It’s an acknowledged fact that ePayments are more efficient, faster, and less prone to fraud than paper checks. However, as we’ve said numerous times, one of the biggest problems with ePayments, particularly in the B2B world, is a lack of standard formatting for remittance information. AribaPay, the latest product offered on the Ariba Commerce Network, seeks to change that.
ePayments have been around for quite some time in the business and consumer worlds. ACH has existed since the 1970s; wire transfers originated with telegraphs in the 1800s. Despite this, according to Ardent Partners research, a full 42% of all B2B payments are made via paper check. This is notwithstanding the increased possibility of fraud, duplicate payments, and overpayments that exist with the manual, paper-based process involved in cutting a check to pay suppliers.
Changing the Game in B2B ePayments
“Even though check is opaque, slow, and prone to fraud,” says Drew Hofler, Ariba’s director of solutions marketing for network and financial products, “it nonetheless does one thing very well and that is delivery of information. [Buyers are] able to deliver pages and pages of information below the check, so at least [suppliers] know what they are getting paid for.”
This delivery of information is particularly important in B2B payments, which Hofler notes are typically made anywhere from 30 to 90 days after the delivery of goods and services. He contrasts this with consumer payments, which are conducted on a 1-to-1 basis at the point of sale. Consider this: a consumer would never think of going to a supermarket, picking out $100 worth of groceries, and then tell the cashier at the checkout that they’ll pay for the food in 60 days.
So Hofler contends that, because of this timing disconnect between delivery and settlement, the B2B payments system is broken. He also argues that businesses avoid ePayment methods such as ACH and wire transfers, which are more secure than paper checks, because they don’t allow for the same level of rich remittance information as a paper check. Hofler notes that ACH only allows for 80 characters of information — a holdover from the IBM punch cards that ACH used to run on. Wire transfer isn’t much better, offering only 140 characters of information along with the transfer.
According to Hofler, it doesn’t help that invoices are typically batched together and paid all at once, so a supplier may receive payment for dozens or hundreds of invoices all at the same time and need to tie each one to a particular transaction.
“If you think about the payables function,” Hofler says, “it occurs at the union of invoicing, working capital, and payments.” Because of this, Ariba decided to leverage its business network and the invoice processing capability they already had into a new technology partnership with the Discover (NYSE: DFS) payment network.
Ariba already has invoice information on its network, which can offer rich remittance data to suppliers, so Hofler says all they needed was a payment processor in order to complete the final stage of the invoice and payment process. That’s where Discover comes into the picture; the credit card company acts as the settlement provider for the AribaPay platform, using its secure banking system to trade funds from buyer to supplier.
Hofler notes that this is another aspect that gives enterprises pause about using ePayment methods like ACH. For every supplier that an enterprise pays via ACH, it must receive, protect, and maintain the correct bank account information in a back-end system. This has led many enterprises to eschew ePayments as a method to settle invoices for fear of a system breach and the liability associated with one.
AribaPay allows for buyers to pay invoices electronically without having to store suppliers’ critical bank account information. The AribaPay solution does this through a tokenization method, where Discover takes the bank account information of the supplier and validates it through the appropriate banking verification procedures. Once Discover has validated the account, its system produces what’s called an Ariba Merchant ID number — a non-sensitive number — that, if stolen, doesn’t enable a theft of funds.
How is Payment Settled?
Once a merchant is enabled on AribaPay with an Ariba Merchant ID number, Hofler says that it’s a simple matter to pay an invoice. When a buyer wants to pay an invoice, it includes the Ariba Merchant ID number. Once the Ariba Network recognizes the ID number, the payment information is sent to Discover, which then makes a single debit from the buyer’s bank account and credits the supplier’s bank account with the same amount.
Everything that came before the payment is available on the Ariba Network, Hofler says, or as an automated download into the supplier’s ERP system. This offers full remittance information on every payment that goes through AribaPay, provided on the network to every supplier.
Hofler says that Ariba worked with Discover because they have the settlement engine and the infrastructure to manage and maintain bank account information in a very secure environment. Through their merchant acquirer system, Discover also has the capability to scale AribaPay up and make it available to all vendors.
Hofler emphasizes that, although Discover is a credit card company, AribaPay is not a card product. “There have been [a lot of solutions] that have come out recently that are basically [just simplified payments made with] a card,” Hofler says.
AribaPay is not that. Hofler emphasizes that there are no fees associated with payment; this is an on-time payment where the funds are withdrawn from the buyer’s account and once those funds are settled, they are immediately turned around and sent to the supplier.
“This is purely on-time payment settlement done better,” Hofler says.
The Future of B2B ePayments?
The AribaPay solution offers a new way forward for B2B payments. Ariba already has arguably the largest B2B commerce network in the world with a reported 1.5 million business transacting $1.37 billion in business commerce every day. Now, Ariba has leveraged its network in a new way by offering a differentiating product in the form of AribaPay; Hofler notes they’ve already seen some success with the new offering. One large telecom buyer brought 20,000 suppliers into the fold, and there are already plans to expand the offering beyond the United States. Hofler says that AribaPay will be available in Europe in 2015, and then to other regions as requested.
Final Thoughts
Given the rich data that Ariba already provides in its invoice product, the new AribaPay product offers a significant benefit to enterprises looking to streamline their procure-to-pay process and/or provide better remittance to their suppliers, while doing so at a cost that’s superior to card solutions. With all the news about electronic payments — on the consumer side and the business side — it’s looking more and more like ePayments will continue to be a hot topic for years to come. Between major players like Ariba and Basware, and newer companies like Traxpay, we’ll be watching the steps the business world takes toward an entirely electronic procure-to-pay workflow.
Keep up with all the discussion around ePayments and other B2B ePayables topics at the Ardent Partners LinkedIn group.
