Web Invoicing & Electronic Payments: Moving Beyond Paper

For generations people have envisioned a paperless, electronic society. In the 1960s, for example, futurists predicted that organizations in the new millennium would exchange information in a fully electronic manner.  This sounds quaint from our current vantage point, but who knew that getting rid of paper would be more difficult than putting men on the moon?

A recent milestone reported by the Federal Reserve Board records that the number of consumer electronic payments has finally eclipsed the number of paper checks, a clear indication that the trend toward financial automation remains strong in the consumer landscape. In the business world, however, B2B settlement transactions remain mired in paper with more than 75 percent of payments still reliant on time-consuming, error-prone and expensive paper checks.

Building a Case for Automation

The results of our 2004 Financial Automation Survey illustrate that organizations continue to experience problems at all stages of the order-to-cash process with pain peaking at discrepancy resolution and exception processing. Our latest research suggests that these forces have sharply increased organizations’ interest in Web Invoicing & Electronic Payments solutions.

Our survey also revealed a keen interest in technology solutions that streamline and automate some or all of the order-to-cash functions. According to our survey of finance, treasury, and accounting professionals, 40 percent of respondents expect their organization to implement workflow tools for approval processing over the next few months. Similarly, 30.1 percent of respondents believe that their organization will deploy a Web invoicing solution to streamline their order-to-cash processes.

The Web Invoicing & Electronic Payments Universe

Web Invoicing & Electronic Payments solutions streamline the processing cycle by enabling organizations to electronically submit invoices and purchase orders, use sophisticated workflow tools for approval processing and make electronic settlement against approved invoices. Additionally, leading practice Web Invoicing & Electronic Payments solution providers bring more to businesses than standard invoicing and electronic settlement methods. Some offer shared supplier networks where thousands of buyers and suppliers can conduct business within a common framework. Most make it possible to integrate payment data into ERP and legacy general ledgers, view real-time transaction activity and notify all interested parties via email of status changes and exceptions.

Another innovation offered by these solutions is the concept of dynamic discounting that allows suppliers to discount their receivables at any point till the maturity date at an interest rate determined by the buyer. This discounting capability not only serves as a short-term, low-cost financing alternative to suppliers but provides buyers with an additional income stream and effectively compresses the working capital requirements for all trading partners.

What is Dynamic Discounting?

A financial practice – dynamic discounting – in place for years in parts of Europe is gaining acceptance in the United States, largely because of the technological innovations of a few, relatively new financial supply chain software solution providers and collaborative bankers.

The solution provides suppliers with the flexibility to discount their approved receivables at any point up to the maturity date and passes on a portion of the finance charges to buyers. This functionality has been gaining acceptance as it offers financing to suppliers at attractive rates while delivering an additional income stream to buyers. The solution providers and participating banks facilitate the transactions through a simple, intuitive Web interface that provides visibility to all parties, including the ability to change rates and terms in real-time—thus the term dynamic.

Dynamic discounting serves the cash management needs of buyers and suppliers alike. The solution providers create the technological framework to facilitate this process. The transaction can be self-funded by the buyer or a bank can stand in as a short-term lender. Through Web-based buyer-supplier networks, buyers are able to project compressed settlement terms through supplier discounts. Suppliers are able to pick and choose among an array of payment options for each outstanding invoice. Banks pay the bill and collect from the buyer the full original price minus a percentage of the discount savings; an arrangement often referred to as “revenue sharing.”

When third party financing is involved, buyers are able to reduce their working capital requirements, some by as much as 40 percent, and suppliers gain access to capital at a more competitive rate than they are likely to obtain through a local bank.

Different Flavors of Web Invoicing & Electronic Payments

Not every solution is created equal, so corporate managers should understand the differences between the various Web Invoicing & Electronic Payments solutions currently available. First, there are direct solutions, which enable either the buyer or supplier to control the invoicing and payment process from their own systems. When they are controlled and managed by the buyer and link the buyer to multiple suppliers, they are referred to as buyer-direct or buyer-centric solutions. On the other hand, direct solutions controlled and managed by the supplier are known as supplier-direct or supplier-centric solutions.

Second, there are consolidator solutions, which involve a third-party processor or bank acting as a consolidator. The consolidator provides a network with a Web-based interface that allows many buyers and suppliers to come to one location to transact with one another. The consolidator acts as an intermediary, collecting invoices and facilitating payments from multiple buyers for multiple suppliers, eliminating the need for point-to-point connections. The consolidator model not only has all of the robust features of a buyer or supplier-centric solution, but also provides additional value through the shared supplier network; open to suppliers and buyers alike. Both may participate in the consolidator model, but neither controls it.

Where is this Market Headed?

Our research shows that the adoption of Web Invoicing & Electronic Payments solutions will grow rapidly over the next five years. We estimate the total number of B2B invoices delivered through a Web invoicing solution will increase from the current 1.76 billion to 6.86 billion in 2010, resulting in a Compound Annual Growth Rate (CAGR) of 31.25 percent. This translates to an increase in transaction value passing through these networks from $1.79 trillion in 2005 to $8.9 trillion five years from now – an amazing CAGR of 37.81 percent.

The accelerating adoption of Web Invoicing & Electronic Payments solutions is not surprising given that the savings from automation are significant. In addition to the cost savings enjoyed by organizations, we believe that the need to adapt to changes in the regulatory environment (i.e. Sarbanes-Oxley and Check 21) and a desire to achieve their automation goals will further provide the momentum for automation.

PayStream Advisors’ latest Corporate Insights Report titled, “Web Invoicing & Electronic Payments: Moving Beyond Paper”is available for download from our online store.  This report, profiling nine of the solution providers, offers valuable insights into Web Invoicing Solutions and helps managers compare and contrast different solutions to identify the one that bests suits their organizations' requirements. Vendors profiled in this report are Bottomline, First Data, GE CPS, JPMorgan, Tranmit, Payformance, PrimeRevenue, U.S. Bank and Xign.The report is available at http://www.paystream advisors.com/reports.htm.

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