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In survey of U.S. B2B payments market, Mercator finds companies looking for most cost-effective payment method, banks struggling to serve many masters 

By Editorial Staff 

Boston — June 1, 2007 — Corporate financial professionals want a conversion from paper to electronic payments, but only if they can get the payment information with the money transfer, according to a new report from financial services research firm Mercator Advisory Group. 

In its report “U.S. B2B Payments: State of the Market,” Mercator delivers a B2B payments growth forecast, an overview of business-to-business payments, how businesses communicate their payments and information, and reviews of major payments network basics and leading bank processors. 

Mercator provides separate forecasts of checks, ACH, CHIPS and Fedwire volume through 2010, and the report reviews how B2B payments are processed by companies and the pros and cons of each method. 

According to the report, banks are struggling to serve many masters; some with like goals and others with contradictory ones. Regulators, corporate clients, boards of director and shareholders are pulling in their own directions. 

Some payment types are declining while others are picking up that slack, as ACH, CHIPS and Fedwire payments are taking the place of B2B check, the report finds. Businesses of all sizes are trying to send payments in the most cost-effective way and not through the bank-established channels. New non-bank entities are arising to fill the void, according to Mercator. 

The report also notes that just a few large banks process most of the B2B payments in the United States. Most of these banks are also based in the U.S., but two are foreign. 

Tim Sloane, research director at Mercator, said that the B2B payments industry in the U.S. and in other countries is struggling with an identity crisis. “Regulatory authorities are demanding that the payments industry tighten their reins on the adherence to regulations and compliance mandates; technology is enabling payments providers, banks and network to venture further into new frontiers; practitioners are worried about security; and infrastructures are getting old and in need of repair or replacement.” 

Sloane added, “The task of replacing these systems is so daunting, no wonder no one wants to launch a project to overhaul the enterprise payments network within the business or within the banks.” 

More information on the report is available at the Mercator Web site. 

http://www.sdcexec.com/ 

admin :: Jun.23.2007 :: Uncategorized :: Comments Off

The credit card system was designed to provide immediate gratification of the wants of consumers by allowing them to purchase goods or services on credit. A credit card is a token of trust that transfers the risk of granting credit from a merchant to the card-issuing bank. Once a merchant has had a purchase authorized by the card issuer over the private authorization network, the merchant is assured of payment and the card issuer assumes responsibility for billing the consumer and collecting the money. Settlement takes place later, when the merchant periodically submits a batch of authorized transactions to the merchant’s (acquiring) bank for settlement with the card issuer. But the issuer’s assumption of risk is limited, however, to “card-present” transactions, such as those taking place in retail stores. When a merchant accepts a credit card by mail or phone (“card not present”), the card issuer accepts only the risk of nonpayment; the merchant bears the risk of fraudulent card usage. Merchants pay the costs of credit card use because selling on credit expands their business. Under U.S. law, a consumer’s liability if someone else fraudulently uses the consumer’s card is limited to $50. 

In a card-present transaction, the merchant validates the payer’s signature by matching the one on the back of the card against the one on the charge slip. Integrity is protected by the device of giving the consumer a carbon copy of the slip. The consumer’s account number is verified by the embossed number on the credit card. Settlement is handled by card associations (such as Visa and MasterCard). The merchant receives immediate confirmation of a transaction while submitting it for authorization by way of the card association’s private data network. 

When a catalog sale takes place by mail or phone, the merchant has no way of verifying the consumer’s right to use the card number proffered. At best, the merchant can request the consumer’s billing address and receive an address verification. In effect, a credit card purchase requires only that the card number be conveyed from buyer to seller. For this reason, consumers are asked to protect their credit card numbers. 

While conventional checking and credit card systems may seem quite similar, the legal meaning of credit card and check payment differ significantly. Credit card companies warrant their merchants; a person can challenge a credit card charge if dissatisfied with the goods. Checks provide no such recourse. If a person buys a plane ticket on an airline with a check, and the airline goes bankrupt before the ticket can be used, the unlucky purchaser becomes an unsecured creditor, behind many other claimants. By contrast, someone who pays for a ticket with a credit card may claim restitution from the card-issuing bank, and the card issuer in turn is entitled to redress from the airline’s bank, which must stand behind the airline. 

Payment systems vary significantly in their allocation of liability and in the warranties made by the different parties. Technical mechanisms have a strong influence on the willingness of parties to assume liability. If only the payer’s bank can verify a signature on a check, the merchant or payee bank will not assume any liability for fraudulent signatures. But if public-key­based “signatures” make it possible for a merchant to verify them on an electronic check, merchants can be expected to undertake verification as they now do in card-present transactions.

http://www.gsia.cmu.edu/ 

admin :: Jun.04.2007 :: Uncategorized :: No Comments »

Since the advent of banking in the Middle Ages, bank customers have used paper-based instruments to move money between accounts. In the past 25 years, electronic messages moving through private networks have replaced paper for most of the value exchanged among banks each day. With the arrival of the Internet as a mass market data network, new technologies and business models are being developed to facilitate electronic credit and debit transfers by ordinary consumers.

These new systems include CyberCash (which is a gateway between the Internet and the authorization networks of the major credit cards) and the Secure Electronic Transactions protocol (a standard for presenting credit card transactions on the Internet), as well as First Virtual (a way of using e-mail to secure approval for credit card purchases of information), GC Tech (a payment system that can use credit or debit via an intermediation server), and NetBill (a public­private-key encryption system for purchasing information).

Conventional checking
In today’s banking world, money consists of ledger entries on the books of banks or other financial institutions. A checking account, also known as a demand deposit account (DDA), records deposits by the consumer and can be used, via the consumer’s instructions in the form of a check, to make payments to third parties. Typically, a check is written by a consumer, authenticated by signature, and presented to a merchant, who may endorse it with a signature before presenting it to a bank for payment. If the merchant’s bank and the consumer’s bank are the same, it can simply transfer the funds on its ledgers from the consumer’s account to the merchant’s. If the payer and the payee keep accounts at different banks, the payee bank presents the check for settlement to the payer’s bank and receives the funds in return through a settlement system. Several private check clearinghouse systems, as well as the Federal Reserve system, provide settlement services in the United States.

When checks are sent to banks for deposit, merchants do not yet know if consumers have adequate funds and therefore need to find out whether the checks cleared. Similarly, consumers receive statements from their banks showing which checks have been paid. Any discrepancy between bank records and those of the payers may indicate that forged checks were presented against consumers’ accounts.

This model works equally well when there is a negative balance in consumers’ accounts, at least if the consumers’ banks are willing to extend credit–that is, to lend the consumers funds needed to pay off the checks. Many banks in the United States and Europe provide such credit facilities, sometimes referred to as “overdraft protection.” A credit card is another example of an account that lends money to the consumer.

Naming: there must be an unambiguous way of identifying the payers’ bank accounts and the payees’ bank accounts.
Signatures: it must be possible for the payers’ banks to verify that payment instructions were generated by people authorized to use accounts.
Integrity: electronic checks should be difficult to alter.
Confirmation: payees must have confirmation that transfers took place; payers must have notification of transfers out of their accounts.
Confidentiality: third parties should not be able to monitor such payments.
Settlement: separate banking institutions must have a way of settling their accounts.

Such a system does exist for paper checks. In the United States and Canada, a bank identification code and account numbers are encoded in magnetic ink on the check. But the naming of accounts is not standardized internationally. Payees provide their account numbers when endorsing checks. The payers’ banks match the signatures on checks with customers’ signatures on file at banks. Integrity is ensured by the use of special paper and the practice of writing checks in ink with no alterations. The U.S. Federal Reserve system provides a vehicle for settlement, and confirmation takes the form of periodic statements or special notices for bounced checks. If checks are presented in person or mailed in sealed envelopes, they are generally protected from observation by third parties.

From a business perspective, payment systems differ in the warranties the different parties make and in the liabilities they assume. For example, the payers’ banks are responsible for verifying signatures on checks. If this fails to happen, the payers are not liable for forged checks drawn on their accounts. It is possible to cut the cost of the entire process if payment messages can be readily tied to the parties’ accounting systems–for instance, by including purchase order numbers or a consumer’s account number with a merchant on all checks. It may also be desirable to link payment to some proof that merchandise has been delivered. These links to other processes are among the principal benefits of electronic payments.

In a payment processing system, the cost of normal operations is frequently outweighed by the costs associated with exception handling. If a typical transaction costs US 5 cents to process, and the manual labor associated with handling errors and exceptions comes to an average of $25, even with an error rate of only two per thousand, exception costs will equal normal processing costs. As electronic processing drives down the cost of normal transactions, exception handling becomes relatively more significant. Payment systems must therefore be implemented to the highest standards of reliability, with automated procedures for recovering from errors whenever possible.
http://www.gsia.cmu.edu/

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