By letting businesses pay each other with card accounts, Bank of New York Mellon Corp. says it can profitably ease the inherent tension between suppliers, which want to be paid as early as possible, and buyers, which often want to hold onto the funds until the last minute.
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.
The gateway has processed some card payments larger than $100,000, she said, and the average transaction now is around $30,000, though she would give no details about the system's total volume. "Our objective is to increase the average transaction size," Krikorian said.
McGortey said corporate clients remain largely at an early stage in converting treasury operations to electronic payments and that some Bank of New York Mellon clients still make 90% of their business-to-business payments by check.
Krikorian said that one reason checks remain popular is that they can be delivered along with detailed remittance files, explaining the payment's purpose. "That data is as important as the money. If you can't get the information to reconcile the payment, you can't recognize the revenue," she said.
Janice Dowiak, a vice president at Bank of New York Mellon treasury services and a senior payment products manager, said that, even considering interchange, card payments can be an attractive option for corporate treasurers. "If you do this through the card network, as much detailed information as the corporation needs just goes along with it," she said.
Other financial companies are also promoting electronic B-to-B payments services.
JPMorgan Chase & Co. and American Express Co., for instance, both operate proprietary systems that can provide integrated processing of invoices and payments.
U.S. Bancorp and Visa Inc. announced the formation in July of a joint venture, Syncada LLC, whose primary asset was the PowerTrack payments unit that U.S. Bancorp has operated since 1999.
Bank of America Corp. agreed in August to sell its PayMode corporate e-invoicing operation to Bottomline Technologies Inc., a Portsmouth, N.H., payments technology vendor. PayMode was a legacy product from B of A's acquisition of FleetBoston Financial Corp. in 2004.
All of these are built around a single banking company, at least for now, said Paul LaRock, a principal in the corporate practice at the Chicago consulting firm Treasury Strategies Inc.
As a result, he said, MasterCard has a head start because its Payments Gateway now has four bank users, whose clients can all send each other payments. Wells Fargo & Co., Citigroup Inc. and the Citizens Financial Group Inc. unit of Royal Bank of Scotland Group PLC have all signed up with MasterCard.
LaRock said that the more users affiliated with a payments network, the more usefulit becomes to participants. "If I'm a corporate," he said, "I want to move into the biggest universe."
Bank of New York Mellon is in final testing now and plans to introduce the service commercially by yearend, initially to users of its SourceNet Solutions unit, which provides accounts payable services.
Bank of New York Mellon already offers ACH, wires and check services to those customers, and will continue to process those transactions in-house, running only card payments through MasterCard's gateway.