Xenakis on Technology

How to Pay on a B2B Exchange

Written by John J. Xenakis for CFO.com, Mar 28, 2001.

Virtual Purchase Connection provides new payment options for Business to Business E-commerce.

The Internet is having a sweeping effect on every aspect of American business. Companies are saving huge sums in E-commerce by providing for online bidding, electronic processing and administration, and real time tracking of inventories and parts flow. An increasing number of companies are using B2B exchanges, even though the projected growth rate has been slashed in recent weeks See CFO.com's recent story entitled "The B2B Exchange Myth".

Products can be bought and sold at the click of a mouse, but the online nature of most E-commerce transactions ends when the buyer pushes the "Pay" button. The payment system is still in the dark ages, and everything is usually still on paper, using faxes, invoices, and paper checks.

The problem is that there's a scarcity of available E-payment options. The traditional methods are still being used, despite their disadvantages in the new world: Credit cards have high fees, checks are slow, and wire transfers are difficult to use.

Alternative payment options are beginning to emerge, including one from a year-old company called Virtual Purchase Connection (http://www.virtualpurchaseconnection.com). VPC has partnered with Wells Fargo Bank, Fleet Bank, and JP Morgan Chase to offer a new E-payment option supported by a number of services.

"We got into it to offer another payment option on our Web site," says Thad Armbruster, CFO for XS Inc, which runs the http://www.XSAgg.com web site which provides products for agricultural companies. "VPC offers an excellent upside, since it offers the same comforts as a credit card. Our credit card fees are passed on to the customer, and people who use credit cards pay 2.5-3 percent. With VPC, the fees are roughly half that."

Buyers who want to use VPC have to sign up in advance with a partner bank, making whatever credit or payment arrangements they agree upon.

When a buyer selects VPC as a payment option on a Web site, the buyer is authenticated using digital certificates. The seller's Web site then transmits detailed (so-called "Level 3") line item detail to VPC's site, which then approves or declines the transaction. If approved, a unique transaction ID is delivered back to the seller, and funds are delivered to the seller on the next business day.

The funds are delivered through the standard Automated Clearing House (ACH) network. Funds never pass through a VPC bank account.

Unlike credit cards, where the seller takes the full responsibility for fraud, VPC provides full fraud protection to the seller, and guarantees full payment on the next business day.

MVM Products LLC is implementing a VPC trial program because credit card fraud has been such a big problem, according to president Daniel Loyer. The company manufactures and sells ink jet and laser printer supplies on its Web site, http://www.ink-jet.com.

"We used to run at 8-10 percent credit card fraud, which is the industry average," he says. "We've cut it down to $1,000-1,500 per month, on sales of $100,000 per month, because we've stopped authorizing all charges. When we get a charge that's suspect, we call the issuing bank and get an authorization."

"With VPC I won't have to do any of that. It releases me from having to check each card with the bank, since the bank assumes the liability for the transaction."

This is one of the main strengths of the program, according to David Kurrasch, president of Virtual Purchase Connection. "Our product is designed to allow the merchant to feel absolutely certain about who the buyer is," he says. "When we give them an approval, a top 50 financial institution is guaranteeing the transaction. We eliminate the merchant's risk that they won't get paid."

Kurrasch points to features that make VPC a complete package. For example, although a VPC transaction cannot be repudiated once made, there is a conflict resolution process. "We have a Dispute Resolution Committee, with merchants, banks, and ourselves represented on it."

Kurrasch would like to see VPC become an industry standard, but there are some obstacles in the way, according to Avivah Litan, analyst at the Stamford, Conn.-based Gartner Group.

"One obstacle is that the banks that participate are going to have to integrate many of their IT systems," she says. "Banks already have many different data bases, and now they'll have to put them all together into a single data base. It's a big job."

The second obstacle is the imposition that it places on the seller. "The seller has to change its system to accept the payments as an additional option," says Litan.

"It took only about a week of software implementation for the IT people to implement the pilot," says Scott Peoples, director of marketing for XS Inc. "However, it'll become more complicated when we make it available across the board because we have multiple buying options for many products, and VPC will have to be made available for each one."

However, despite these obstacles, Litan thinks VPC has a good chance of making it.

"The bottom line is that it fills a void in the E-commerce B2B space," she says. "In my mind, it's a credit card without all the baggage, like high fees. How far it'll go will depend on whether they can line up enough banks and enough sellers to make it work. The incentives are there, but nothing comes for free."

VPC is not the only company launching new B2B E-payment services.

Clareon Corp. (http://www.clareon.net) was launched as a spin-off from FleetBoston Financial, and offers a system called PayMode. It doesn't require any modifications to the seller's Web site, since it works with the buyer's and seller's existing accounts payable and accounts receivable system. A PayMode buyer would receive electronic invoices from a PayMode seller. After reviewing the transaction details, instead of issuing a check, the buyer clicks on a button which automatically transmits instructions to Clareon to make a payment. As with VPC, the money is payed through the ACH system.

BankServ Corp. (http://www.bankserv.com) offers a collection of services to facilitate traditional methods of E-commerce payments, including ACH system payments, credit card payments, and wire transfers. As an example of one of many services, BankServ provides real-time credit card authorizations within 2-4 seconds. In doing so, it performs several additional security and authentication checks to reduce fraud. As another example, BankServ systems provide for fast and efficient wire transfer payments.

These E-payment servers are easier to implement because they use existing invoicing and payment mechanisms, without requiring changes to web sites. However, they do not as readily target impulse B2B purchases by first time buyers, as the VPC option does.

(This is a modified version of an article that originally appeared on Mar 28, 2001 on CFO.com at this location. )