Turf War Rages Over Electronic Payments

Global Finance, Oct 2004 by Hawser, Anita

TREASURY & CASH MANAGEMENT

Internet-based technologies are threatening to make existing electronic payments systems obsolete.

In the late 1960s a handful of large companies took the first few awkward steps toward making electronic commerce a reality. In an effort to eliminate the costs and inefficiencies associated with handling paper, they developed proprietary formats that allowed for the electronic exchange of purchase orders and invoices with specific trading partners. The concept of EDI (electronic data interchange) was born, which, thanks to the work of standards organizations such as the American National Standards Institute (ANSI), evolved into a set of specific EDI standards: ANSI X12 in the United States and the United Nations Electronic Data Interchange for Administration, Commerce and Transport (UN/EDIFACT) standard.

By 2001, 300,000 companies were using the US EDI standard X12. A 2001 McKinsey study indicated that more than $2 trillion in business transactions passed through EDI networks. But the advent of the Internet and globalization has transformed the way companies do business, extending the supply chain beyond national borders to encompass potentially new trading partners. New standards have also emerged around the Internet, namely XML (Extensible Mark-up Language), which is perceived to be more open, flexible and easier to implement than proprietary EDI formats such as Xl 2 and EDIFACT.

XML has given rise to new international standards such as ebXML (electronic business Extensible Mark-up Language), TWIST and SWIFT XML. The RosettaNet Payment Milestone Program, led by corporates such as Nokia, Intel and Dell, has also used open XML standards to demonstrate 'live' working end-to-end straight-through processing (STP) from the buyer's to the seller's enterprise resource planning (ERP) systems. But what does this mean for those companies that have already invested in EDI? And does XMLs inherent flexibility and lower cost mean that EDIFACT's days are numbered?

David and Goliath

While EDIFACT is relatively ubiquitous among large corporations, its penetration rate constitutes only 5% of total trading volumes. One of its chief drawbacks is that it is costly to implement, particularly -when it comes to extending it to mid-market vendors and suppliers. EDI/EDIFACT requires a dedicated server, which can cost anywhere from $10,000 to $100,000. Tom Buschman, treasury center development manager at Royal Dutch Shell, says in the case of bank-to-corporate communications, the investment in EDI is difficult to justify for companies that do not have sufficient business volumes. "If a company doesn't deal with many banks, that can become burdensome," he says.

So although EDIFACT may have delivered on its promise of allowing companies to automate purchase orders and invoices, implementation costs have prevented its being extended to smaller companies further down the supply chain. "There was always a challenge in taking EDIFACT out to smaller users," says Chris Hayes, solutions manager for business-to-business solutions provider Sterling Commerce. Typically, Hayes says, companies have 20% of their supply chain doing EDI, which represents 80% in terms of overall value. "That is where XML can offer additional value," he says. "It should make it easier to enable other parts of the supply chain."

The structure of XML messages is less complex than EDIFACT, which is based on 'rigid' business rules for handling data. An EDI message is stripped of metadata-data about data-which can make it difficult to interpret. "If you wanted to use EDI for a specific part of the supply chain, you would need someone with expertise in the business processes and in using these messages for that supply chain," explains Leii Schwarte, director, channel management, at ABN AMRO Bank. "XML, on the other hand, is less expensive because the knowledge level around how to use it is accessible by more people."

Grown-up Standards

As metadata is stored within an XML message, it can be more easily interpreted and transmitted via a web server or read within a web browser. Buschman, chairman of TWIST, which has produced XML standards for companies wanting to connect to their banks for seamless processing of payments, points to the example of remittance information passed between banks and companies to help them reconcile incoming payments more quickly. "A significant bottleneck is that banks are not necessarily structured to pass this remittance information on to the company," he explains. "It is costly for the banks to do that using EDI." However, with XML, Buschman says, this information could be easily transmitted via email or a web interface.

But while XML is an open standard promoting higher levels of interoperability, it, too, has its limitations. Some maintain that its inherent flexibility means that there is a problem in getting users to agree on document type descriptions (DTDs). "Over the next three to five years the market around XML should take on a more sensible structure," says Schwartz. "Now you have 70 organizations developing XML standards which overlap." Schwartz believes XML standards will consolidate around similar processes, like making a payment, and he anticipates that, unlike EDIFACT, XML will evolve to allow standards from different supply chains and business functions to more seamlessly work together. The 1ST Harmonization Team has brought together various XML standards bodies such as TWIST, SWIFT, OAGi and IFX to try to harmonize the data around XML payments messages. "To have a common grammar is a huge step forward," says Hayes.