment processes and systems around an electronic solution.

This report begins with a comparison of payment systems in the U.S. to those in other countries. The second section describes how any electronic payment solution must be part of the broader financial supply chain, which will entail collaboration between banks and software vendors. The third section examines the factors and players contributing to the widespread adoption of electronic payments, profiling MasterCard’s SmartLink and initiatives by Clareon and Xign.

B2B

Paymen

t Systems





5

S H O W M E T H E M O N E Y : B 2 B P A Y M E N T S Y S T E M S

An overview of the status quo and individual payment vehicles is useful to set the stage for an evaluation of the future of business-to-business (B2B) payment systems. (Here, as elsewhere, B2B denotes both online and offline transactions.) Almost all types of non-cash payment vehicles are used in B2B transactions: checks, commercial credit cards (including purchasing cards), automated clearing houses (ACH) transfers, and wire transfers. The dominant payment vehicle in the U.S. is by far the check, accounting for 82% of total B2B payments volume and 65% of total value (Figure 1). ACH dominates commercial cards in terms of both volume and value, with commercial cards having a very small sliver of the value. Wire transfers are excluded below because they are predominately used for large-value inter-bank and inter-clearing house transactions and account for a small fraction of B2B payments. They are, however, included in Table 1 (page 6), which shows volume and value figures as well as average transaction size.)

In terms of pure use and acceptance, wire transfers rank second after the check. 98% of corporations make wire transfer payments, and 93% receive them, according to a survey by the Association of Financial Professionals. Wire transfers are followed by ACH credits (82% and 83%, respectively), ACH debits (71% and 45%, respectively), and commercial cards (52% and 29%, respectively).

Figure 1: Total B2B Payments in the U.S. in 2001

Source: Celent Communications*ACH transactions exclude cash concentration transactions (used by corporations to consolidate accounts).

Volume Value

13.2%5.2%

81.6% 65.2%

33.9%0.9%

9.1 billion transactions

ChecksACH*Com’l.cards

US$31.3 trillion



6

T H E P E R S I S T E N T R E I G N O F C H E C K S

Electronic vehicles have usurped the check in most developed countries except the U.S. (Figure 2). The migration toward electronic channels in Europe and Canada provides

Table 1: B2B Payment Systems Volume, Value, and Average Transaction Size

Payment VehicleVolume(million)

Value(US$billion)

Avg. Transaction Size(US$)

Checks 7,440 20,370 2,738

ACH 1,220 10,600 8,689

Commercial Cards 473 290 613

FedWire* 110 425,330 3,797,619

CHIPS** 60 311,700 5,195,000

Source: Federal Reserve; NACHA; Celent Communications*Data estimated based on year-to-date 3Q2001. **The Clearing House Inter-Bank Payment System, a wire transfer system run by the New York Clearing House

Figure 2: Migration to Electronic Payments Varies Across Countries: 1991-1999

Source: BIS; Celent Communication*Canada check value to GDP in 1991 is off the chart at 31.7 (prior to their Large Value Transfer System)Notes: NL = Netherlands; CH = Switzerland (includes only bank payment volume; France data are for 1998; the paper-based giro is included with checks because it is a check substitute.

0

2

4

6

8

10

12

14

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Check Valuedivided by GDP

1991 1999

Canada*

U.S.

U.K.

Italy

Norway

France

Germany

NL CH

Electronic Payments (% Non-cash Payments)



7

evidence of its feasibility in the U.S. Between 1991 and 1999, most European countries embraced electronic payment vehicles with three (Germany, Netherlands, and Switzerland) attaining over 95% penetration (percent of non-cash transactions). In contrast, the U.S. has only gradually replaced the check with electronic payments, moving from 18% of total non-cash payments in 1991 to 40% in 1999.

The persistent reign of the check can be explained primarily by four factors: universal acceptance, legacy systems and processes (i.e., inertia and lack of integration), lack of an electronic payment standard, and price.

Universal Acceptance. For B2B transactions, the check is the quintessential universal payment vehicle: nearly every business trusts and accepts it. Check payment initiation and tracking is ingrained in every accounts receivable, accounts payable, audit, and ERP system. (Auditors love it because it offers a relatively straightforward paper trail.) In addition, check payment can be readily accompanied by a full-page script providing rich remittance details, (e.g., differences between payment and invoice by line-item).

Legacy Systems and Processes. A majority of corporate executives cite lack of integration of a company’s electronic payment and accounting systems as a significant barrier to adoption of electronic payments. Banks have supported the check’s continued use by making check processing less painful for businesses. For instance, banks have improved lockbox services (e.g., linking the lockbox service with a corporation’s accounts receivable system) and shortened clearing times. As a result, float has become less of a problem (though some treasurers continue to fixate on it).

Lack of a Standard. In the U.S., the check has had relatively weak competition. U.S. banks and corporations have not thrown resources and marketing efforts behind electronic payment modes to the same degree as their European counterparts. Nor have they developed a payment standard, which is imperative for widespread adoption. In Germany, the German Banker’s Association developed a domestic payment standard linked to their ACH that has been accepted by all banks and a majority of corporations, a pan-industry collaborative effort that is unheard of in the U.S. This payment standard enabled widespread use of direct debit for C2B transactions, which has, in turn, percolated up to B2B transactions.

Price. As shown by the experiences of Norway and Finland, there is price elasticity. In the early 1990s, Norwegian banks decided to no longer subsidize check services with float and other “relationship” income (as U.S. banks do). By implementing direct pricing of check services, the cost of using checks rose while the relative cost of electronic payments dropped. By 1999, electronic payments’ share of non-cash payments had catapulted to 75%, from 28% in 1991. While U.S. banks could never raise prices uniformly due to antitrust issues, Norway’s experience provides a useful lesson about price elasticity.



8

E L E C T R O N I C P A Y M E N T V E H I C L E S E X T E N D T H E I R S C O P E

Although today’s electronic payment vehicles will suffice to serve B2B payment needs, they must be enhanced to make them more B2B-friendly. As a consequence, their scope in terms of transaction value will expand (Figure 3). For commercial cards, the ability to expand into new payment tiers will depend, in part, on value-added programs (e.g., MasterCard SmartLink) that provide superior data integration into accounting systems. For ACH systems, third-party software vendors, which provide means to attach prerequisite remittance information to the ACH payment, will play a pivotal role. In addition, the New York Clearing House (parent to EPN, an ACH, and CHIPS, a wire transfer system) is keenly eyeing medium to large transactions as means to boost volume. It has added an EDI capability to CHIPS and is developing other features which should pump more B2B volume through both CHIPS and EPN.

Figure 3: B2B Electronic Payment Vehicles Expand Their Scope (Avg. Value)

Source: Celent Communications*Includes purchasing cards (p-cards); average purchasing card transaction is US$273 (includes government transactions).**Excludes cash concentration transfers.

Payment Vehicle:

Wire Transfer

>US$1 Mil.

US$100,000to

US$1 Mil.

US$5,000to

US$100,000

<US$5,000

Checks Com’l. cards (incl. p-cards*)

ACH**

TransactionSize

US$2,738

US$613

US$5.2 mil. (CHIPS)

US$8,689

An

Electron

ic Paymen

t Solu

tion





9

A N E L E C T R O N I C P A Y M E N T S O L U T I O N : B E Y O N D B A N K S

In order to grasp the future of electronic B2B payment systems, the entire financial supply chain must be examined, from invoicing through payment settlement. With the cycle consuming a minimum of 30 days, payment settlement accounts for a small fraction of the time involved. Ultimately, whether a corporation uses a check or an ACH, the clearing and settlement time saved is at most 10% of the entire cycle. Much of the pain, and hence the greatest potential gain, is in the other 90%, that is, in the process that leads up to payment settlement. As a result, providers other than banks must be involved in streamlining the financial process. Collaborative solutions will excel.

T H E F I N A N C I A L S U P P L Y C H A I N ’ S L O N G A N D W I N D I N G R O A D

Business-to-business transactions involve a complex process with many variables. Each combination of variables adds nuance to the way the process transpires (Figure 4 lists the variables).

Figure 4: B2B Transaction Variables (shaded area = electronic)

Source: Celent Communications

Buyer/seller Relationship

Payment Initiation Mode

• Frequent, trusted

• Sporadic, moderate trust

• Infrequent, less trust

• Stranger, no trust

Internal SystemsPayment

Settlement

Transaction Size

• Small (< US$5K)

• Medium (US$5K – 500K)

• Large (>US$500K)

• Accounts payableand receivable

• ERP

Deal Location

• Off-line

- Domestic

- Cross-border• On-line

- PublicMarketplace

- PrivateMarketplace

Information Exchange Mode

• Mail

• Phone

• Fax

• Meetings

• E-mail

• EDI

• Internet (e.g., XML)

• Paper

• Telephone

• Buyer’s system

• Buyer’s bank’s Web site

• Seller’s Web site

• 3rd party’s Web site

Remittance and Reconciliation

Mode

• Mail

• Phone

• Fax

• FEDI

• ACH addenda

• Internet (e.g., XML)

• Manual (paper-based or manualentry)

• Check

• Purchasingcard

• ACH

• Wire transfer



10

As many of the early movers into B2B electronic bill presentment and payment (EBPP) have learned, wholesale transactions are not at all similar to retail ones. Solutions that work fine for retail are woefully inadequate for wholesale.

There are multiple points along the financial supply chain at which the process may stall or slow (Figure 5). Due to paper-based accounting processes, manual data entry, multiple systems, and attendant human intervention, the overall process consumes at least 30 days. Periods of 40 to 60 days are more typical, however, and periods of 180 days are not unheard of in Europe and in cross-border transactions. Shifting to electronic payment vehicles requires automating these cumbersome steps up the chain. According to surveys of corporate finance and treasury executives, the greatest barriers to using electronic payments are: (1) lack of integration of payment systems and accounting systems and (2) lack of sufficient information. Because many sellers offer buyers a discount of approximately 1.5% for early payment, the process is typically not prolonged by the buyer in order to take advantage of the seller’s implicit credit extension, or float.

Figure 5: B2B Financial Supply Chain—Points of Pain, Room for Electronic Gain

Source: Celent CommunicationsNote on accounting terminology: invoices and purchase orders are matched by buyers while remittance infor-mation and bank credits are reconciled by sellers.

Payment and remittance received

Seller

Buyer

Remittance attached to

payment

Payment authorized/

initiated

If sent to lockbox,remittance info

forwarded to seller

Seller’s bank

Seller

Invoice sent

Buyer

Invoice infoentered intoA/P system

SellerBuyer

Invoice infomatched with

purchase order

Remittance infoentered into A/R

system

Seller

Remittance inforeconciled with

bank credits

Buyer Seller

Volley of messages: phone, fax, e-mail, etc.

Manual entry Check cut and remittancesent, occasionally a

letter is typed

Manual entryVolley of messages

Risk of incomplete remittance info

A min. 30 – 60 day process



11

Although inefficiencies plague both buyers and sellers, the early experiences of solution providers is that buyers (i.e., the accounts-payable side of the equation) are more eager to reform their processes than suppliers.

M O V I N G T O A N A U T O B A H N : M U L T I P L E P L A Y E R S O L U T I O N S

Banks, which have historically owned the entire payment process, are no longer the sole controllers of the electronic transformation of the financial supply chain, thanks to two irreversible trends. First, the Internet has ushered in an era of open systems, enabling non-banks to enter the playing field. A variety of accounting and ERP software vendors and new intermediaries will make an important imprint on the financial supply chain over the next ten years and this will facilitate electronic payments (Figure 6). Banks, regarded as paragons of security, will continue to have a secure role in the process. The open question is how large this role will be.

The second irreversible trend is the rising cost of technology development, which makes collaborative efforts paramount. Few banks can afford to go it alone. Even the behemoths which have preferred to build versus buy are entering into joint ventures. (Table 2, page 12 cites some examples.) Moreover, banks are increasingly recognizing that their strength lies not in technological innovation, but in securing funds transfer, monitoring accounts, and

Figure 6: Multiple Players Will Propel Electronic Payments


Payment InitiationInternal SystemsPayment

Settlement Remittance and Reconciliation

Banks and their ACHs

• Oracle, SAP, PeopleSoft

• Intuit and Great Plains

Accounting & ERP Software Vendors

• iPlanet, IBM, Microsoft• Ariba, Commerce One, Clarus

B2B Software Vendors

• Clareon, Xign

Payment Network Service Providers

• Clarus Settlement (ERP integration)• Bottomline Technologies, BCE Emergis, BillingZone (EBPP)• SurePay (payments outsourcing)

B2B EBPP Software Vendors and Outsourcers

Credit Card Associations

• MasterCard International



12

managing risk. Their role requires risk aversion, whereas technology development excels in environments characterized by risk-taking and experiment.

Table 2: Rise in Collaborative Efforts Between Banks and Technology Companies

Financial Institution/ Consortium

Technology Company

Objective

Wells Fargo

Citigroup(separate initiatives)

OracleIntegrate banks’ respective payment initiation and settlement functions into Oracle’s B2B e-commerce products

Identrus iPlanet and IBM

Develop specifications for an electronic payment initiation and settlement application (iPlanet) for large-value transactions

Develop a commercial application (both)

MasterCard SAPEnhance purchasing card functionality by linking purchasing card information with accounts payable/receivable systems

Fleet Bank ClareonProvide rich remittance information with ACH payments (Fleet is an investor in Clareon and the ACH gateway bank in its model)

GE Capital OracleFacilitate reconciliation by electronically transferring purchase order information

PNC Bank(and Perot Systems; 50/50)

BillingZoneDevelop electronic bill presentment and payment systems for both the B2C and B2B markets

PayPal Intuit QuickenIncorporate an electronic bill payment feature in small busi-ness accounting software


Puttin

g th

e Byte in

to th

e B2B

Paymen

t Process





13

P U T T I N G T H E B Y T E I N T O T H E P A Y M E N T P R O C E S S

The migration of U.S. B2B payments to electronic channels will be an evolutionary process, for no revolutions are expected in corporations’ payment behaviors. Electronic payment systems are still immature, as demonstrated by the lack of standards and the presence of numerous competitors. However, several important bank and non-bank initiatives will accelerate the migration away from the check. Although these initiatives are just budding, the first-movers are showing strong potential with several gaining traction in the marketplace.

Their biggest challenge is building critical mass. No matter how good their technology is, the network externality theory holds: a certain number of buyers and sellers must be part of the system (as suggested by EDI adoption rates, critical mass could be as low as 10% of trading partners). The Internet is playing a pivotal role in building mass, by allowing one-to-many and many-to-many connections (versus the traditional one-to-one connection with EDI).

Automation is a complex process. Because it includes factors which can both spur and impede the adoption of electronic payment channels (Table 3) and the prospects of current

Table 3: Electronic Payments Driven by Some Factors, Slowed by Others

Growth Drivers Growth Inhibitors

Automation of the financial supply chain offers a multitude of quantifiable benefits that can deliver a sufficient return on investment:

• Integration of the payment and accounting systems

• Reduction in processing costs (primarily in reconciliation) and easier exceptions management

• Easier cash flow management through greater transparency of payment status

Automation will become increasingly easier to implement (or outsource) and use

Automation of the financial supply chain is not a panacea

• Requires restructuring of accounts payable and receivable processes to some degree

• Could reduce flexibility and impede customization of payment terms

• Does not eliminate errors and sometimes causes them (e.g., missed discounts)

Automation is less attractive to small to medium-sized companies:

• Limited cost savings due to small accounting staff

• Lack of systems in place to adopt straight-through-processing

Buyers gain:

• Ability to earn early payment discounts Buyers lose:

• Some still fixate on float and do not want to pay faster, even though they earn discountsSellers gain:

• Reduction in days sales outstanding




14

initiatives, the rise of B2B electronic payments in the U.S. will be incremental. By 2008, the value (US$) of electronic B2B payments (ACH, wire, and commercial cards, including purchasing cards) will surpass that of check payments, but the check will continue to dominate in terms of volume (number of transactions). In 2010, checks will still account for over half of all B2B transactions. In the long run, electronic payment modes will continue to nibble away at the check’s fiefdom, just as they have in Europe.

P L A Y E R S P A V I N G T H E E L E C T R O N I C R O A D

The banks and non-banks that will play a pivotal role in moving B2B payments into the electronic realm are those linking payment systems to accounting systems and developing electronic payment and remittance standards. Because their offerings are relatively new (typically less than a year old) or are still in the pilot phase, it is too soon to tell how they will evolve. Businesses, in general, are just warming up to automating the financial supply chain, and many are still recovering from massive ERP implementations. In the long run, the winners will be those that offer relatively easy implementation and ease-of-use, and deliver quantifiable benefits that exceed costs.

Table 4 lists players showing strong signs of enabling electronic payments. Although the strongest growth will be in open systems, it is important to note that EDI will continue to play a role at large corporations.

P U R C H A S I N G C A R D E N H A N C E M E N T S S T R E A M -L I N E T H E P R O C E S S

The purchasing card will nibble away at check volume thanks to initiatives such as MasterCard SmartLink. MasterCard SmartLink and its imitators will breath new life into purchasing cards by not only delivering rich information electronically but also by feeding the information into a company’s ERP system(s), leveraging the workflows and controls already built into these systems.

Table 4: Beacons of the Future of B2B Payments

Transaction Size(primary)

Provider Value Proposition

Small Value (<US$5,000)

MasterCard SmartLink Automation of rich remittance information tied to purchasing cards

Medium Value(US$5K-500K)

ClareonAutomation of rich remittance information attached to ACH payments

Xign Same




15

MasterCard has teamed with SPS International to integrate purchasing card transaction information into ERP systems (MasterCard SmartLink currently runs on SAP R/3 application servers), thereby allowing:

• For all participants, real-time transfers of data (versus the batch-mode currently offered by most purchasing card vendors) and an e-mail based workflow system, allowing cardholders and managers to monitor the transaction approval process

• For buyers, a review of daily transactions (vs. weekly or monthly) and the ability to generate transaction data on any purchasing cardholder company-wide (including cross-border)

• For authorization managers, the ability to review and change accounting data and direct it to appropriate cost centers

• For suppliers, links to their inventory, production, and procurement systems to determine manufacturing schedules

Figure 7 outlines MasterCard SmartLink’s purchase and approval process while Table 5 (page 16) summarizes the invoicing and payment process.

Figure 7: MasterCard SmartLink Streamlines the Flow of Purchase Information (an authorized transaction)


Company’s ERP server

MasterCard Central data repository

Authorized manager

Review accounting data

Direct data to appropriate cost centers for reconciliation

Send cumulative transaction data for review7

Merge data with info in accounting systems

and send to appropriatecost centers, funds, and general ledgerexpense accounts

6

8

Buyer/Cardholder

1

2Make purchase

SupplierSupplier’s

Bank

Request/receive authorization

3 Collect POS info and pay supplier

Download of data(throughout day)

5

4 Transfer transaction data(financial and product line itemdetails throughout day)



16

Given its value proposition, MasterCard SmartLink should jump-start growth in purchasing card transactions. Although improvements in purchasing cards will not extend their use beyond small-value transactions, it will extend their use across companies of all sizes and within companies that are current users.

O T H E R E L E C T R O N I C P A Y M E N T C A T A L Y S T S : C L A R E O N A N D X I G N

There are several other payment players that share MasterCard SmartLink’s goal of facilitating electronic payments by linking the payment process to the rest of the financial supply chain. The initiatives of Clareon and Xign make ACH systems more B2B-friendly by overcoming ACH’s shortcoming, the lack of rich remittance information. While every business wants to see the money, they also want to see sufficient remittance information explaining the money. With around 20% of all invoices involving an exception item, lack of remittance details causes delays, wastes accounting personnel time, and inflates processing costs for both sellers and buyers. Even if remittance information is sent electronically, it often goes by way of a bank and the payee receives it separately from the payment. In addition, EDI remittance can be error-prone (as high as 30% of transmittals).

Prior to the Internet, there was no easy solution to couple ACH with rich remittance beyond bank-provided proprietary systems, which required cumbersome, bilateral implementation. The Internet, with its open communications standards, has released a flood of possibilities. A project for the U.S. Treasury has spawned two contenders: Clareon and Xign (Table 6 provides background). Both players are relatively young (Clareon went live in the fourth quarter of 2000 and Xign in the third quarter 2001). Thus, their market penetration is just

Table 5: MasterCard SmartLink’s Invoicing and Payment Process

Process Details

Invoicing

Once an authorized manager approves the charges, SmartLink automatically generates an SAP R/3 invoice, which includes full line item data and is payable to the issuing bank

Purchase orders and goods receipts can also be gener-ated if accounting requires a three-way match

Payment

Upon receipt of the issuing bank’s statement, MasterCard SmartLink reconciles the transactions on the statement with the invoices

After reconciliation, MasterCard SmartLink releases the invoice for payment to the issuing bank




17

scaling up; they have facilitated over US$500 million in payments and fewer than 10,000 transactions.

The underlying technology of both Clareon’s and Xign’s product has its roots in a project funded by the U.S. Treasury to develop a secure Internet payment method in the late 1990s (the initial pilot project went live successfully in 1998). Although their legacy is in providing electronic payment for online deals, the silver lining of the disappointing B2B e-commerce traffic is that they have redirected their energies to serving offline deals, which explodes the market potential by more than tenfold.

The heart of each company’s value proposition is the same: attach the missing remittance details to the payment, and thereby facilitate reconciliation. Their technology pulls remittance information directly from accounts payable and ERP systems and links it to the payment, thereby enabling direct reconciliation against accounts payable and receivable. (Figure 8 provides a high-level diagram; differences between the two offerings are highlighted in Table 7, page 19.) Both are able to work with all the major system vendors (e.g., Oracle, PeopleSoft, and SAP).

The appeal of their offering is twofold. First, it does not require any major new software implementation. In Xign’s case, the offering requires only the integration of “adapters” that interface with accounting systems. In Clareon’s case, existing modules within the company’s systems are used, and thus no programming or coding is necessary. Both firms claim that set-up time takes at most three weeks (with the record being two days). For suppliers, registration entails twenty minutes. Second, their product focuses on being buyer-friendly (in contrast to the early B2B electronic bill presentment and payments solutions, which have focused on making invoicing easy for the supplier without sufficient attention to making payments easy for the buyer).

Table 6: Company Backgrounds of Clareon and Xign

Clareon Xign

Established March 2000 April 2000

InvestorsMayfield Fund, Technology Crossover Ven-tures, Morgan Stanley Dean Witter, Berkshire Partners, BancBoston Ventures

Charles R. Schwab, Matrix Partners, Charles River Ventures, FT Ventures, RDM Corp.

Financing1st round: US$15 mil. (3/00)2nd round: US$30 mil. (9/00)

1st round: US$14 mil. (4/00)2nd round: US$20 mil. (11/01)

Major customers

MSDW, Fleet Bank, Fairchild Semiconductor, TXU, State of Maine

Charles Schwab & Co., Sprint, VoiceStream

Source: Vendors; Celent Communications



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Although they share the same roots and are in a market drag race, Xign’s and Clareon’s offering are not the same. Two major differences and three minor ones exist (Table 7 on page 19 details the differences and their implications). First, Clareon is browser-based, whereas Xign is software-based. Second, Clareon’s model includes a single gateway bank to the ACH system while Xign uses the buyer’s bank.

Although both Clareon and Xign are expanding their buyer customer base and supplier adoption rates are hitting 30%, their short-run growth hinges upon convincing corporations of the quantifiable benefits and return on investment of their offering. In the long run, further integration up the financial supply chain (e.g., invoicing) and greater payment options (e.g., conditional payments) could propel their growth.

Figure 8: Remittance—ACH Linchpin

Source: Vendors, Celent CommunicationsNote: Currently only real-time payment initiation is offered*Xign requires adapters to be installed**Clareon uses an ACH gateway bank, Fleet bank***Xign offers a dispute resolution component.

* = difference between Clareon and Xign model

Buyer

Seller

Adapter*

A/P System

5

1Send

invoice

2 Pull remittance info

3Sign paymentauthorizationand send withremittance info

Xign or Clareon

4Initiate financial

settlement

5Debit/credit

accounts

6Send remittanceinfo with proof

of payment auth.

Adapter*

A/R System

Bank**

ACH

4Initiate electronic

reconciliation process

7

Settle anydisputes***



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Table 7: Differences Between the Clareon and Xign Models

Variable Clareon Xign

Major

Implementation

Browser-based solution

Implication:No software needs to be installed; no programming or coding is required

Software-based solution

Implication:Adapters must be installed

Bank-neutrality

Model has an ACH gateway bank: Fleet Bank acts as the originating depository financial institution

Implication:Buyer has choice of next-day settle-ment or two-to-four-day settlement (transaction fees decrease because of float earned by Clareon)

Model integrates buyer’s bank intosystem

Implication:Buyer’s bank must be integrated, an additional implementation

Minor

ACH sequenceACH debit is initiated first (Clareon-initiated on payer’s request)

ACH credit is initiated first

Security - Digital Certificates

Yes, through Digital Signature Trust, a root certification authority

Not directly, customer choice

Disputeresolution

NoneYes, Xign Payment Services Networks (usage unknown)

Source: Vendors, Celent Communications

Co

nclu

sion

s





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C O N C L U S I O N S

The race towards electronic payment solutions for B2B transactions has just begun and it will be a marathon journey marked by incremental triumphs. Given the size of the U.S. B2B market, every percentage-point shift from checks to electronic payments amounts to a huge number of transactions: 91 million, worth US$313 billion (based on data from 2001). Shifts of this magnitude take not only time and technology but also require businesses to alter their payment behavior and restructure their financial processes.

Although most of the initiatives to spur electronic payment adoption have just gotten out of the starting blocks, their offerings show promise and will pave the way to an electronic financial supply chain. The momentum generated by the payment players spotlighted here (MasterCard SmartLink, Clareon, and Xign) will accelerate the adoption of electronic payments.

Critical to their success is defining the problem, that is, the impediments to electronic payment adoption, and then developing the technological solution. Most have excelled at figuring out the greatest points of pain along the financial supply chain. Now it is a matter of time for the electronic payment pioneers to further facilitate implementation, enhance functionality, and convince treasury and accounting executives that any costs are worth the benefits. Most large corporations do not need any convincing but are already leading the way. There is no reason—other than sticking to the status quo—that other Fortune 500 corporations should not don their running shoes in order to catch up. In addition, medium-sized businesses need not remain at the back of the pack for long, as solutions propagate down to serve them as well.

Although there are no silver-bullet applications in the electronic payments arena, electronic payments will gradually eat away at the check’s dominance of B2B payments in the U.S. It will take some time, however, before electronic payment processes will go from the exception to the norm. Yet, as the European examples demonstrate, with today’s technology, the norm is exactly what electronic payments should be.

Glo

ssary





21

G L O S S A R Y

ACH - Automated clearing houseAn electronic payment system originally designed for recurring payments such as salary (aka direct deposit) and utility bills (aka direct debit).

CHIPS - The Clearing House Inter-Bank Payment SystemA bank-owned (the New York Clearing House), privately operated, real-time net payment system for B2B transactions; an alternative to the Fedwire (both are wire transfer systems).

EDI - Electronic data interchangeThe communication of trade-related information among business partners in a structured, standardized, machine-readable electronic form.

EPN - Electronic Payments NetworkThe largest private ACH operator (owned by the New York Clearing House).

ERP - Enterprise resource planningA system that integrates a company’s systems with the ultimate goal being to streamline the flow of information across the entire organization; by linking disparate systems and processes within a company, an ERP system improves the exchange of information between divisions and reduces cycle time.

FEDI - Financial electronic data interchangeA vehicle for settling invoices by initiating payments, processing remittance data, and automating reconciliation, via the exchange of electronic messages.

FedwireA real-time gross payment system for large value B2B transactions run by the Federal Reserve; an alternative to CHIPS.

InvoiceAn itemized list of goods shipped, including price and terms of sale, sent by the seller to the buyer; a standard business document used to request payment.

Purchase orderAn itemized list of goods sent by the buyer to the seller; a standard business document that is used to initiate a purchase.

Purchasing cardA purchasing card is a reengineering tool designed to simplify the traditional purchase order



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and payment process for low value transactions. A purchasing card program allows an organization to streamline purchasing, reduce or eliminate paperwork, and control spending through the card program's authorization process.

Remittance informationItemized, detailed information that accompanies a payment and explains what the payment is for and what changes have been, if any, that cause the remittance to differ from the invoice.



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A B O U T C E L E N T

Celent Communications is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology, and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally experienced analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis.

Celent’s research services cover the following eight sectors of financial services: Retail Banking, Wholesale Banking, Retail Trading, Institutional Trading, Personal Insurance, Commercial Insurance, Mobile Financial Services, and European Financial Services. For inquiries, visit www.celent.com; email [email protected]; or contact:

Headquarters:183 State Street, Fifth Floor 489 Fifth Avenue, 12th FloorBoston, MA 02109 New York, NY 10017USA USATel.: +1.617.573.9450 Tel.: +1.212.490.2220Fax: +1.617.573.9455 Fax: +1.212.490.2225

50 California Street, Suite 1500 16, Place VendômeSan Francisco, CA 94111 75001 ParisUSA FranceTel: +1.415.439.5291 Tel.: +33.1.53.45.28.58Fax: +1.415.439.5299 Fax: +33.1.53.45.28.29



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A B O U T M A S T E R C A R D I N T E R N A T I O N A L

MasterCard International has a comprehensive portfolio of well-known, widely accepted payment brands including MasterCard, Cirrus and Maestro. More than 1.7 billion MasterCard, Cirrus and Maestro logos are present on credit, charge and debit cards in circulation today. An association comprised of more than 15,000 member financial institutions, MasterCard serves consumers and businesses, both large and small, in over 210 countries and territories. MasterCard is a leader in quality and innovation, offering a wide range of payment solutions in the virtual and traditional worlds. MasterCard's award-winning Priceless advertising campaign is now seen in 81 countries and in 41 languages, giving the MasterCard brand a truly global reach and scope. With more than 24 million acceptance locations, no card is accepted in more places and by more merchants than the MasterCard Card. MasterCard can be reached through its World Wide Web site at http://www.mastercard.com

MasterCard Internationale-Commerce and e-B2B Center of Excellence2000 Purchase StreetPurchase, NY 10577USA

Philip PhilliouVice President, e-Business and Emerging Technologies (eB2B)Tel.: +1.914.249.6841Email: [email protected]

Shari KrikorianDirector, e-Business andEmerging Technologies (eB2B)Tel.: +1.914.249.5871Email: [email protected]

www.mastercardbusiness.com

Celent Communications183 State StreetFifth FloorBoston, MA 02109USA

Alenka [email protected]

Tel.: +1.617.573.9450Fax: +1.617.573.9455Email: [email protected]

www.celent.com

Contact us:



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