Though the Internet has quickly become the main consumer electronic bill payment channel, businesses billing other businesses electronically are still mostly using private networks - and seem in no hurry to switch.
The majority of electronic invoices sent between businesses today use the Electronic Data Interchange format, or EDI, which dates back to the mid-1980s. Though the technology is clunkier than the Internet invoicing systems that have been built to supersede it, the modern version has failed to capture much market share.
Indeed, though the Internet applications - known by the acronym EIPP, for electronic invoicing, payment, and presentment - may have gained some buzz at industry conferences, even the companies that offer them acknowledge they have not made much of a dent in the private EDI networks they aim to replace.
"We're a gnat on their business, and occasionally they notice us," conceded Eric Smith, who sits on the executive leadership team of the EIPP vendor Velosant and was its president and chief executive under its previous name, BillingZone. In June, BillingZone's owner, First Data Corp.'s eOne Global unit of Atlanta, decided to rename the unit in a reorganization of its EIPP business.
Avivah Litan, a vice president and research director with the market research firm Gartner Inc. in Stamford, Conn., estimates that 56% of U.S. companies are sending invoices electronically and that about 46% of these will be transmitted in digital format by yearend. But only 18% of those e-invoices are sent in Web formats - the rest use EDI.
And that gap is only increasing. Ms. Litan estimates that two-thirds of all invoices will be sent electronically in this country by 2006, but only 27% will be using Web applications. "Everyone used to think that the Web systems would replace EDI, and they're not," she said.
The most basic reason for this is that EDI systems work. Companies typically work with a private networking partner, called a value-added network. Buyers send EDI-formatted purchase orders to their suppliers through the VAN and receive both shipping confirmation notices and invoices. Some can also transmit electronic payment instructions through the VAN to financial institutions, though the majority of payments are still made with paper checks. These systems have been in place for years, sometimes decades, and are commonly used by many of the nation's largest corporations.
Velosant and other EIPP vendors may rue this situation, but EDI vendors are sitting pretty, largely because big companies have put so much money into their technology.
"EDI has proven to be more robust than most people thought it would be," said David Hay, the marketing manager for financial services at Global eXchange Services of Gaithersburg, Md., and one of the earliest advocates for EDI. "Many large companies have invested millions of dollars" in putting in EDI systems, "and they are not going to start breaking them out."
Mr. Smith of Velosant points out that only the largest companies use EDI. Smaller ones have proven unwilling to invest in the systems, and unless they do a lot of business with massive companies that demand EDI-formatted invoicing, many of them have seen no reason to use the technology.
Despite many companies' firm commitment to EDI, Mr. Smith said there is a large, untapped market of companies of all sizes that have not started using an electronic invoicing system. They are the main target for EIPP applications. "You would be surprised at how many big companies can't" send or receive electronic invoices, he said.
"I would rather be in the EIPP space than working on EDI VANs," Mr. Smith added, "because there is nothing but headroom and growth for us." Velosant's e-invoice volume is low, he said, but its revenue has doubled since last year and the number of transactions it is processing has risen 75% to 100% the past three quarters. "We're not going to be a gnat for much longer."
There are some advantages to using Web EIPP applications, not the least of which is price - subscribing to a VAN is much more expensive than using the Internet.
Ray Simonson, the chief technology officer for CheckFree Corp.'s i-Solutions group in Norcross, Ga., said it can cost millions to install EDI systems and software, and to hard-wire each dedicated connection to the VAN. And updating the systems is costly. He said companies can spend anywhere from $12,000 to $20,000 simply to add information about a new trading partner.
Mr. Smith says EIPP applications are also more flexible, because they can accept invoices in any format, even paper, and then translate the files and documents into whatever format the receiver requires. This is helping smaller companies get started with electronic invoicing.
CheckFree's Mr. Simonson said: "I think EDI is holding on because of inertia. It solved a pretty big business problem, but you had to be pretty big to afford it."
The next step in EIPP's evolution will probably be a hybrid of EDI and Web applications. Both CheckFree and Velosant sell products that let non-EDI-equipped companies send and receive documents through the Internet to larger partners that use legacy EDI systems. These applications tend be based on a newer format, Extensible Markup Language, or XML, and essentially act as a translator to convert documents into whatever format is required at either end, including EDI. "I think XML is going to be the EDI of the future," Mr. Simonson said.
There is a strong consensus that the EDI format will remain popular for some time to come, but the VAN business model is less secure. The hybrid systems allow companies to send e-invoices across the public Internet and they eliminate the need for dedicated connections to VANs.
Mr. Hay of Global eXchange said his company has a foot in both camps. Though the vendor still sees a healthy revenue stream from dedicated VAN connections, it is also developing applications that use the Internet to send EDI-formatted files. "I think EDI will go forward, but the VAN could end up playing a different type of role," he said.
