More than 4 million merchants will gain access soon to an electronic business-to-business payment system through an agreement between MasterCard Inc. and First Data Corp.
The two companies are expected to announce today that they have linked First Data's network with the MasterCard Payment Gateway corporate payment system the card company introduced this month.
The agreement likely will boost the use of electronic payments between businesses. A survey a trade group plans to release today confirms that the vast majority of corporate payments are still made by check, though the percentage has dipped somewhat in the past three years.
Stephen Orfei, a senior vice president in the Purchase, N.Y., company's advanced payments unit, said in an interview Friday that the deal with First Data would add significantly to the system's user base. "Having First Data on board gives us critical mass up front."
When the system was introduced, MasterCard said that Wells Fargo & Co. was planning to use it to process B-to-B card transactions. Shari Krikorian, a senior business leader in MasterCard's advanced payments unit, said Friday that Wells is working with a corporate customer to integrate the MasterCard system with the one the San Francisco company uses now to initiate check, automated clearing house, and wire payments.
"That's on the issuing side," she said. "With First Data, think of that on the other side of the gateway, more on the acquiring side."
Barry McCarthy, the president of product innovation at First Data's commercial services unit, said his company is enabling merchants to send and receive payments through MasterCard's system.
"Whether the merchant is the buyer or the vendor is less important. What is important is that the two parties can exchange payments, and they can exchange payments faster," Mr. McCarthy said. "It's a very significant opportunity in the marketplace, and we are at the very early stages of electronifying B-to-B payments."
Though the MasterCard system lets businesses transmit remittance information along with card and ACH payments to their suppliers, it does not let the businesses place purchase orders, as do American Express Co.'s S2S source-to-settlement services and JPMorgan Chase & Co.'s B-to-B order-to-pay system.
"Our core competency is payment processing," Ms. Krikorian said. "We're focusing on what we do best."
The three corporate networks are expected to increase the use of electronic payments between businesses, which are still mired in paper. The Association for Financial Professionals plans to release a survey today at a conference that checks remains the dominant B-to-B payment vehicle, but their share of the market slipped to 74% this year, from 81% in 2004, the last time the Bethesda, Md., trade group surveyed its members.
"Organizations are gradually reducing their reliance on checks," said Arlene S. Chapman, a senior consultant to the trade group on technical issues. "I think that's progress."
Studies by the Federal Reserve Board have shown that check volume is declining, while the total number of payments is growing, but Ms. Chapman said the trade group's survey did not address the use of checks in absolute terms — only as a percentage of payments.
Only 19% of the respondents, mostly large companies, use electronic procurement and payment networks, the survey found.
"There are a variety of barriers," including the allocation of technology resources, the task of persuading suppliers and customers to participate in electronic commerce, and the lack of standards for payment information, Ms. Chapman said. "There's no single barrier."
One example of how difficult the standard-setting task can be: The Fed and The Clearing House Payments Co. LLC announced at an AFP conference a year ago that they would work together to incorporate remittance information into wire transfers. Initially, they said they would spend six months studying the question of standards; later they pushed the target date to June. As yet, there has been no further word.
Susan Feinberg, the research director in the wholesale banking group of TowerGroup, a Needham, Mass., independent research group owned by MasterCard, said the transition to electronic payments is likely to be long and challenging.
"We are in a period where banks and corporates have some very difficult decisions to make," Ms. Feinberg said.
The MasterCard system is different from others because banks can customize it to meet their own needs, she said. "It's interesting that they are positioning this as a financial institution-provided service. "It's interesting that they are positioning this as a modular service."
Wells Fargo, for instance, is using the system for card processing but not for check, ACH, or wire payments, Ms. Feinberg said. "These are things that Wells has other solutions to handle, which is the way you would expect very large banks to do it."
John Meakin, the group head of information security at Standard Chartered PLC of London, said that companies around the world are wrestling with the same set of issues. He cited the problems facing a large buyer such as Wal-Mart Stores Inc. "I want all my purchasing to be done electronically, but I don't want to restrict my suppliers to the big behemoths. I want to be able to connect with the local supplier, but I'm scared of them connecting the PC in their back office," Mr. Meakin said.
Though a big company can try to impose e-commerce requirements on its suppliers, it should avoid imposing "closed loop systems," he said. By doing business only with suppliers within such a network, "I've now artificially shrunk the size of my market."
Mr. Meakin is a member of the Jericho Forum, which he called "a college of security professionals" dedicated to breaking down barriers associated with collaboration among computer systems while maintaining security. "It takes a shift in mindset, but it's doable. A lot of it is doable today."
But achieving the full benefits of electronic purchasing and payments will take a long time, he said. "That's years off, probably five or 10 years."
