In a strained economy, with increased regulation and heightened financial pressure from shareholders, banks are examining more deeply their financial supply chain offerings and increasing the use of automated, electronic payments for corporate transactions.
The use of paper checks for business-to-business payments has dropped to 57% in 2010 from 74% in 2007. But while financial supply chain payments are becoming more automated, more than half of all B2B payments remain in paper form, creating an unprecedented opportunity for innovation.
To thrive, banks must find a way to quickly and easily innovate in the B2B space and maintain transparency for the corporations they serve, while not jeopardizing their market advantage. Moreover, vendors in recent years have vied for market share, threatening to cut banks out of the picture.
Completely disconnected, payments take varied forms, including check, automated clearing house, card and wire. The current process for most organizations to complete payments between corporations and their suppliers lacks transparency for both parties. Depending on a company’s size, the maintenance of such disjointed systems can require significant resources, resulting in a monumental annual expense.
In order to reconcile these varied, siloed systems, corporations must coordinate efforts with several different banks and suppliers which are often spread around the world.
Filling the payment niche created in recent years, several banks and payments technology companies have launched B2B payment networks (including Syncada, which I run) to answer the needs of their individual clients. A situation in which individual banks and payment technology services are providing unique systems to their corporate customers further divides an already splintered system—and poses a difficult marketing situation, as a rival bank is not likely to adopt a payment system controlled by a competitor.
A successful payment network would unite banks under a large and trusted external corporation in order to more simply and transparently tackle currently complex financial supply chains. The umbrella system that connects the disjointed financial supply chain system for corporations must offer several components in order to achieve successful integration.
First, the service must address the full supply chain. It must not only complete payments but also offer trade finance, invoice processing and data collection. In doing so, banks would have unparalleled access to flows of information.
Second, banks do not have excess capital to spend on experimenting with technologies that are not already established. Therefore, a successful payment system must also consider the technological requirements of the banks with which it operates. Cloud computing provides a safe and effective alternative to the handling of physical payments. It allows for the instantaneous transaction of payments, which in turn is cost efficient as banks simplify the extensive existing supply chain. To support this system, the entity which oversees it must have enough access to capital to finance any transaction.
Third, the use of technology for payment systems not only cuts costs, but also provides transparency, a concept necessary in a post-Lehman banking world, which would mitigate business partners’ potential risk factors. A universal business-to-business payment system would streamline financial supply chains, enabling them to have instantaneous insight into each and every transaction on a global scale.
Today's corporate payments climate, combined with the frequent entrance and exit of companies in this space, has created a unique opportunity for banks to realign their efforts and preserve their payments business by using a financial supply chain system that directly connects them with other banks and corporations.
Such a system would be global, transparent, open and inclusive. The solution is to integrate existing payment types while envisioning a future in which business-to-business payments are fully electronic and increasingly automated.
Some banks will do this on their own. Some will seek outside help. All should be thinking about this topic.
Kurt Schneiber is the chief executive officer of Syncada from Visa, a joint venture between Visa Inc. and U.S. Bancorp.