While banks are pouring money into new treasury management systems, a lack of technological literacy at business clients and a strategic disparity between corporate buyers and their suppliers continues to anchor many companies to paper checks.
Bank of New York Mellon Corp.'s treasury services unit hopes that offering MasterCard Inc.'s Payment Gateway service will entice some of these Luddite corporate clients to implement electronic payments.
Payments Gateway is an enterprisewide processing platform that can manage multiple payment types, including cards and electronic funds transfers. The service offers BNY Mellon clients several payments efficiencies. For example, it can serve as an automated card "bridge" between suppliers who want immediate payments and buyers who want to hold on to cash for a longer period — conflicting agendas that have encouraged businesses to maintain the status quo in B-to-B payments.
"The virtual card allows our clients to continue processing the same way they process today," said Laura McGortey, a product line manager for BNY Mellon Treasury Services. She sees Payment Gateway as an additional path to straight-through processing that will reside alongside other payments options, including automated clearing house transactions and wire transfers.
Besides attempting to make both sides of the payment transaction happy — the card posts payments to suppliers immediately while buyers pay a credit card bill later and retain some amount of control over cash flow — the use of virtual cards can also improve data management.
"Credit card companies have always had a large bandwidth to handle information," McGortey said. The lure of data storage is an ability to improve upon the exhaustive manual searches and bookkeeping required for corporates to organize and track paper payments, she said.
Cards also can track purchases. "If an employee uses MasterCard, there's a report that can be generated," said Alistair Newton, a research vice president in Gartner Inc.'s banking group. "From the purchaser point of view, the method you use to pay revolves around how you want to control payments."
Bank of New York Mellon, which joins Wells Fargo & Co., Citigroup Inc. and Royal Bank of Scotland PLC as Payment Gateway clients, is making the service available to all its customers, and believes it is especially compatible with the upper-middle-market segment, where suppliers are less likely to have robust electronic payments technology. "There's a tier of customers where we see this card transaction as a better fit, based on the supplier's tech needs," McGortey said.
Aaron McPherson, a research manager for payments at IDC Financial Insights, also sees opportunity with smaller suppliers. "The tier-one suppliers are pretty well automated" with ACH and electronic data interchange systems, he said. "The companies below that tier can't justify the expense of an [electronic data interchange] implementation, so they're doing manual processing with paper checks and remittance."
Kevin Phalen, an integrated card and comprehensive payables product executive for Bank of America Corp., which offers a variety of automated payment options, said the card payments option could increase adoption for payments of about $5,000 or less, because the value proposition for buyers and suppliers is "in check."
For larger purchases, however, such as heavy equipment that can carry a six-figure price tag, a 2% interchange fee charged to merchants for card purchases makes cards a less attractive payments option.
Phalen said there are options that can fix that problem. "What we'll do is sit down with the buyers and suppliers and say for the high-value payments, we can still take the payment files and initiate them on behalf of the buyer, but do it via our Paymode solution, which will optimize the best way to pay, thus lowering the cost of making the payments."
Financial institutions face added hurdles in drawing corporates to automated payments, including the lack of standards among different banks in different countries and the fact that many suppliers have a steep automation curve.
Ed Kountz, a senior analyst for Forrester Research, said that in a 2007 survey (the most recent available) checks still accounted for two-thirds of B-to-B payments, versus an 18% share for ACH.
"I don't think the numbers are still at those levels, but they haven't changed a lot, either," Kountz said. "What has been a primary concern with many businesses has been the customer-facing or front-end payments processing. It touches multiple departments and organizations, and it's daunting to automate all of this."