E-commerce demands a dynamic settlement process

Credit & Financial Management Review, Third Quarter 2000 by Kaiser, L H

Abstract

E-commerce enterprises are quietly automating their settlement processing. In the business-to-- consumer world, credit cards are proving to be the preferred method of payment. In the business-to-business environment, credit cards, usually in the form of purchasing cards (p-- cards), are an acceptable payment medium for only a small portion of the marketplace. In most B2B transactions, open terms such as net 30 days are the norm, and business customers are loath to relinquish the benefits derived from trade credit. At issue is not so much fees and interest rates, but that business customers do not want to give up control. With open terms you can take deductions to redress product and service deficiencies, and even hold up payment entirely without any real short-term threat of a penalty. In addition, business customers use open terms to facilitate internal audit controls between the purchase of goods and services and their subsequent payment.

The challenge for B2B companies has been to cost effectively automate their settlement processing. In order to thoroughly understand the dynamics involved in moving from manual cash applications to automated processes, it is essential that the different types of costs involved in remittance processing, no matter what the technology, be first understood.

The Cost Structure of Applying Cash

Cash application costs fall into three areas: document transmission, document handling and document recording. Transmission costs (see chart #1) comprise only five to ten percent of the total cost of posting cash, and so automation's impact is minimal. Even so, mailing costs are significantly more than those involved in transmitting remittance data via the Internet. The costs of using a dedicated phone line to transmit data fall in between these two extremes.

More significant are handling costs (see chart #2), which, for a manual process, range from ten to thirty percent of the total cost of posting cash depending on industry characteristics. Even though scanning involves automation, it is more costly than the manual keying of paper documents. This added cost, however, is usually recaptured thanks to the lower retrieval costs associated with post application tasks. After paper and scanning, costs decrease. In descending order, OCR (optical character recognition) technologies, spreadsheet applications for exchanging remittance data, EDI (electronic data interchange), and even newer technologies such as XML (extensible markup language) each incur ever lower costs.

The majority of the costs (60 to 85 percent) of posting cash are incurred as a result of capturing and recording document data. Of course, manually applying cash receipts is much more costly than automating this process. Of the automated technologies (see charts #2 and #3), autocash is slightly more costly, in descending order, than MICR scan (magnetic ink character recognition), EBPP (electronic bill presentment and payment) and credit cards. However, in a B2B environment, only autocash and EBPP provide all of the data needed for applying customer cash receipts without manual intervention. And, of these complementary technologies, only autocash will provide a cash application solution for most cash receipts, since EBPP will appeal to a much smaller range of customers. Furthermore, MICR scan and credit card data are usually used in conjunction with an autocash system. MICR data will identify the customer who is paying, but not the items being paid. Credit card data typically identifies a document number that must be translated into an invoice number for payment to be posted. As a result, companies that employ credit cards, MICR scan and EBPP will still need to also utilize autocash in order to ensure the highest possible match rate of their customer's remittance detail with unpaid open items and thereby minimize processing costs.

EBPP Is New But Has Limited Use

During the last few years, the only new method available for the remittance processing of B2B settlement transactions is EBPP. Simply stated, EBPP is the online presentation of invoice data along with an electronic settlement mechanism. Its biggest advocates are a number of large corporations along with the commercial banking industry. Their hope is that as e-commerce becomes a cultural norm, business customers will routinely turn to EBPP web-sites to pay their bills. That should provide tangible benefits to the vendors, not to mention the financial institutions processing the payments. Most appealing to the vendors is a greater assuredness of being paid and more knowledge regarding when payments will be executed. Better information, specifically in the form of payment commitments being made early on, should facilitate more focused and hence less frequent collection efforts. EBPP will also provide consistent and detailed payment information, which is crucial when payment deductions have been taken. Moreover, there are the savings the vendors will realize via the automatic, electronic distribution of invoice data.