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Ready or Not for E-Payments

DJ Gilbert
11:15 AM ET (US)
EIPP makes absolute sense but its rise at first will probably be driven more by the desire to get rid of EDI, which is a 1970s technology that is expensive to configure and manage, rather than a positive uptake by consumers. That will limit the rate of adoption to certain industries and certain company sizes.

Ultimately a consumer standard is needed to foster exponential adoption. That depends on reform of the current banking and clearning infrastructure to mandate standards and strongly discourage checks.
PayStream Advisors
10:21 AM ET (US)
Why has e-Payment technology been stuck in the doldrums? Online billing, also known as Electronic Bill Presentment and Payment (EBPP), has been struggling for consumer attention over the past three years. Analysts once predicted a meteoric rise, with some saying that as many as half of all US consumers would be paying their bills online by 2003. While adoption has been growing, we have yet to see the predicted exponential growth rates. Many excuses have been offered as to why adoption has lagged; lack of critical capabilities within the software, poor bank marketing efforts, lack of billers offering the service, or just sheer consumer apathy. We believe B2B payments, aka Electronic Invoice Presentment and Payment is where the action is.

According to the PayStream Advisors national survey of treaury managers, EIPP will soon attain equal footing with its technological cousin EBPP and potentially surpass it. Currently, only 10% of Fortune 1000 companies have adopted B2B electronic payment and presentment (EIPP) compared with a 13% adoption rate for EBPP. Future growth for EIPP, however, looks bullish. Forty percent (40%) of these same companies plan to investigate or implement this technology in the near future.

Clearly, opportunities exist for both EBPP and EIPP technology in the future, but B2B payment and presentment may be the best opportunity for real savings in the long run.

-Henry Ijams, Managing Partner
DJ Gilbert
04:31 PM ET (US)
My experience in this area is also amazement with the low adoption rate in the U.S. I lived in Switzerland for 10 years and, like many European countries, writing a check is virtually the last thing one would want to do. The key differences are that 1) there are universal payment routing standards and 2) that there is a hefty charge by the banks for checks.
The payment routing standards in Switzerland are set either by the Post Giro Bank and / or by a mutual agreement of the banks. That is also true in most of the Euro Zone, of which Switzerland is not a member. This allows me (a private person) to make a payment to you (also a private person or a business) by knowing your bank, account number and bank city. There are also field designators for references, which may be an invoice or account number. International payments can also be handled this way, which is a big deal now for the 12 countries in the Euro Zone.

Absent an account-level routing system standard, it is difficult to see how e-payments will take off in the U.S. That is the type of work the Fed should be promoting heavily. The experience in Sweden for another good example where the banks agreed on voluntary but universal routing standards.
In Switzerland, as in most of Europe, both the payor and the payee are assessed service charges for checks. For example UBS charges CHF 5 (about $3.00) for each transaction PLUS CHF 1 (bout $0.75) per check. Write one check and plan on paying $3.75 just for the pleasure of writing it, regardless of amount. The party receiving it will have about the same fees to deposit or cash it. By contrast, electronic payments are about $0.15 each. and often less if you have a monthly fee for the account. This fee differential is a strong incentive for consumers to use e-payments and for businesses to accept them. FYI retail transactions have migrated heavily to debit cards in recent years, but remain still largely in cash.
Electronic payments in Switzerland constitute well over 95% of bank payments. The universal routing standards along with a strong financial incentive of fees has made this happen. A similar dose of medicine for U.S. would do the trick.
Roger Loeb
11:40 AM ET (US)
A competent ePayment system is going to be essential to the adoption of "web services." Furthermore, it's going to have to efficiently handle micropayments.

The web services model approaches the kinds of re-use that developers have only dreamed about for years, changing the "build it or buy it" decision into "build it, buy it, or search for it." However, the supplier of a web service is going to want to be paid for providing the service, and the consumer of such a service is going to want the usual purchasing infrastructure to support the payment accounting.

The concept of searching for a web service using UDDI and then connecting to that service with WSDL works fine when no money is changing hands. In the current world, however, that electronic process would be followed by a series of telephone calls, a purchase order, a credit check, and a paper invoice -- all for a transaction whose value is likely to be measured in pennies. It won't happen... The entire process is going to have to be automatic for web services to really catch on.
04:10 PM ET (US)
I think most people would agree that e-Payment will eventually become
 commonplace and possibly even predominate. It is not a certainty only
 because of the byzantine network of (understandably) self serving
 players that need to be able to answer the question of what's in it for
 them. Of course one answer for some of these players may be nothing, in
 which case they will either make an accomodation for the greater good
 (only possible for certain players), find a way to benefit, try to
 sabotage or stonewall the process, or be shoved aside when others find a
 way to work around them. You mentioned most of the key players in your

 Payers must see benefits to themselves or benefits to their customers
 that can help the payers gain or retain them. For example, I work at a
 mid sized public university. We take in about $30 million in fees per
 year. We have been trying for years to move to electronic processing, We
 have had some success, but there are lots of obstacles. Our experience
 has gone as follows:

 * We have managed to implement EFT (electronic funds transfer) for bank
 loan funds. We get a file of data and the bank gets the EFT
 transactions, similar to the arrangement you mentioned in your article.
 We do not pay for this service. Presumably it is paid for by
 compensating balances.

 * Our State Controller's Office (SCO) made payroll direct deposit
 available for certain employees and then gradually expanded this to
 include almost all employees, including students. We have promoted this,
 but some employees (including some of our most computer knowledgable)
 refuse to sign up. I would like to be able to require it, but we can't
 do that. We don't pay for this service. I don't know if the SCO pays,
 but I doubt it.

 * We have also implemented direct deposit for financial aid
 disbursements. Students provide us with a deposit slip, and we send it
 on to the bank (Wells Fargo). We send a check (or net the amount against
 EFT recipts) and data file to Wells Fargo, and they distribute the funds
 to the students' banks. We no longer have long check disbursement lines,
 checks not picked up, or stale dated (uncashed) checks. The students get
 their money on time with no hassle. Initially Wells Fargo charged for
 this service, but after some discussion they agreed that our balances
 are usually sufficient to (more than) cover their costs.

 * We have been accepting credit card payments on line (first phone, and
 now web also) for a few years. We have had a lot of problems with the
 credit card companies (especially VISA), because we wanted to charge a
 "convenience charge" to offset the cost of merchant fees. VISA insisted
 on a flat rate. Other companies (AMEX, Discover and Master Card) allowed
 a tiered fee. All of the companies insist that the charge must be the
 same for all card types (companies). Therefore we do not accept VISA
 cards. We may soon be switching to a 3rd party processor. We will be
 required to do this in order to implement ACH (unless we want to charge
 our ACH users the same tiered fee that we charge our credit card
 customers even though we will only be paying pennies per transaction.

 * We are probably about to begin accepting ACH payments with the help of
 our cashiering system vendor, Informed Decisions Corporation. IDC
 furnished and helped us set up our credit card processing systems. They
 are now working with us on ACH and "Smart Pay" (the 3rd party credit
 card processor. Because "Smart Pay" is a 3rd party, they can charge a
 percentage fee for credit card transactions. The theory is that they
 provide additional services relative to the transactions, while we do
 not (I will spare you my arguments on this point). In any case, by using
 the 3rd party processor and having our student pay a slightly higher fee
 for credit card transactions we will be able to offer them ACH payments
 at no cost (to them). Of course with ACH payments we will have some "bad
 check" problems, because these transactions are settled by batch at
 night rather than on a real time basis, and they depend on student bank
 account balances rather than credit lines. We don't expect this to be a
 major problem, since we have pretty good collection leverage and our
 student population is pretty stable.

 * I forgot to mention that in order to implement any of these payment
 methods we had to set up separate bank accounts, because our State
 Treasury account (our primary account by law) is only a depository
 account and can't handle e-transactions. This may change someday, but
 don't hold your breath.

 We would like to pay our vendors on line, but we have not yet figured
 out a way to do this. I am about to retire, so maybe my younger and
 smarter replacement will figure this out, or maybe the system will
 undergo a magical transformation. This reminds me of the old joke about
 the great mathematical discovery in which a very complex set of
 equations includes, somewhere in the middle, the phrase "then a miracle

 Actually a lot of miracles have occurred, and I am sure they will
 continue to occur. It remains to be seen if/when the miracles necessary
 to bring about e-payment will take place.

 I hope this information is helpful.
Anthony Ludwig
01:57 PM ET (US)
Edited by author 01-30-2002 01:57 PM
My belief is that in the world of "brick" and "mortar", companies
fundamentally want everything in their possession extremely quick and yet
want to pay for it very slowly. The old idea of being invoiced for a 30 day
term and then not paying for 60 to 90 days is the norm. "All" businesses do
it. To have the utilize e-payments could mean losing out even 1 extra day
of collecting interest on their money before they have to pay out. This
would drive all the "bean counters" crazy --

The real trick for us as engineers is to design a system that imitates the
paper trail paying world.
just my opinion.
Ernie DeVore
01:56 PM ET (US)
My compliments on your great article in CIO concerning automated payments.
Up until this past summer I worked for a brokerage company as a project manager.
One field where we spent a lot of development time was in automating
payments, particularly in the account opening phase. The major problem I ran
into over and over again was Federal regulation which requires brokerages to
know where the customer's money comes from. Just a bank routing number isn't

When Federal regulation loosens up and companies start finding it more
economical to support and track E-payments, we'll see some serious progress
made. Right now in the finance industry every electronic payment generates
THREE accounting checks where a paper payment only generates one. Go figure.

Good article. Keep up the excellent work.
Ryan Mulcahy
01:54 PM ET (US)
Edited by author 01-30-2002 01:54 PM
You can start making e-payments at any time. But are you, your trading partners and your respective banks ready to be early adopters?

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