High Noon

The story of banks and e-commerce resembles an Old West tale, one that's been retold many times. Banks, as lawmen, enter the saloon announcing they've arrived to clean up the town. Everyone dives for cover as the banks find themselves surrounded by the same mean-looking desperadoes, or obstacles to e-commerce, that killed off earlier B2B initiatives. Then the posse arrives, in the form of industry-wide solutions to address the needs of buyers and sellers, including secure online payments and compatibility with accounting systems.

For decades, banks have been trying to help businesses cope with the challenges of adapting paper-based processes to an electronic medium. But with the exception of EDI, which is viable for only the largest companies, the goal of an e-commerce solution for all businesses has proved elusive.

Parlaying their roles as trusted intermediaries, banks have tried to peddle e-commerce portals and e-marketplaces to their traditional cash management customers. For the most part, however, these services have failed to address the real problems of B2B, said Jane Hennessy, senior vice president at Wells Fargo Bank. "Existing payment services have a disconnect with the needs of the New Economy. A lot of solutions are unilateral proprietary systems."

"There's not much straight-through processing today," continued Hennessy. What's needed, she said, "is a single integrated window for payments and settlement."

Businesses can go online to order goods and services, but must go offline to make payments, reintroducing the inefficiencies of traditional paper-based commerce. "Sellers want to get their cash faster," according to Avivah Litan, research director at GartnerGroup. "This can be achieved by the automatic application of payment to accounts receivable, online payment guarantees and nonrepudiation."

In an ideal world, buyers and sellers would communicate all payment information across the Internet, instead of mailing invoices, appending data to private network payment messages, or exposing data to breach of privacy. Buyers would simply initiate a payment online in conjunction with negotiation and purchase, instead of offline.

A couple of industry-backed solutions are attempting to fill this gap. One is a scheme, devised by the New York Clearing House, for creating an online B2B payments network. The other is a specification for initiating online payments being pushed by Identrus, a New York-based venture that was set up to establish digital trust. Both were presented in May at the BAI TransPay conference in Anaheim, Calif.

INITIATION RITES
The Identrus solution, called Project Eleanor, facilitates secure, direct B2B payments on the Internet. It's not a new technology or software product, but rather a payment initiation front-end that can be mapped into existing e-commerce services offered by financial institutions.

An offshoot of the Identrus digital trust platform, Project Eleanor (which will soon be given another name) is backed by 15 of Identrus' owner-banks. The project, which was undertaken in collaboration with Sun Microsystems and iPlanet E-Commerce Solutions, was scheduled to go live at presstime.

The Project Eleanor solution includes functional specifications (payment, finance and risk management tools for e-commerce), technical specifications (XML message formats, architectures and workflows) and operating rules (which provide the basis for legally enforceable and commercially interoperable service level agreements between trading partners and their banks).

In the Project Eleanor scenario, payments aren't a separate activity, but are integrated with the negotiation and order process. Complete payment information-what's being ordered, paid for, when and how-is linked to the electronic payment message itself. The processes the bank uses to execute the payment are transparent to the trading partners. "Eleanor is about a new customer front-end, not a back-end," said Hennessy.

In a typical Project Eleanor transaction, a buyer signs an agreed payment instruction and sends it to the seller, who then adds account data and transmits it to the seller's bank. The seller's bank adds details for processing the payment, and then transmits it to the buyer's bank. The buyer's bank verifies the buyer's identity and ability to pay. The buyer's bank then responds to the seller's bank and executes the payment. Participants digitally sign messages and validate digital identities with Identrus global IDs at every step, often transparently.

Six payment types are available: payment order, payment obligation, certified payment obligation, conditional payment order, conditional payment obligation and certified conditional payment obligation. The payment types vary depending on whether they're revocable before the payment is completed, whether they require documents to be filed as a condition of receiving payment, and whether they're guaranteed by the buyer's financial institution. For example, when the seller requires payment assurance, the buyer can electronically request that its bank, when initiating payment, take on the responsibility of paying the seller.

On a macro level, Project Eleanor improves liquidity by allowing banks to package their payment obligations and resell them, effectively creating a secondary market for trade-based financial instruments. In time, the trading of payment obligations could become a profitable endeavor, allowing banks to securitize their receivables and manage portfolios of trade-based instruments.

UNIVERSAL ACCEPTANCE
While Project Eleanor focuses on the front-end, or payment initiation, portion of e-commerce, the New York Clearing House initiative, called Internet Clearing and Settlement or iC&S, focuses on the back-end. The service, when fully rolled out, will provide end-to-end payment and remittance information delivery via the ACH network.

As the largest private ACH operator, NYCH is uniquely positioned to graft an e-commerce solution onto its existing ACH clearing and settlement system. ""The key to successfully implementing an Internet-enabled payment system is to maintain or upgrade the current payment systems and take advantage of the current infrastructure,"" Jeffrey Neubert, chief executive officer at NYCH, said at the time the project was announced last year. The NYCH approach eliminates the need for each bank to invest in functionality best served by a bank-owned utility, he added.

The cornerstone of iC&S is a Universal Payment Identification Code or UPIC, a checking account-like number that banks assign to their business customers to ""mask"" confidential data such as the bank account number. The UPIC is designed to alleviate fears about fraud, which have prevented companies from sharing account information.

""Companies are robbed because people use their account numbers to debit them,"" said Christine Nautiyal, director of iC&S product management. ""The UPIC is a pseudo-account number that allows only credit transactions. You cannot debit.""

By permitting only credit transactions, UPICs allow businesses to openly display account information on their invoices and Web sites. ""UPIC is moving toward allowing vendors to post an electronic address for credit push, and to put it on their invoice,"" Nautiyal said.

A company will get a separate UPIC for each checking account. ""GE, which has thousands of accounts in various banks, will have a UPIC for every account,"" said Nautiyal.

UPICs are permanently assigned to a business, relieving it of the hassle of revising payment information on its invoices and Web site every time it switches banks. A translation table maintained by NYCH maps a company's UPIC to its bank account number.

""Sellers just say, 'Pay me at this routing and transit and this UPIC,'"" said Nautiyal. ""It's attached to the business's checking account. They don't even have to know it's a UPIC.""

SMART OPERATORS
Banks don't have to belong to NYCH to use UPICs. If a non-NYCH bank originates an ACH transaction with a UPIC, it's ACH operator (e.g., the Fed) will recognize it as a UPIC and send it on to NYCH for processing. ""Whenever the Fed gets a UPIC, they send it to us and we will translate it,"" said Nautiyal. The transaction then gets processed as an ordinary ACH transaction.

NYCH intends UPIC to serve as a gateway to its clearing and settlement systems, EPN and CHIPS-systems to which small companies don't ordinary have access. ""NYCH would be a funnel, similar to how we offer ACH. We get in everybody's ACHes, we sort them and send them out. We would do the same for UPICs,"" said Nautiyal.

A NYCH-provided Web interface permits banks to manage UPICs. ""We have a Web browser that's part of the application, where a bank could assign, maintain and look up UPICs,"" said Nautiyal. ""Some banks will eventually build a UPIC into their own customer information file.""

With banks already assigning UPICs to their customers, NYCH is calling on vendors of accounting and home banking systems to get on board. By including UPICs in their products, accounting system vendors could design them without worrying about whether they'll connect to a bank's cash management system. ""SAP would love us to say we're backed by 11 banks, and this is the format,"" said Nautiyal.

And as more companies are able to receive payments electronically, more consumers can be coaxed into using online bill payment, which would benefit home banking software vendors. ""We're looking at assigning UPICs to those home banking companies that are still receiving checks, so they can receive e-payments,"" Nautiyal said. ""Banks can then mass-enroll small companies with UPICs.""