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The Federal Reserve's announcement that the number of checks written in the U.S. has dropped from 65 billion to 49.6 billion annually is proof that electronic payments is no pipe dream.

The Federal Reserve's announcement that the number of checks written in the United States has dropped from 65 billion to 49.6 billion annually is proof that the vision of electronic payments is no pipe dream.

Checks now comprise only 60% of payments made in the United States (down from 85% in 1979). Some 30 billion payments per year occur electronically through credit/debit cards, ACH transactions and electronic benefit transfers.

"The number and percent of electronic transactions has grown exponentially since 1979, thus demonstrating acceleration in consumer and business use of electronic forms of payment," said Cathy Minehan, president of the Federal Reserve Bank of Boston.

Eager to shed costly paper check technology such as image scanners, optical character recognition and fraud detection systems, the payments industry-banks, associations and technology companies-is attempting to sway individuals and businesses over to electronic payments.

Mid-sized businesses, in particular, appear ripe for conversion. Large enough to require advanced financial services, yet lacking the scale for customized financial technology, the middle market is emerging as the next steppingstone in the path toward a paperless economy.


In a bid to gain a foothold in the middle market, CheckFree has launched its WebPay for Small Business Service. "The small business arena is our step into the business payment market, bridging the gap between the consumer market and the B2B area," said Marc Berkowitz, product manager at Atlanta-based CheckFree.

"We've put together for that market a tool for our existing sponsor network to go after those customers with an EBPP Electronic Bill Payment and Presentment application," he continued.

CheckFree provides online billing and payment services to 5.6 million customers of over 400 sponsor organizations such as Bank of America, First Union, Merrill Lynch, Morgan Stanley Dean Witter, Navy Federal Credit Union, PNC Bank,, Yahoo!, and the U.S. Postal Service.

As with the consumer version, WebPay will permit a small business to quickly pay all of its bills, view payment records, and download information into Intuit's QuickBooks and Microsoft Money. WebPay customers can include additional information along with a payment, such as invoice, discount and adjustment amounts. "You can free-form enter that information and tie it to the payment," said Berkowitz. "The extended remittance will travel in the form of a paper invoice along with a laser draft check."

That's on the accounts payable side. "In the future, we're looking at helping small businesses to move their accounts receivables online," said Berkowitz. An upcoming release will allow multiple employees at a company to manage various aspects of the payment process.

Other software companies are also courting middle market customers. Fidesic offers banks a private-labeled invoice presentment and payment service for small business customers. Formerly known as CheckSpace, Fidesic had developed its software for Compubank, which was later acquired by Netbank.

But in order to succeed, electronic invoicing must be compatible with a firm's accounting systems. "The payment process is a full round-trip, and if it breaks down anywhere in the process, it's just not worth it to the customer," said Naseem Tuffaha, CEO of Fidesic, Bellevue, Wash. "That requires deep integration both in the accounts payable and accounts receivable side."

The Fidesic solution allows companies to manage the payment process using Microsoft Great Plains and Peachtree, two of the leading small business accounting packages. "A small or mid-sized business runs a different system than an enterprise that uses an SAP or a Peoplesoft," said Tuffaha. "Those applications really form the lifeblood of the business."

The accounting department can choose how to deliver an invoice-whether via e-mail, fax, or through the mail-from within a company's existing accounting software. "We take the burden off of the customer in terms of figuring out which delivery option to use," said Tuffaha.

For Fidesic, the big challenge was working with accounting software providers. "The larger size business that you address, the more of an IT services component is required for implementation," said Tuffaha. "It was very important to us to educate the Great Plains channel so that they're able to fulfill the implementation."

"Banks do not have this IT services component," he added.


But banks are definitely in a position to help larger companies unlock hidden value in the financial supply chain through the use of business technology.

Xign, a Pleasanton, Calif. software company spawned by a project of the Financial Services Technology Consortium, has started a Payment Service Network that moves detailed remittance information in parallel with ACH payments. "Our solution is about cutting the administrative costs associated with paper-based settlement, streamlining the process and reducing working capital," said Tom Glassanos, CEO of Xign.

Xign provides a set of "adaptors" that plug into the accounts payable systems of Peoplesoft, Oracle, SAP and other enterprise-level systems. "We enable those systems to transmit payment systems instructions into our network on a real-time basis," said Glassanos. "We use the customer's own bank to move the money on their behalf." So far, Xign has arranged with Bank of America, Bank One, Citibank, Wells Fargo and Silicon Valley Bank to initiate their customers' electronic payments.

The Xign adaptors coordinate the movement of information before, after and during the movement of funds. "Suppliers know which invoices have been approved, so they have information on the status of their invoices before the money moves," said Glassanos. That reduces uncertainty on the timing of payments, while also helping to prevent discrepancies on an invoice before payments are made.

Companies on the Xign network can both send and receive payments. "Any supplier who has activated into the network to receive payments in this manner receives an electronic lockbox," said Glassanos. "Once they activate, they can receive payments from anyone."

Motorola, Worldcom, Nortel, KPMG and UPS are among the companies listed in the Xign directory. "They can receive electronic payments without having to give out their bank account number," said Glassanos. "Because it's based on the notion of an electronic check, there's no reengineering on either the disbursement or collection side."

An initiative by the New York Clearing House (NYCH) further illustrates the need for payment methods that operate outside of traditional banking relationships. NYCH has introduced a Universal Payment Identification Code (UPIC) which, like the Xign solution, allows companies to mask their bank account and bank routing numbers.

NYCH, which operates the Electronic Payments Network (EPN) and CHIPS networks, could help Xign connect to banks, said George Thomas, president of EPN. "Right now they're using ACH. They have to hook up to thousands of buyers' banks-why not hook up to us?"

As operator of the largest clearing and settlement alternative to the Federal Reserve, NYCH will take whatever steps it can to bring the business world online. "We're looking at ways of helping to facilitate electronic payments, even when it's putting an electronic address on a paper invoice," said Thomas.

But any dreams of paperless commerce also have to encompass consumers, who write slightly over half of the checks in the U.S. economy (almost 25 million per year).

Consumer demand for EBPP remains lukewarm at best. "The vast majority of consumers remain unconvinced of the benefits of receiving and paying bills electronically, especially when it only involves a few bills and additional fees are charged," according to Meridien Research analysts Jeanne Capachin and Dave Potterton.

A good first step would be to eliminate fees. "The billers are the ones who are really getting the added value," said Capachin.

And banks that operate lockbox services need to adapt to a paperless world. "That's a business that's going to be declining either way," said Capachin. "So they might as well replace themselves."

Since paper won't decline overnight, banks will need to integrate both EBPP and lockbox services, so that a company can receive a single data feed. "There are billers who have already turned to their banks for a solution to their remittance processing," said Capuchin. "They're likely to turn to their bank again for an EBPP solution."

Consequently, banks are turning to technology. Meridien Research divides EBPP solution providers into three broad categories: application vendors, transaction vendors and comprehensive solution providers. Application vendors, including Avolent, edocs, Group 1, Intelidata and iPlanet help billers to go online. Transaction vendors such as Alltel, EDS, MasterCard, Spectrum, Billserv, YourAccounts and Paytrust facilitate the movement of funds. Finally, CheckFree, Metavante and Princeton eCom are classified by Meridien as comprehensive solutions providers.


Annual Value of Checks Written in the United States

Business to Business $20.4 trillion

Consumer to Business $4.9 trillion

Business to Consumer $6.9 trillion

Other $15.5 trillion

TOTAL: $47.7 trillion

Source: Federal Reserve Check and Electronic Payments Research Project, 11/01

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