Pay Up

Payment  that last link, that final piece of a supply chain transaction that matters most to suppliers  has largely remained paper-based. This is not by design, however, and enabled technology is beginning to change the way suppliers are paid.

[From iSource Business, March 2001] Pity the poor supplier. Up until now he has watched e-business enablers offer solutions to meet every conceivable need a supply chain professional might have. Need to develop a strategic sourcing program? No problem. Want to track procurement expenditures for certain departments or even very specific functions, such as machine maintenance? Got it covered.

For suppliers, granted, there are many good packages that can manage content or sell side order functions. But payment has largely remained paper based.

This is not done on purpose, however, at least for purchases of direct goods. Automating this sort of payment is a complex process, in part because the payment is often intertwined with the financing arrangements of a company, such as a line of credit, letter of credit, working capital loan or a factor. "Typically a payment of this sort is not just an accounts payable transaction, but requires a series of approvals and substantial business process integration," says John Gonsalves, who heads the Technology Enabled Strategy practice of ADVENTIS, a Boston-based business strategy consulting firm. "It's really a series of steps."

Even for MRO-type purchases, which are usually low-cost items, the payment mechanisms have been limited.

Traditionally, It's Been ...

Traditionally, companies have had two options: Electronic Funds Transfer (EFT) and Purchasing Cards (P-cards), both of which have their advantages and disadvantages. EFT is basically an electronic check sent through the Automated Clearing House (ACH). It's inexpensive, but can be cumbersome as it must be prearranged between the buyer and seller. There must also be a certain degree of trust involved on the part of the buyer, if payment is made before the purchased goods are inspected.

P-cards, which have been around for about five years or so, can be integrated into an e-procurement system very effectively, merging and reconciling data in the system or on the P-card itself. However their credit terms are usually inflexible and the cost to use them can be somewhat steep. "We just haven't seen P-cards reach the popularity or level of acceptance that was forecasted for them," says John Fontanella, senior analyst at AMR Research, a Boston-based consulting firm. "It was a nice concept but, for whatever reason, it hasn't taken hold."

But now, as e-procurement is taking off, purchasing and supply chain professionals recognize the need to automate the payment function into the buying process.

And Now ... The New Options

"I think just about every professional buying organization knows e-procurement needs to be a win-win situation for both buyer and seller," says Alex Milward, senior manager in Andersen Consulting's European eProcurement Leadership Council, based in London. "There is no point in pushing a supplier to the limits of bankruptcy, and buyers know they will get better service from suppliers whom they treat well."

The good news is that a number of new B2B payment products and services have been introduced in recent months, especially as digital signatures and other legal niceties make online payments safer. The bad news is that none seem to meet the need for an end-to-end solution.

Most of these solutions tend to focus on only one portion of an online transaction, such as payment infrastructure, dispute resolution, risk management, credit ratings, actual settlement (through SWIFT for example) and online credit insurance. The players range from e-commerce providers that act as "trusted third parties" to banks and other finance providers, to B2B marketplaces, many of which have begun to offer financing and payment options.

Some of these marketplaces have developed some very sophisticated financial products. One of the first Web sites to take this plunge was, an online marketplace for the seafood industry. signed an agreement with GE Capital and CIT Commercial Services last year for a $25 million credit facility, basically because of client demand, executives at the site say. In fact, CIT has joined forces with a number of exchanges. Global Sources is another example, having paired with ABN AMRO to offer trade finance to its users. Citigroup has teamed with Commerce One to launch the Citibank Procurement Connection Portal. Ariba has formed partnerships with American Express and Bank of America. Chase Manhattan Bank is providing cash management services for

And companies can expect the finance and payment value-add portion of these exchanges to grow even further in the coming months. A recent Forrester Research report showed that while only 52 percent of B2B exchanges currently offer credit and alternative payment options, 98 percent plan to offer these services by the end of this year.

The real question is, will these products go the way of the P-card, which is available, but not widely used? The consensus appears to be that it's too soon to tell. "Most of these products are still in the early stages," says Browning Rockwell, founder and CEO of Trade Compass, a Washington, D.C.-based provider of trade tools, content and business applications for cross-border business. "Right now there are more companies offering payment products than there are companies looking for them."

Place Your Bets, Finally

Despite this ambiguity companies do need to sit down and consider future strategies. Gartner Group Inc., a Stamford-based consulting firm, projects that by 2009 some 61 percent of B2B payments will be done electronically  up from 14 percent today. And many believe that in certain overseas markets, online payment options will be a significant competitive factor. Killen & Associates, for example, estimates that by 2005 some 70 to 80 percent of all bill and statement presentments in Europe will take place electronically.

Meanwhile, most believe these various options will take some time, not to mention input, from legal and financial departments. Much depends on a company's individual circumstances  what is accepted practice in its particular industry, with whom and in what part of the world does it do business, and so on. The following are some general guidelines that companies should keep in mind.

  1. Shop around. The costs to use these payment vehicles can vary significantly. Many of the credit cards developed for the B2B markets are applying consumer-market pricing models to the transactions and charge anywhere from 2 to 3 percent of the transaction, according to Morgan Stanley Dean Witter.

  2. Almost all of these payment solutions are not yet available. The much-heralded Identrus, for example, will not be ready for market until mid-2001. Keep up-to-date about which bank or transport provider, or even competitor, has announced it will participate in a particular network or system.

  3. It's unlikely there will be any one or two dominant methods for the time being (which is small comfort to companies that will have to invest time and money in deciding which system to choose). You can also expect many to die quietly or merge with another company. Most agree a consolidation among the smaller players will happen at some point.

    Rockwell of Trade Compass, for example, says he couldn't "pick a winner right now." Rockwell has been following the developments in this field closely because he eventually plans to build an alliance among several of the major players. "We would like to offer four or five different settlement methods on our site," he says.

  4. There will likely be one dominant "institutional" method sanctioned by the majority of global banks. This is because banks are hedging their bets by forming multiple alliances  many of which overlap. A quick look at all the different alliances Citigroup has formed can tell you that.

  5. All of these systems are more exclusive than their marketing materials would have you believe. Your bank almost always has to be a participating member, and oftentimes your logistics and transport provider does too. Fortunately, banks and transportation companies have not been shy about participating in multiple venues.