Moving corporate america to

electronic payments
How can financial institutions position their payments business for tomorrows world? Native electronic payments offer banks unique opportunity to provide valueadded services for business customers. By Rossana Salaris.

n todays rapidly changing marketplace, if financial institutions focus their strategy on creating native electronic payments, theyll be more likely to improve the profitability of their payments operations and avoid the distractions of the latest new technology or silver bullet solutions. A native electronic strategy has the potential to pay enormous longterm financial and risk management benefits by reducing paper-based transactions. Equally as important, a native electronic payments strategy will enable institutions to transition from interim solutions, such as check conversion to ACH and image exchange.

Despite both systems acceptance in the marketplace, neither processes a significant share of electronic payments between businesses. The reason is that while consumer paper checks have been declining steadily, the number of B2B checks has remained constant at about four billion annually. For financial institutions, then, one of the most significant opportunities to reduce costs and improve the efficiency of their payments operations is to put the elements in place to migrate B2B payments to native electronic payments using the ACH and Wire systems.

The opportunity ahead Making the most of your payments strategy

For financial institutions, the twin pillars of an electronic payments strategy are the Automated Clearing House (ACH) payments and wire transfers. Secure, cost-effective and popular, the ACH is today the workhorse of the US payments systems, touching millions of business, consumers and financial institutions each day. ACH systems such as the Electronic Payments Network (EPN), which is operated by The Clearing House, and FedACH, which is operated by the Federal Reserve Banks, are highly reliable and particularly useful for transactions that dont require immediate settlement. Wire transfer systems such as CHIPS, the private sector network run by The Clearing House, and FedWire, which is run by the Federal Reserve Banks, are used primarily by business for large-value dollar payments both domestically and abroad. Wire transfers are typically the system of choice when immediacy is of paramount importance. Financial institutions have two solutions that can help them achieve that increasingly important objective: The EPN STP 820 (STP 820) and the Universal Payment Identification Code (UPIC). The STP 820 is an emerging standard that enables invoices to be reconciled without manual intervention. The STP 820 establishes a remittance information standard that can be used to both send and receive payments to facilitate straight-through-processing (STP). For both corporate America and small businesses, the STP 820 eliminates the inefficiencies in paper checks, minimizes the potential of fraud and creates the basis for native electronic payments. The UPIC complements the STP 820 by allowing financial institutions to provide their customers with a unique identification number to receive secure, electronic ACH credit payments. The UPIC (www.upic.com) permits a business entity to request electronic payments to this unique identifier without divulging their sensitive bank-

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ing information thereby protecting the confidentiality of their account and routing number. These industry-wide initiatives are being led by EPN, which is working with financial institutions, software developers, trade groups and government agencies to promote the adoption of these standards and remove the traditional obstacles that have impeded the growth of native electronic payments.

The barriers to native electronic payments

Both the STP 820 and UPIC were developed in response to research from The Clearing House and The Association for Financial Professionals (AFP). In its 2004 Electronic Payments Survey, AFP identified the following barriers to electronic payments: Accounts Payable and Accounts Receivable systems are not integrated with electronic payments systems. The lack of a single standard format for remittance information makes it difficult to reconcile invoices and payments. Trading partners do not send or receive electronic payments with sufficient remittance information. The study found that the paper component of the payment can be removed from the process, and the electronic payment and remittance information can flow through the payments system without manual intervention or errors. The study also noted that the information necessary for sellers to automatically post the payment already exists in electronic form in the buyers accounts payable system.

ment amount, purchase order, adjustment and discount information. The incorporation of these data elements permits the electronic payment to flow seamlessly between the buyer's cash management system to the seller's accounts receivable system. S1 is another major cash management package that recently implemented the STP 820. Other cash management package providers such as Financial Fusion, BankLink, and Metavante have also agreed to adopt the standard and are in various stages of implementation. NexTec Group, a leading provider and reseller of business management solutions, has implemented the standard and is offering the STP 820 for Microsofts Great Plains Dynamics accounting software. Great Plains is likely to be followed by Solomon, and Sages MAS500, the leading accounting packages for fast-growing and midtier companies. Treasury Software, a leading provider of middleware payment solutions, has also implemented the EPN STP 820. Treasury Softwares ACH Universal will accept data from any major accounting package from QuickBooks to PeopleSoft. ACH Universal provides a secure, easy-to-use solution for automated B2B transactions using the STP 820 format.

Rossana Salaris

Standards simplify the complex

The STP 820 eliminates the barriers to electronic payments by creating a single remittance standard that can be used by all business entities and makes it easy to send pertinent information to reconcile payments electronically. The STP 820 standard is supported by NACHA, BITS and AFP. The STP 820 rationalizes the complexity of the existing ANSI 820 electronic payments standard. The STP 820 identifies 10 existing ANSI data elements two mandatory fields, payor name and the biller account number assigned to the payor. It also contains up to eight data elements, including invoice number, invoice date, gross invoice amount, amount paid, discount, adjustment amount, adjustment reason, PO number for each invoice being paid. Consistent data in a structured format enables A/P and A/R systems to work together seamlessly. As a result, the STP 820 enables accounting and cash management software providers to create electronic payment modules for a remittance standard that they can code to and that can be implemented cost effectively. This resolves the current problem in which trading partners cannot send and receive electronic payments with remittance information. The industrys adoption has been encouraging. WebBANKER, a product offered by Fundtech (www.fundtech.com), has become the first cash management software to implement the standard. Fundtech allows banks to offer small and mid-sized companies a way to create electronic payments that include invoice and remittance data. Corporate users are able to transmit payment information along with invoice number, invoice amount, pay-

Rossana Salaris
Rossana Salaris is SVP of The Clearing House Payments Company, responsible for the Electronic Payments Network, the nation's largest private sector ACH processor and regional ACH association, serving nearly 1600 nancial institutions nationwide. Salaris is on NACHAs Board of Directors, has served on numerous NACHA task forces and councils and is an accredited ACH professional (AAP). She also manages Education Services. She can be reached at rossana.salaris@epaynetwork.com. Established in 1853 to simplify the exchange of checks and improve the efficiency of the payments system, The Clearing House is a world leader in the payments business. It has come a long way from exchanges using bags of gold specie it offered in 1853 but the central mission remains the same to facilitate the efficient, safe and sound clearing and settlement of payments between financial institutions. The Clearing House provides payment services for check, electronic check, ACH and wire transfer. It also includes industry forums to discuss and take action in issues critical to its owners.

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Coastal Software, a reseller of QuickBooks and PeachTree, is implementing the EPN STP 820 with its first QuickBooks customer.

UPIC: Creating secure payments

Another barrier identified in AFPs 2004 survey was the reluctance to reveal bank account information. This finding was consistent with a study The Clearing House Payments Company (TCH) released in 2002:

The Remaining Barriers to ePayments and Straight-through Processing. UPICs provide a secure account identifier that allows companies to receive electronic credit payments without divulging their sensitive banking information. A UPIC also allows companies to proactively provide their account information without worrying about security or portability issues. This is especially important because of the rising incidence of fraud. UPICs enable the banking industry to protect both itself and its customers. A UPlC looks and acts like a bank account number, and is used in conjunction with a universal routing and transit number (URT). The UPIC and URT can be printed on invoices and displayed on the Internet without exposing the organization to potential fraud. This ready access to the recipients electronic payment address enables electronic payments

In 2006, more than 80,000 UPIC payments totaling $4.7 billion have been made

to be made on the spot. Any paying organization can use this information to initiate an electronic payment. With a UPIC, only ACH credits can be initiated. A UPIC cannot be used to debit accounts, and this safeguard reduces the risk of unauthorized ACH debits, demand drafts and fraudulent checks. The importance of this protection can't be overstated. The Payments Risk Study conducted by AFP in March 2006 revealed that 79 percent of organizations with annual revenues greater than $1 billion and 54 percent of organizations with annual revenues below $1 billion report payments fraud in 2005. One of the key features of a UPIC is its portability. If financial institutions merge or an organization moves its banking relationship, the UPIC stays with that entity only the underlying bank account information changes. A portable UPIC minimizes the cost and inconvenience of communicating new account information to hundreds or even thousands of trading partners. In 2006, more than 80,000 UPIC payments totaling $4.7 billion have been made. Transactions and dollar volume through the first six months of 2007 have surpassed the total for 2006. UPICs have been issued to organizations in 32 industry sectors, including government, manufacturing, telecommunications, utilities, education, real estate, medical technologies, financial services, associations, government agencies, agriculture, and a variety of service industries. The Wire Transfer Systems are evaluating incorporating the UPIC and STP 820 into its formats. Once this is accomplished, the US will have a cohesive strategy for moving business payments to an electronic payments environment. Together, both the UPIC and the STP 820, represent real opportunities for the financial services industry to move toward an all-electronic environment for B2B payments. To succeed in that key business objective, financial institutions need to demonstrate clear leadership, while remaining committed to educating the marketplace about the benefits of electronic payments. The industry stands poised to make that vision a reality.

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