CoreStates Financial Corp. has announced an effort to streamline the payor-payee relationship of two of its largest corporate clients with a financial electronic data interchange service.
The pilot of the new service - which involves Consolidated Rail Corp., a major freight transportation company in Philadelphia, and Public Service Electric and Gas, which serves northern and central New Jersey - is an example of how banks hope to win the loyalty of corporate customers by offering EDI services.
"We have always had a close partnership with CoreStates," said Eric Erickson, financial EDI manager with Conrail. "There are other banks that perform EDI services for Conrail, but we initially spoke with CoreStates. They are very receptive to new ideas."
Financial electronic data interchange is the electronic movement of payments and related information in standard formats through the automated clearing house network.
An increasing number of corporate cash managers offer the service as a concession to large clients who demand it. But because of high startup costs, few institutions have been able to make the service turn a profit, observers said.
Though CoreStates did not discuss the financial terms surrounding the new service offering, its commitment to financial EDI is understandable.
Approximately 40% of the holding company's earnings are derived from noncredit-based services, a major component of which is cash management, according to Thomas A. Gregory, CoreStates vice president in cash management.
The $29 billion-asset bank's cash management area has grown in recent months, with the acquisition of two nonbank providers of lockbox services: Financial Telesis, which owns Nationwide Remittance Centers Inc., and Cashflex. The bank has melded all its lockbox processing into Cashflex, making it one of the nation's top providers of retail and wholesale lockbox services.
The new EDI pilot, which will begin Feb. 15, will automate the process by which payments and bills flow between Conrail and Newark-based PSE&G.
Officials of CoreStates, the railroad, and the utility said the program will drastically improve many labor-intensive operations, such as the handling of invoices and the posting of accounts receivable information.
More specifically, the system will automate the bills and payments exchanged by the companies to cover Conrail's use of electricity for railroad crossing gates.
Conrail deals with 540 utility companies in the Northeast and Midwest. It transports freight over 12,000 miles of track that spans 14 states and Canada.
At every intersection of a road and Conrail track - there are approximately 7,500 of these - utility companies run meters that monitor power usage for crossing barriers that halt traffic when Conrail's trains roll by.
Each intersection generates a separate bill for Conrail, some for amounts as small as $10.
Conrail now manually enters the billing information into its accounts payable system in order to generate payment to PSE&G - which accounts for 324 of the 7,500 bills - and other utility companies.
Since PSE&G's accounts receivable system is designed for remittance processing of utility payments from consumers rather than companies, each of Conrail's payments creates an exception item in the accounts receivable system.
Both parties agreed that the system was ripe for restructuring.
At a conference sponsored by the National Automated Clearing House Association and the Treasury Management Association, Charles Stanbach, a vice president with CoreStates, detailed how executives met to create a platform that would address both sides of this labor-intensive business transaction.
Operating within the service that resulted from these meetings, PSE&G will mail utility bills directly to CoreStates rather than to Conrail.
CoreStates will then enter the data into an electronic file that will be translated into two formats - a standard invoice format that will reconcile Conrail's accounts payable system, and a remittance payment format for PSE&G's accounts receivable system.
The bank will warehouse transactions until the payment date.
"They've created a commonsense solution to a very unwieldy payment system," observed Larry Forman, an Ernst & Young consultant specializing in cash management. "It sounds like a win-win solution."
Financial EDI, heralded as the next wave of the future in electronic payments, has in many ways failed to live up to its high expectations. One reason for this failure, in addition to the high startup costs, is a lack of demand for the services from rank-and-file cash management customers.
Still, financial EDI has grown steadily as more potential clients have awakened to the benefits. If this trend continues, banks may soon see profits from the service, experts said.
David P. Smay, general credit manager and treasurer with Chevron USA, Concord, Calif., said the long-awaited cooperation on EDI is a welcome change.
Although Chevron can deliver electronic payments to "anyone, anywhere," Mr. Smay said, it has yet reap the full benefits of EDI - because the vast majority of commercial banks have not embraced the service.
"We want to get out of the 'paper business,' and we've been waiting for a long time to get a critical mass going," Mr. Smay said.
"There is an incredible amount of interest among corporations," added Maggie Scarborough, senior director with the National Automated Clearing House Association. "Most corporations are looking at ways of being more competitive and reducing costs.'
