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This story appears in the April 2009 issue of Cards&Payments.
Most large U.S. corporations are well on their way to replacing business-to-business checks with faster, more-secure electronic payments. But getting small and midsize companies to electronify their B2B payments is proving difficult.
Electronic-payment channels have grown increasingly sophisticated over the past five years, with the automated clearinghouse network and wire transfers providing more-efficient rails for many larger companies' B2B payments compared with checks.
Commercial credit cards also serve a key role in shifting payments away from checks for B2B transactions
But analysts say that despite these options, thousands of smaller businesses are sticking with paper checks and invoices for many B2B payments because most electronic alternatives still fall short of meeting their core needs.
Indeed, no single electronic-payment vehicle yet provides the average smaller business with an adequate balance of lower cost, convenience, payment-information capabilities and acceptance to significantly drive down B2B check use, says Judson Murchie, an analyst with U.S.-based Aite Group. "If an electronic-payment channel emerged that could effectively balance these four key needs, we believe check usage would decline dramatically within a few years," he says.
Companies with less than $10 million in annual sales account for 65% of all payments, according to NACHA, the electronic-payment association that manages the U.S. ACH network. Though B2B payments overall are steadily shifting to electronic channels, NACHA contends conversion is very slow among smaller businesses.
During last year's fourth quarter, B2B ACH volume, including remittance information, rose 15.2%, to 14.4 million transactions from 12.5 million during the same period a year earlier, NACHA reported in February. The total value of those payments was $691 billion, up 11.8% from $618 billion. Smaller businesses drove only a fraction of those totals, NACHA says. (Total fourth quarter ACH-transaction volume for all types of payments reached 3.8 billion, up 4.4% from 3.64 billion in 2007. The total value of those transactions was $7.3 trillion for both quarters.)
"There are probably billions of B2B check payments that could be adapted to ACH payments. We have identified a lot of growth potential among smaller businesses," says Michael L. Herd, NACHA managing director of ACH network rules.
NACHA last year conducted a market-research study among small-business owners to identify their needs and the obstacles they face in modernizing B2B payments, Herd says. And NACHA this year is forming a work-group committee to gather input from smaller businesses about what prevents them from shifting more payments to electronic channels.
The committee will focus on invoice-delivery formats, payment reconciliation and resolving disputes, observers say. NACHA was not ready to disclose its market-research findings or to provide details about the committee at Cards&Payments' deadline.
The need to enrich the bare-bones transaction data accompanying each ACH payment is one of the biggest hurdles small businesses face in using the ACH system for B2B payments, Herd says. "Small businesses that receive an ACH payment tend to want richer information describing the payment, and they want an easier pathway to integrate the payment and its remittance data into their existing accounting systems," he says.
Large corporations manage ACH payments through sophisticated electronic data interchange formats, which enable their mainframe computers to log and reconcile ACH payments automatically. But smaller businesses typically lack such resources.
"Translating EDI information requires some skill and software tools, and that route is not usually useful for small businesses," Herd says.
NACHA is exploring how different types of technological tools, network functions or payment-data formats could help small businesses process ACH payments more easily. One possibility would be to convert certain ACH payments into XML-based documents, a data format widely used among small and midsize businesses, Herd says.
"We are exploring whether companies want XML-formatted information or not, and whether this could solve some issues," he says.
Analysts agree that with some improvements, the ACH network could be a far more powerful channel for small-business B2B payments.
"ACH has the potential to play a big role, but it doesn't offer a strong enough convenience factor just yet," Murchie says, noting ACH transactions still require both parties to share bank-account information, minimizing the ease of use. "With checks, that information is provided on the MICR line of the check, and the buyer needs only an address from the seller."
Electronic-payment alternatives, including the ACH system, remain costly and complicated. But the paper-check logjam could crumble in the next few years if initiatives succeed in making ACH-payment data more manageable for small businesses. CP
