02. Mobile Payments: Sustainability of Business Models Payment Cards: Trends, Challenges and Innovations 25

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1 IN THIS ISSUE Mobile Banking and Payments Security and Usability: What's in Your Mobile Wallet? Innovation in Retail Payments Electronic Invoicing: How to Increase E-Invoicing B2B Transactions

2 CONTENTS Preface From the Editor s Desk Retail Payments 01. Innovation in Retail Payments Mobile Payments: Sustainability of Business Models Payment Cards: Trends, Challenges and Innovations Mobile Banking and Payment Security and Usability: 35 What's in Your Mobile Wallet? Wholesale Payments 05. Wholesale Payments: Trends and Transformation Electronic Invoicing: How to Increase E-Invoicing B2B 49 Transactions 7. Centralizing Wholesale Payment Services: The Key to 55 Improved Growth, Efficiency and Risk Management 08. Money Movement Automation: A Case Study Financial Institution Opportunities in Healthcare Revenue 73 Cycle Management Payments Transformation 10. Enterprise Payments: Breaking Barriers Top Transformational Trends in Check Processing SEPA: Outsourcing - The Key to Changing Times Payments Fraud 121

3 6 ELECTRONIC INVOICING: HOW TO INCREASE E-INVOICING B2B TRANSACTIONS PATRICK BRENNAN VIPIN KUMAR NITIN JAIN E-invoicing means different things to different people. For some, it is sending and receiving scanned copies of paper invoices through the Internet. For others, it is downloading invoice data from scanned copies or images directly into their ERP or financial systems. E-invoicing - a component of B2B procurement and a part of the financial supply chain - is a system where organizations can send and receive purchase, supplier and pricing data directly from their purchasing or ERP system. This is done via an electronic medium with minimal manual intervention. The focus of this article is to look at the lack of business acceptance for e-invoicing, despite the fact that it could provide significant cost reduction opportunities and the ability to optimize B2B transactions. This lack of acceptance is counterproductive, since the current situation yields no reduction in procurement cost and is compounded by the loss of any increased working capital and tangential cost savings. We conclude by detailing how sponsoring banks can be an instrumental force in increasing the number of B2B e-invoicing transactions.

4 Hurdles for e-invoicing implementation Even though e-invoicing can offer substantial savings for a business, it has yet to gain mass acceptance with firms. Only one out of six invoices issued and paid in the United States, and one out of seven internationally, is currently enabled for electronic invoicing. Researchers have identified many possible reasons for this phenomenon. Some believe that organizations are too accepting of their current practices and lack the drive to make changes to their existing purchasing and financial systems. This complacency is likely due to the sense of security and control that accompanies paper-based invoicing. Owing to this existing belief in the current system, a strong justification is demanded for any investment in an electronic invoicing system. Other companies believe that e-invoicing entails only sending a scanned copy of paper invoices through s. This belief is generally misguided, since the initial data has to be keyed in or scanned manually. Other organizations believe that since their transaction information is already on the Internet, e-invoicing should be free of cost. Here are a few serious challenges that a business faces due to delayed adoption of e-invoicing: Failure to provide a compelling business proposition In his article, Overcoming barriers to e-invoicing (GT News July 2005), Garry Young of LogicaCMG writes that the biggest challenge faced by e-invoicing firms is providing a compelling business proposition to the corporation. He argues that the costs of processing paper invoices are typically understated because organizations fail to consider the cost involved in making late payment penalties, missing prompt payment discounts, handling queries, etc. This lack of understanding of the true cost of paper invoice processing means a company will typically base its calculations on the lowest common denominator: the cost of its accounts payable staff (for example, 15 at 30,000 per annum) divided by the number of invoices processed (150,000 at say 3 per invoice or 450,000). With electronic invoicing, the new cost might only be 150,000, delivering an annual saving of 300,000. However, these savings may not necessarily be enough for an e-invoicing system to make the final cut of prioritized projects for that financial year. To reap the benefits of e-invoicing, organizations need to receive a significant amount of electronic invoices from their suppliers. Often, the problem is getting the suppliers on board, as each usually has their own way to process invoices. Additionally, some companies are not yet ready for electronic invoicing, since they do not have a centralized account payable, matching and archiving system. Regulatory Issues Probably the biggest hurdle for e-invoicing is the lack of uniform standards internationally. In the last couple of years, bodies like NACHA, UN/CEFACT, ISO, SWIFT, TWISt, CEN, etc. have come up with various e-invoicing standards. However, these standards are usually proprietary and tailored for specific industries or regions. Due to this narrow scope, they can have unintended results. For example, a global supplier may lose business to other suppliers since he might not be able to afford different invoicing systems for customers located in different countries. The European Union (EU) made the first steps towards universal standards through the issuance of Directive 2001/115/EC - the EU Invoicing Directive. This directive did not only prescribe standard data on the invoices, but also made them legally enforceable. Though suffering its own ambiguities, this directive prompted organizations to consider e-invoicing seriously. 50

5 In the United States, lawmakers passed the Check Clearing for 21st Century Act (aka Check 21 act). Initially, the purpose of this legislation was to avoid the huge risk of check float that resulted from the airline shut down after the September 11 terrorist attack. The Federal Reserve now allows the clearing bank that received the check to create a scanned copy of the check and process the scanned item as a check. While this action did reduce some of the paper processed in the check system, the primary reason for paper reduction in the check system was consumer acceptance of banks and biller sponsored EIPP functionality. While available to businesses, the Check 21 legislation did little to change corporate issuance of paper checks due to the perceived security risks with electronic payments. Although some large companies have adopted e-invoicing with direct suppliers, the perceived risk of using the e-invoicing model for indirect business expenditures has tainted the idea of e-invoicing for US organizations. Hence, its growth has been curbed. Diversity and Buyer Power Barrier Another reason why organizations that buy from multiple geographies shy away from e-invoicing is the sheer number of languages and currencies that they need to manage. If the suppliers are not captive, only buying power could require a supplier to have a compatible or similar ERP systems, as well as produce the invoices in the required language and currency. Business sense of e-invoicing Many statistics are available that provide costs to send and process paper invoices. Robin Colla, in his article The basics of e-invoicing: Is it right for you? (GT News- November 2007), estimates that it costs approximately 1.20 to print and send an invoice to a customer, 2.50 for data entry and 5-15 to manually process each paper invoice. After switching to e-invoicing, buyers can save up to 70% of manual processing costs and suppliers would save on the cost of sending invoices.this effectively means that in a single invoice exchange, the seller/ sender could save 1.20 (approx. 2) while the buyer/ receiver could save 10 (approx. 17). However, this figure does not include exception handling, which may alone cost 50 per exception. Considering that there are millions of invoices being exchanged each year, the savings resulting from e-invoicing would run into billions of dollars. In his article E-invoicing: History in the making (GT News- October 2007), Adolfo Tunon predicts that adoption of e-invoicing would mean annual savings of 225 billion in the Western Europe marketplace. In another study, by the Aberdeen group (Supplier network speed e-invoicing adoption, Increase ROI-January 2006) the author identifies the following improvement areas and the corresponding performance impacts: The above performance figures build a compelling business case for e- invoicing, but for small suppliers, the obvious deterrent for its adoption is the significant upfront cost. Many are skeptical of investing in a system that would send electronic invoices to the Improvement Area Performance Impact Invoice processing cost Reduced 30% - 60% Processing cycle time Reduced 65% All labor Reduced 25% - 40% On time payment percentage Improved 15% - 59% Discounts earned Increased up to 500% 51

6 suppliers in the desired format. The exact cost of implementing an e-invoicing system would depend on the amount and type of integration with the buyer's back office, and related ERP systems. However, a broad estimate can be calculated from the report prepared by DG Information Society and Media for e-government unit in Denmark (e-government interoperability at local and regional level - January 2007), which estimated that the upfront cost of investing in e-invoicing system is less than 10% of the savings that would be generated by its adoption. Another such study (www. sourcewire.com, January 2008) by EGS, UK's largest e-commerce Exchange for the public sector, estimated that Essex County Council would realize annual savings of 500k by processing 65,000 invoices electronically for its 100 largest suppliers. The payback period for Essex County is estimated to be less than one year. Opportunities for Banks In the global business marketplace, companies, printing providers and postal carriers are the major participants in the invoice flow. With regard to organizations that have adopted e-invoicing, the communication is directly between the buyer and seller. In response to a purchase or procurement order from the buyer's ERP System, the seller normally provides a scanned copy of the invoice. In more advanced cases, an electronic transaction would be generated by the seller's ERP system. The problem arises when the respective ERP systems of the buyer and seller are unable to format compatible invoices and purchase orders. Most small and medium-sized companies do not have a core ERP system in place, implementing discrete buyer procurement packages and systems instead. Another problem is that financial and accounting systems are typically not part of an ERP installation. With a limited or nonexistent core ERP or a limited financial accounting system, it is not feasible for the small buyer or seller to modify their system for a particular counter-party (though exceptions do occur in direct procurement scenarios). The lack of e-invoicing acceptance, due to high initial cost, provides the bank with a unique opportunity to develop and market an e-invoicing capability, as part of the bank's cash management product portfolio. Using an Invoice to Pay process, enabling and charging buyers/ sellers on a per transaction basis, opens a lucrative revenue stream for banks. Additionally, it will improve e-invoicing acceptance by removing the initial cost bottleneck. Banks would act as the intermediaries who will be at the receiving end of the e-invoice information sent by the invoice/ payee/ creditor. Banks would then convert this information into a standard format and transmit it to the payer bank via an interbank network (ACH). The payer would then accept the invoice and the payment would be made using Straight Through Processing (STP). With the rollout of Electronic Payment Network (EPN) STP 820, it has become easier to include the invoice and remittance information in the ACH transfer. Currently, influential banks are marketing their segmented proprietary e-invoicing system. Their argument is that building a uniform format for e-invoicing is a complex job. Moreover, demand is limited to a handful of large corporations. To realize the full benefits of e-invoicing, a concerted effort is required by banks and corporations to develop a common and comprehensive Seller/ Payee Invoice Sent Payment Received Buyer/ Payee 52

7 4. Acceptance of e-invoice Payer's bank Payer 5. Interbank credit transfer with reference 2. Interbank delivery 3. Presentation of arrived e-invoice 1. e-invoice initiation Payer's bank Payer 6. Information on received payment with reference code e-invoicing standard. The European introduction of SEPA, earlier this year, could be used as a model and is a step in the right direction. Future of e-invoicing Technology is a major driver in changing business processes from paper to e-invoicing. Over the last few years, a great deal has changed in the industry. This change has given rise to new forces that are beginning to push companies to switch to electronic invoices. Paper-based offices and transactions will gradually be replaced by paperless offices using e-invoicing systems. With the advancement in integration technology and messaging standards around the e-invoicing space, scanned invoices will eventually be replaced by the use of XML (or some other medium) to facilitate faster transmission of buyer/ supplier information within systems. This will not only automate the financial supply chain, but may give rise to other opportunities for banks in factoring, procurement, financial supply chain processing, outsourcing, and other lucrative domains. There are two parts of the ideal future e-invoicing system. The supplier of the e-invoice makes the first part. Until now, most efforts have been overly focused on this stage. Accordingly, there are various solutions and third party providers in the market that let the sellers upload their invoices on vendor's networks. The critical question then becomes: how does it reach the buyer, i.e., the second part of the e-invoicing system? For banks and other providers of invoice sending services, it becomes crucial to be able to uniquely identify each buyer and each Purchase Order (PO). We believe that in the future the recipient of the e-invoice could be identified unequivocally by a unique code. With SEPA transactions, recipient accounts are uniquely identified by using International Bank Account Numbers (IBAN). A similar environment should evolve for non-sepa e-invoicing. Ideally, the desired recipient would be identified by a unique code and the e-invoice could be routed in its desired format. A combination of ACH information and IBAN number could be used to receive the detailed electronic invoices in the future. On the uniform e-invoicing standards front, we believe that convincing organizations and nations to agree on a single e-invoicing standard could be a long-term process. Even so, companies and banks will eventually start to look for interoperability. This means that, independent of the network or standard employed, the sender and receiver would be able to exchange e-invoices. Recommendations The viable economic proposition for e-invoicing is that buyers need to have a critical mass of suppliers capable of sending e-invoices. While captive suppliers may be an easier market, external strategic suppliers would need to evaluate and accept the economic value proposition to ensure delivery of the invoice, and faster payments. Certainly, suppliers need a ubiquitous model to connect 53

8 seamlessly and securely with multiple buyers. Since many current providers do not supply a complete cost effective, end-to-end, open buyer/ supplier network, the opportunity emerges for third party providers. These providers could process the invoicing data from the suppliers and send them to the buyers in any available format, desired by each party. For the small suppliers, the initial cost and resource investment of an e-invoicing solution is the biggest hurdle. In this market, a third party provider could provide the e-invoicing service and infrastructure, charge a minimum onboarding fee, and then charge per invoice processed. Banks are uniquely qualified to team with a trusted third party, such as Infosys, to create, manage and execute e-invoicing transactions between buyers and sellers. In small and middle markets, banks are viewed as a company's trusted strategic partner. Adding to this, receiving and executing payments for companies of all sizes, as part of the cash management portfolio of services, is the core operation of any wholesale bank. Aligning with a strategic partner, to provide e-invoicing services between buyer and seller, is a natural extension of a bank's Account Receivable/ Accounts Payable Cash Management services. More than ever, banks are working very hard to maintain their very profitable small and medium-sized business clients, while continuing to minimize their disintermediation risk. Third party hosting of e-invoicing services meets all parties' requirements, while also providing the added benefit of mitigating the risk and challenges associated with e-invoicing. Patrick Brennan Principal Consultant Infosys Consulting Patrick is recognized as an internationally renowned financial services, payments, procurement, and transactions systems industry executive. He has over 15 years experience as a Management Consultant, assisting major US and international financial institutions in business process reengineering, legacy system review and conversions, and supply chain design ventures. Through the expert use of his Six Sigma, SAP tools and consulting methodologies, Patrick has directed, launched and successfully completed many short and long term engagements for financial institutions, private companies and clients in the international public sector. Vipin Kumar Business Analyst Infosys Technologies Limited Vipin is a Business Analyst with the Banking & Capital Markets Group at Infosys. He has worked in the domains of Payments, Cash Management, Mortgage, and Data Management. He has been actively involved in the development of different solutions in these areas. Nitin Jain Business Analyst Infosys Technologies Limited Nitin is a Business Analyst with the Banking & Capital Markets Group at Infosys. He has worked in the domains of Cash Management, Payment solutions, Data Privacy and Compliance. His involvement has been highly active in the development of various solutions within these domains.

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