The New York banking company is expected to announce today that it has connected its business-to-business accounts-payable service to a corporate payments network operated by MasterCard Inc.
Executives said the new service can significantly accelerate business payments — and that receivers would be willing to pay interchange fees in exchange for faster settlement. They also hope the service will encourage more companies to make payments electronically, instead of using paper checks.
"We believe, over time, this model will demonstrate its value," Laura McGortey, a managing director in Bank of New York Mellon's treasury services unit and its payments and liquidity products manager, said in an interview Friday.
The company is not the first bank to use MasterCard's Payment Gateway; at least three other financial companies have connected to the system since the Purchase, N.Y., card company introduced it in 2007. However, the B-to-B payments market remains doggedly tied to paper, and Bank of New York Mellon is the first bank to offer this detailed a look at the business case for shifting from paper checks to electronic transactions, a strategic marketing move that could bolster demand.
Shari Krikorian, the vice president of innovative platforms at MasterCard, said corporate suppliers typically want to minimize the number of days a statement is outstanding before the company receives payment; buyers, by contrast, want to retain cash in hand as long a possible.
By offering businesses a payment service built on the credit card model, Bank of New York Mellon is effectively fronting the payment; the payer can authorize the transaction quickly and settle the transaction later, while the receiver gets paid right away.
When buyers pay invoices by card, "they're preserving the" days statement is outstanding, "but the supplier gets the benefit of getting funds faster," Krikorian said.
One important change from receiving checks is that this model makes the supplier into a merchant that must pay interchange fees.
Nancy Atkinson, a senior analyst at the research and advisory firm Aite Group LLC in Boston, said this might deter some potential users. Though she acknowledged that card payments benefit both buyer and seller, and that speedy settlement is particularly appealing, she also said other electronic payment formats exist, such as the automated clearing house system, that do not charge fees to the receiver.
"That is something that's a big hurdle for suppliers to get over," she said.
Krikorian said the Payment Gateway carries interchange fees far lower than those paid by merchants for consumer transactions. Merchant interchange can run to 2% to 4% or more for purchases at the point of sale, but the rates for these business payments can be as low as 70 basis points, plus $40, for invoices exceeding $100,000.
This is lower than the discounts suppliers have long offered businesses for faster settlement; many companies offer their customers an arrangement known as 2/10/net 30, or a 2% discount for payments made within 10 days, instead of the customary 30-day window.
Krikorian said the lower rate is due, in part, to the fact that accounts-payable transactions, where both buyer and seller are known to the bank, carry less risk than point of sale transactions, where both fraud risk and credit risk are higher.
