To spur electronic transactions among businesses, especially small ones, Clearing House Payments Co. LLC is developing a new payment standard.
The New York company, which is collaborating with its bank-owners and several payment technology vendors, plans to unveil the initiative next week at a conference for corporate treasury management executives.
Though consumer online bill payment has been one of the banking industry's best growth stories, the corporate market lags far behind. Recent studies show that only 14% of business-to-business payments are made electronically, and that the smaller the organization, the less likely it is to make e-payments.
"Most corporates say that electronic payments are inevitable, but they won't adopt it until it is as easy as paying with a check," said Rossana Salaris, a senior vice president at Clearing House Payments who is responsible for its Electronic Payments Network unit.
Many large companies have an e-payment system based on the aging electronic data interchange format, but its complexity has held down use of the technology, she said.
"EDI exists, so why aren't more people using it?" Ms. Salaris asked. "It's because it requires too much information."
EDI files are quite complex and can include hundreds of data fields. Not all of them are needed to process a payment, but companies initiating transactions and their payees must set up their systems to use the same fields, in the same format. If the two systems use different formats, or if the sender uses too many or too few fields, the recipient may not be able to process the payment correctly.
So Clearing House Payments has taken the standard EDI file, known by its American National Standards Institute designation as an 820 file, and trimmed it down to 10 essential fields. These fields include such basic information as the payment amount, customer's name, business account number, and bank account number.
Simplifying and standardizing the process should facilitate the delivery of e-payments and invoicing details, Ms. Salaris said.
"Right now it can be easier for some companies to deal with a check and a paper invoice," because there "is no specified minimum standard" for the 820 file, she said. "Our goal is to increase the use of electronic payments for corporations."
Richard Leary, a senior vice president at Wachovia Corp. and the manager of its automated clearing house services, said, "A full 820 file is extremely data intensive." EDI technology was originally developed for, and is still used primarily by, large companies, he said, and as a result, the files can include numerous data elements that a small business would not need.
Reducing the number of data fields would make it easier for small businesses to adopt e-payments, Mr. Leary said.
The simplified EPN 820 format has already been approved by the Standards Institute. It is supported by Clearing House Payments' bank-owners; Nacha, the electronic payments association; the Independent Community Bankers of America; the Federal Reserve banks; BITS, the technology arm of the Financial Services Roundtable; and the Association for Financial Professionals, the trade group for treasury management executives that will host the conference next week.
Arlene Chapman, a senior consultant with the Bethesda, Md., treasury group, said executives often recognize that electronic payments can be faster and cheaper to process. But she said there is a strong sense within the industry that the current system is not broken, so there is no need to fix it.
One common barrier: Corporate accounts receivable departments must deal with lots of incoming payments, and many customers pay several invoices with a single payment. As a result, receiving detailed billing information is just as important for the accounts receivable department as receiving the funds. That information can easily be submitted in paper format with a check, but submitting multiple invoices with an electronic remittance can be harder.
That task has made it far more challenging to implement electronic systems for B-to-B payments than for consumer payments, which almost always involve a single payment by a customer to cover just one invoice.
"There are many more issues on the corporate side than the consumer side," Ms. Chapman said.
Ms. Salaris said that only 14% of roughly 3.9 billion annual B-to-B payments are submitted electronically, and just 32% of those e-payments contain enough billing data for the transactions to be posted automatically. For the rest "remittance information must be inputted manually" into the payment system, and doing so dramatically reduces the convenience of receiving funds digitally.
Ms. Chapman said that in a recent survey of her group's members, 28% of respondents said their companies are "very likely" to be making a majority of their B-to-B payments electronically within three years.
"I think that's a good number. It's a big shift," she said.
When the group conducted a similar survey in 2000, only 9% of respondents gave the same answer.
Ms. Salaris said the new format has also been designed to work in conjunction with another payment innovation EPN introduced last year: the universal payment identification code. Many businesses, especially small ones, are reluctant to transmit their bank account numbers in e-payment files, she said. The universal code functions as a proxy for an actual account number; companies can submit an invoice with their assigned UPIC number, which can then be used to determine where to transmit the funds.
Because the EPN 820 format is simply a streamlined version of an existing standard, companies can begin using it after a simple software change, Ms. Salaris said.
Randy Lewis, a senior product manager for the payment software vendor Fundtech Ltd., said it has two applications that support the original 820 format, and both have been updated to let customers use the new format.
Modifying the software to accommodate the new format was easy, he said. "They haven't done away with the 820. They just made it simpler."
Diana Knox, a vice president for strategic migration at Wachovia who was involved in developing the new format, said a simple transition was one of the goals. "We wanted to be able to leverage the existing payments software."
One of the obstacles to the adoption of e-payments: Not all accounting packages can generate payments with remittance information.
"One of the reasons why people have been happy with checks is because the software they are using didn't have the ability to create electronic payments with remittance information," said Peter Hohenstein, a senior vice president for business and industry development at Bank of America Corp.
But by developing a simplified format and persuading software vendors to implement it, he said, EPN "will give a whole range of small and midsize businesses the opportunity to move from a paper environment to an electronic environment."
