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Alenka Grealish, Celent Communications
Alenka Grealish, Celent Communications
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Migration to Business-to-Business Electronic Payments: From Theory to Reality

Various industry, technological and regulatory trends will propel the adoption of e-payments.

The adoption of electronic payments in business-to-business transactions will break out of the doldrums over the next five years. The forces that will blow wind into the e-payments sail are numerous, ranging from technological and regulatory trends to industry and banking initiatives (e.g., accounting and payment system integration, demand for financial transaction transparency and implementation of standards). As the economic interests of banks, third-party solution providers and companies gradually align, the prerequisites for adoption will be assured.

Migration to e-payments has been stymied by a strong preference to pay by check in the United States. While most countries have achieved exceptionally high e-payments usage rates over the past decade, the use of e-payments in the United States currently makes up only half of total non-cash payments. 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 drivers of adoption include both collaborative and competitive forces and players outside the banking realm. The era of banks' molding of payment systems in their favor is over. Next-generation payment systems will be structured with corporations' needs in mind and will be influenced by technology providers.

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, 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. 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 reconciled automatically along with the payment will stomp on the competition.

The role of technology, and consequently third-party providers, in the adoption of e-payments is also profound. Until the activities that precede payment are automated, e-payment is unlikely. As confirmed by several surveys, the prerequisite for the migration to e-payments is automation of the financial supply chain, in particular electronification of rich remittance data (i.e., detail comparable to what EDI formats provide). Currently, electronic payments suffer from a major problem: Either the payment and data are separated, or the data is insufficient for posting and reconciliation purposes or in a format incompatible with the recipient's ERP/accounting system. Research by the Electronic Payments Network revealed that only 32 percent of e-payments can be applied automatically.

When it comes to e-payments adoption, companies are scattered along the spectrum from the apathetic to the evangelistic. Evangelistic firms tend to have an electronification champion at the "C" level (e.g., chief operating officer, chief financial officer). This champion just gets it, from the hard-dollar savings (reduction in FTE) to the soft-dollar gains (lower Days Sales Outstanding, which reduces working capital costs). Overall, several trends, combined, will sway companies to embark on financial supply chain automation projects. Currently, the companies that have taken steps to automate the financial supply chain and adopt e-payments have been motivated by hard cost savings. Not surprisingly, these costs are much easier to calculate than financial efficiency gains and therefore are easily attributable to the actions of a particular department (e.g., accounts payable).

While e-payments will likely not take business-to-business transactions by storm, the wind in their sails will pick up over the next five years. Celent anticipates that the aforementioned trends will push business-to-business adoption of e-payments up to 58 percent of total volume by 2010. Beyond that, the winds will continue to push adoption to levels near those attained in Europe.

Alenka Grealish is the manager of the banking practice at Celent Communications, a global research and advisory firm focused on the application of information technology in the financial services industry. She can be reached at agrealish@celent.com">

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