The Department of Defense is planning an aggressive push into electronic payments for its gargantuan contracting program, a move that could be a boon to banks.
The Pentagon hopes that electronic data interchange (EDI) will enable it to process payments and invoice information more efficiently.
Though much ballyhooed for its potential cost-saving and revenue-generating abilities, EDI has been implemented by only a handful of financial institutions.
Demand Not Yet Significant
Bankers have been wary of getting involved in the process because, with the exception of a few industries such as automobile manufacturing, few businesses are demanding the service from their financial institutions.
However, according to the Department of Defense, that may soon change.
As part of a program to streamline payments to vendors supplying military equipment, the Department of Defense said it planned to move 90% to 95% of its contract payments to an electronic format in the next four to five years.
"For all those banks that wonder, will there be a market for this, I reply that we have over 300,000 contractors out there that we plan to move to electronic payment mechanisms by 1996," said William L. Blumberg, a financial management analyst for the Department of Defense's finance and accounting service in Crystal City, Va.
"That represents hundreds of billions [of dollars] in payments - a decent launching pad for the business," Mr. Blumberg said.
The Department of Defense declined to specify how it planned to get its contractors to begin accepting electronic payments rather than checks and paper-based remittance documents.
But bankers familiar with government payment systems said that as the department merges 400 disbursement centers into a few centralized facilities, most businesses will find it takes more time to get paperbased payments.
Using improved cash flow as the carrot on the stick, the government is hoping that many businesses will opt to receive electronic payments, which can be disbursed as many as three days quicker than paper checks.
Bankers believe that the Pentagon is overly optimistic in predicting that 300,000 businesses will be accepting electronic payments by 1996. But few dispute that the government's vested interest in making the technology work will go a long way toward getting bankers involved.
In addition, the Defense Department's decision to support the CTX corporate payment format - which allows a large amount of nonfinancial data to accompany each electronic payment - will help the program's acceptance, observers said.
"Getting the contractors involved will create a lot of opportunities for nongovernment transactions, which will geometrically expand the base of businesses participating in EDI," said Mark Stuparich, vice president in Chase Manhattan Corp.'s EDI product division.