American Banker

Getting the e-payments payoff

Despite the many advantages electronic payments have over their paper counterparts, the vast majority of business-to-business payments remain stuck in the counting-house age, moving by paper invoices and old-fashioned checks.

By Steve Berez and Arpan Sheth

First published on Μαΐου 23, 2008
min read


The Internet ushered in "frictionless commerce" nearly a decade ago. And yet the vast majority of business-to-business payments—exchanges that total $27 trillion annually—remain stuck in the counting-house age, moving by paper invoices and old-fashioned checks. The cost of managing the massive exchange of paper adds up to $116 billion to approve, reconcile, and process payments. The paper jam may soon break. Big financial services companies, like American Express Co., Citigroup Inc., and JPMorgan Chase & Co., have begun partnerships with payment-software developers to host a new generation of third-party payment technology—known formally as electronic invoice presentment and payment, or EIPP. Because the new systems are more robust and neutral between buyers and vendors than their predecessors, their potential to transform how payments are made is large. Our analysis indicates that EIPP can help companies cut payment-related costs by more than 50%. Buyers can save as much as $9 per payment; for vendors, the savings should run between $7 and $12 per invoice. Less clear is whether companies that adopt EIPP—and the banks that offer it—will realize its full promise. Overlaying an automated account-settlement system on top of inefficient paper-based procedures will not do much to improve productivity. Buyers and vendors need to rethink how they handle payables and receivables, within their organizations as well as with one another. Banks that sponsor the new payment systems have a big stake in helping their clients make the transition. We estimate that transaction-processing fees and follow-on business for companies that consolidate a position in this still highly fragmented market could total $21 billion. Normally, the full benefits from EIPP do not kick in until more than half of all invoices are processed online. Assembling a critical mass of vendors or customers requires the coordination typical of a military campaign and a deft touch to coax intransigents along. EIPP-sponsor banks are easing the conversion by helping their clients with three major tasks. First, they help segment their clients' rosters of vendors (or customers) by both volume of business and their technical readiness for the switch. Second, they provide back-up support to integrate vendors' and suppliers' systems as they bring them on board. Finally, they offer continuing training to help payers and payees integrate their billing, reconciliation, and payment processes. From our conversations with company executives we have found two strong examples. The experience of Memorial Sloan-Kettering, the cancer treatment center, in working with its EIPP system sponsor, JPMorgan Chase, illustrates one successful approach to coaxing suppliers aboard. The cancer center processes more than half a million invoices each year from legions of suppliers to its research, clinical, and administrative departments. To ensure that EIPP would yield the hoped-for benefits, the conversion team approached the task in phases. Looking for a quick success, the team began with a 90-day blitz targeting 50 of the most visible research lab vendors. Because the center was already linked to this group through an online ordering system, moving to EIPP was a logical next step. The cancer center set up the transition as a quid pro quo: speedier automated payments in exchange for electronic invoices using the hospital's internal codes. In phase two, the team tackled the more daunting job of converting the hospital's vendors of such staples as food services, drugs, and medical supplies. It was in these high-volume, paper-intensive transactions that the biggest savings could be reaped. The team segmented vendors in this group according to their level of technical sophistication and met with them one-on-one. The center relied on its EIPP provider to help the less adept suppliers overcome technological hurdles. The final phase focused on the most challenging group—providers of highly specialized medical services. Few of these suppliers had the basic electronic data interchange capabilities to enable digital procurement. But they were indispensable to ensuring top-quality patient care. Again taking a firm but supportive approach, the team targeted 90 key vendors and set out to win them over by shortening the payment cycle and guaranteeing payment within 30 days. But the center also made clear that the vendors would have to convert to EIPP by the time their contracts came up for renewal. In the end, about 85% made the switch. The payoff has been substantial. With no addition to head count, the organization today processes 877,000 payments per year—nearly twice as many since EIPP was first adopted. For many other companies, persuading partners to switch requires documenting the new platform's advantages and shifting rapidly to the new system to avoid diluting everyone's potential gains. This challenge was faced by Kennametal, a supplier of engineered components and advanced tooling, when it set out to switch to EIPP in 2005. As the processor of about 840,000 payments annually, to 96,000 suppliers worldwide, Kennametal knew that the opportunity was large. But where to begin? Working with an EIPP vendor called Harbor, now a division of American Express, Kennametal took a comprehensive approach, converting all 18,000 suppliers to its North American business to the new system at once. Beginning with its largest suppliers, the Kennametal team, backed up by Harbor, set out to establish uniform invoicing protocols and quickly helped attain them. In parallel, the team worked to boost the technical capabilities of smaller suppliers and help them overcome their doubts about the new system. With virtually all domestic suppliers online within a year, skeptics were won over as they saw Kennametal's reimbursements speed up about 30%, from an average of 45 days under the manual payment system. For Kennametal, the benefits were just as striking. Accounts payable overhead has fallen two-thirds, and processing costs plunged 90%, to just 9 cents for an electronic payment. EIPP has been a long time in coming. For companies that adopt the new technology—and the financial services firms that aim to be their payment intermediaries—its arrival will be as welcome as discovering a big electronic deposit. Mr. Berez is a partner at Bain & Company based in Boston. Mr. Sheth is a partner based in Bain's New York office. Both are members of the firm's financial services and information technology practices.

The Internet ushered in "frictionless commerce" nearly a decade ago. And yet the vast majority of business-to-business payments—exchanges that total $27 trillion annually—remain stuck in the counting-house age, moving by paper invoices and old-fashioned checks.

The cost of managing the massive exchange of paper adds up to $116 billion to approve, reconcile, and process payments.

The paper jam may soon break. Big financial services companies, like American Express Co., Citigroup Inc., and JPMorgan Chase & Co., have begun partnerships with payment-software developers to host a new generation of third-party payment technology—known formally as electronic invoice presentment and payment, or EIPP. Because the new systems are more robust and neutral between buyers and vendors than their predecessors, their potential to transform how payments are made is large.

Our analysis indicates that EIPP can help companies cut payment-related costs by more than 50%. Buyers can save as much as $9 per payment; for vendors, the savings should run between $7 and $12 per invoice.

Less clear is whether companies that adopt EIPP—and the banks that offer it—will realize its full promise. Overlaying an automated account-settlement system on top of inefficient paper-based procedures will not do much to improve productivity. Buyers and vendors need to rethink how they handle payables and receivables, within their organizations as well as with one another.

Banks that sponsor the new payment systems have a big stake in helping their clients make the transition. We estimate that transaction-processing fees and follow-on business for companies that consolidate a position in this still highly fragmented market could total $21 billion.

Normally, the full benefits from EIPP do not kick in until more than half of all invoices are processed online. Assembling a critical mass of vendors or customers requires the coordination typical of a military campaign and a deft touch to coax intransigents along. EIPP-sponsor banks are easing the conversion by helping their clients with three major tasks.

First, they help segment their clients' rosters of vendors (or customers) by both volume of business and their technical readiness for the switch. Second, they provide back-up support to integrate vendors' and suppliers' systems as they bring them on board. Finally, they offer continuing training to help payers and payees integrate their billing, reconciliation, and payment processes.

From our conversations with company executives we have found two strong examples.

The experience of Memorial Sloan-Kettering, the cancer treatment center, in working with its EIPP system sponsor, JPMorgan Chase, illustrates one successful approach to coaxing suppliers aboard. The cancer center processes more than half a million invoices each year from legions of suppliers to its research, clinical, and administrative departments.

To ensure that EIPP would yield the hoped-for benefits, the conversion team approached the task in phases. Looking for a quick success, the team began with a 90-day blitz targeting 50 of the most visible research lab vendors. Because the center was already linked to this group through an online ordering system, moving to EIPP was a logical next step. The cancer center set up the transition as a quid pro quo: speedier automated payments in exchange for electronic invoices using the hospital's internal codes.

In phase two, the team tackled the more daunting job of converting the hospital's vendors of such staples as food services, drugs, and medical supplies. It was in these high-volume, paper-intensive transactions that the biggest savings could be reaped. The team segmented vendors in this group according to their level of technical sophistication and met with them one-on-one. The center relied on its EIPP provider to help the less adept suppliers overcome technological hurdles.

The final phase focused on the most challenging group—providers of highly specialized medical services. Few of these suppliers had the basic electronic data interchange capabilities to enable digital procurement. But they were indispensable to ensuring top-quality patient care. Again taking a firm but supportive approach, the team targeted 90 key vendors and set out to win them over by shortening the payment cycle and guaranteeing payment within 30 days. But the center also made clear that the vendors would have to convert to EIPP by the time their contracts came up for renewal. In the end, about 85% made the switch.

The payoff has been substantial. With no addition to head count, the organization today processes 877,000 payments per year—nearly twice as many since EIPP was first adopted.

For many other companies, persuading partners to switch requires documenting the new platform's advantages and shifting rapidly to the new system to avoid diluting everyone's potential gains. This challenge was faced by Kennametal, a supplier of engineered components and advanced tooling, when it set out to switch to EIPP in 2005.

As the processor of about 840,000 payments annually, to 96,000 suppliers worldwide, Kennametal knew that the opportunity was large. But where to begin?

Working with an EIPP vendor called Harbor, now a division of American Express, Kennametal took a comprehensive approach, converting all 18,000 suppliers to its North American business to the new system at once. Beginning with its largest suppliers, the Kennametal team, backed up by Harbor, set out to establish uniform invoicing protocols and quickly helped attain them. In parallel, the team worked to boost the technical capabilities of smaller suppliers and help them overcome their doubts about the new system.

With virtually all domestic suppliers online within a year, skeptics were won over as they saw Kennametal's reimbursements speed up about 30%, from an average of 45 days under the manual payment system. For Kennametal, the benefits were just as striking. Accounts payable overhead has fallen two-thirds, and processing costs plunged 90%, to just 9 cents for an electronic payment.

EIPP has been a long time in coming. For companies that adopt the new technology—and the financial services firms that aim to be their payment intermediaries—its arrival will be as welcome as discovering a big electronic deposit.

Mr. Berez is a partner at Bain & Company based in Boston. Mr. Sheth is a partner based in Bain's New York office. Both are members of the firm's financial services and information technology practices.