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After a slow start, banks are taking another look at electronic presentment and payment.
Andrew Osterland, CFO Magazine
April 1, 2002
Of all the ways that E-commerce was supposed to change how consumers and businesses manage their affairs, electronic billing and payment was considered among the most bankable.
After all, who'd miss the paper cuts, the check writing, the envelope licking? Or, at corporate finance departments, the drudgery, delays, and expense of manual processing? Yet electronic bill presentment and payment, usually dubbed EBPP (for consumers) or EIPP ("I" for invoice; for businesses), has fallen significantly short of very high expectations. Despite the potential cost savings and efficiencies of online billing and payment, old habits apparently die hard. Last year, American consumers paid just 1 percent of their bills online, according to consulting firm Gartner. And of the 9 billion business-to-business payments remitted last year, 82 percent were made the old-fashioned way, by paper check, reports IT consulting firm Celent Communications.
Why are so many checks still in the mail? On the consumer side, individuals are clearly reluctant to send private financial information into cyberspace, and analysts expect it could be years before they feel differently. Furthermore, while some companies have had success with Web-based billing, most have yet to provide a compelling reason for people to manage their bills online.
Lack of enthusiasm on the business side is harder to fathom. Most companies are already familiar with the value of electronic payment systems like automated clearinghouse (ACH) and wire transfers. And treasurers understand the potentially huge benefits of automating receivable and payable processes on an Internet platform. In a case study, Gartner analyst Avivah Litan found that a company could save $7.15 per invoice by presenting it over the Internet rather than in paper format. With the average large company issuing 792,000 invoices per year, the savings could exceed $5 million annually. And with an average investment of less than $500,000 needed to get an EIPP system up and running, a typical company could break even if it issued just 2.3 percent of its customer invoices electronically.
That's a compelling case, but it runs up against at least one compelling issue: With the economy weak and corporate profits in the doldrums, finance chiefs are looking at E-commerce projects far more skeptically these days, and EIPP applications are no exception. "Two years ago, companies were in a 'let's try' mode, and it was easy to get commitments," says Brian Hinton, a vice president at Bottomline Technologies, one of the leading vendors of EIPP software. "Now they have a 'show me' attitude."
Like all EIPP software vendors, Hinton has been developing metrics that parallel the Gartner findings, hoping to persuade CFOs that money spent on EIPP will reap a quick and sizable return.
The immediate cost savings are only part of the picture. Blistex Inc. CFO Phil Hoolehan, who is currently implementing an EIPP system, hopes that the bigger payoffs will be improved working-capital management, better cash-forecasting ability, and higher employee productivity.
O Banker, Where Art Thou?
If economic conditions are working against electronic billing and payment, so too is inertia in the banking world, particularly in the United States. In Canada, where five major institutions dominate the industry, the banks have agreed on one standard for the presentment and payment of electronic bills. That has helped EBPP grow at a faster rate there than in the United States. U.S. banks have for the most part pursued individual strategies, offering up a host of proprietary approaches. Most have viewed consumer-oriented electronic billing as a potential threat to their customer relationships, and have therefore been reluctant to build a common technological platform with competitors. Spectrum EBP, an alliance that includes 6 of the top 10 U.S. banks, was formed to establish technological standards nearly a decade ago, but has made little progress to date.
In the EIPP market, however, the banks are starting to care less about losing their middleman position in corporate cash-management services and more about helping clients make the transition to EIPP. "We see it as an extension of services we already offer," says Paul Markovic of Cleveland-based National City Bank. "Banks are in the middle of the payment world now, and we have to think about how we're going to stay there in the future." Certainly, customers are looking for banks to help them reach the nirvana of straight-through processing from invoice to payment to the general ledger. "We felt a lot more secure doing it with a bank than with a dot-com," says Blistex's Hoolehan.
Increasingly, banks are stepping up to the plate, striking deals to resell vendor software and assuming the role of integrator between customer and supplier systems and back-office enterprise resource planning systems. Citibank, for example, has struck a deal with Bottomline Technologies to help corporate clients implement EIPP. And while the growth of EIPP has to date been slow, Norberto Spangaro, the Americas regions head for Citibank E-Business, believes it will accelerate during the next couple of years. "It's a matter of people changing processes, and any major change in business processes is hard to accomplish," he says. "Companies have been slow to adopt EIPP, but those that have are delighted with it."
Some banks are offering to serve as outsourcing partners. Almost two years ago, Hoolehan hired LaSalle Bank, a division of Dutch banking giant ABN Amro, to manage a comprehensive receivables program for Blistex that eventually incorporated an EIPP application from BillingZone LLC. His A/R department was spending too much time chasing money it should have collected months earlier, and staff turnover was high because the job was unbearably boring. "I wanted my professional people working on strategic things, not on clerical work," says Hoolehan.
During the six-week EIPP implementation, staff from Blistex and ABN Amro Services Co., which provides the technical solutions for LaSalle's EIPP offering, mapped out Blistex's receivables processes, determining which employees were responsible for generating invoices, who gave approvals, and which of Blistex's more than 2,000 customers were eligible for discounts. Now Blistex simply routes all invoices through LaSalle and leaves it to the bank to determine which customers will receive paper invoices and which can handle electronic transmissions. LaSalle also helps customers connect to the BillingZone system. "We passed a lot of frustration over to our bank," says Hoolehan. "My A/R department now focuses on important things, like the extension of customer credit." With one large customer, Kmart, now in bankruptcy, customer credit is undoubtedly a critical issue these days.
Whether companies outsource the function, as Blistex has done, or run an EIPP system in-house, they can decrease days sales outstanding and improve their cash visibility and forecasting ability. Customers, or payers, benefit too, from lower overhead costs, more-efficient dispute settlement, and — most important — earning discounts for early payment. "There is so much ROI to be had," says Gartner's Litan.
Power to the Payer
But all that ROI can be difficult to capture. The EIPP market suffers from the same chicken-and-egg dilemma that has stunted the growth of the B2C market. Until more bills are available online and in one place, businesses won't take the plunge. And until there is enough demand for the services, billers will be reluctant to make the investment.
There are signs that the stalemate may be ending. At first glance, the supplier side of B2B transactions would seem to have the most to gain from EIPP. Not only does it reduce the cost of invoicing, it could help companies to collect payments faster and reduce working-capital requirements. So most leading EIPP software vendors, including BillingZone, Bottomline Technologies, BCE Emergis, and edocs, have traditionally aimed their offerings at billers. But it is the payers that wield the leverage in B2B transactions. Most seasoned vendors have come to realize that, and they now make their sales pitches to payers as well as billers. New vendors, like Xign Corp. and Clareon, offer "payercentric" systems that aim to put a greater proportion of a company's spend on a Web-based platform. "Every major A/P organization needs an automated payment and settlement system," says Xign CEO Thomas Glassanos. "I haven't found a treasurer who wouldn't take a 2 percent discount for paying within 10 days."
In much the same way that dominant companies like the Big Three automakers and Wal-Mart forced their suppliers to connect with their proprietary electronic data interchange networks, "power buyers," as Gartner's Litan calls them, will drive the adoption of EIPP systems. Given the far lower cost of connecting with and participating in Web-based systems, they will likely have an easier time bringing suppliers along.
Banks may be aided by other entities. MasterCard's RPPS (remote payment and presentment service) unit sees a ready market in EBPP. The bank-owned credit-card company is already the largest electronic payment processors in the country. It could serve as a hub to aggregate presented bills, process the payments, and distribute funds between banks — all with the blessing of banks. "We're connected to 95 percent of banks and third-party service providers, and we're a stable, profitable, neutral party," says Cathleen Conforti, who heads the RPPS division. Given the success it's had with corporate purchasing cards, a move into EIPP seems likely as well. Success may be in the cards for electronic payments after all.