The revelation that U.S. businesses, more often than not, pay their suppliers via paper check still draws quizzical reactions from professionals abroad. The corporate and financial services communities in the U.S. understand that paper checks are slow, expensive and risky, and yet they endure. The Federal Reserve, however, is ramping up efforts to change that.
Formerly known as the Remittance Coalition, the Federal Reserve Bank of Minneapolis’ Business Payments Coalition is relying on corporate collaboration to promote the adoption of electronic B2B payments.
Lawrence Buettner is one member of the industry participating in this effort. As the senior vice president of innovation and business development at Wausau Financial Systems, owned by Deluxe, Buettner participated in the Remittance Coalition’s efforts, and has since kept the momentum going by joining the B2B Payments Directory Association (BPDA) as its chair.
The trade association emerged as part of the government’s call to digitize B2B payments, and aims to develop a digital “phone book” of information that corporates need to pay their suppliers. But, as Buettner recently told PYMNTS, the BPDA has additional objectives in mind that speak to the various points of friction that plague B2B payments processes today, including longer payment cycles for suppliers and the ever-increasing risk of fraud.
“The intent of the organization is to help payers better identify [the] payee information they need in order to make electronic payments,” he said in an interview, adding that the directory aims to be “payment agnostic” and support payments made via a variety of rails, including FedWire, ACH, SWIFT, lockbox and, yes, paper check. Providing payers with this information could make it easier for them to quickly and efficiently pay their suppliers. Payees, meanwhile, are responsible for maintaining their data and taking control of their information as they seek to reduce days sales outstanding.
The concept of a B2B payments directory isn’t new. The Federal Reserve currently operates its own ePayments directory, the E-Payments Routing Directory, which includes routing information for FedWire and FedACH transactions. However, in its “Strategies for Improving the U.S. Payment System” report, published last September, the Fed called for the creation of a B2B directory to simplify and standardize business payment information.
Now that the BPDA has formed, it will try to address some of the failings of past directory efforts to make a meaningful impact in the corporate payments space. One way Buettner said the BPDA aims to differentiate itself is by including more information on payment preferences.
“The real distinction is that the directory contains details for the payer to understand what is the preferred method [for] the payee [that] is looking to be paid,” he explained. The directory would also include specifications for payees, including whether they want to be paid via a certain payment rail past a certain dollar amount, or whether payment preferences change based on which subsidiary is being paid.
Other directories, Buettner explained, are “single-focused” and don’t contain enough information to support B2B payments in a variety of payment rails for a variety of payment preferences.
But with the Fed urging improvements not only in digitization, but also in the security and speed of B2B payments, the BPDA has other initiatives on its agenda as well — one of the largest is to combat fraud. The Fed’s existing ePayments directory recently issued a notice that later this year, the directory will no longer make its files publicly available “due to increased misuse of the data.”
The BPDA’s plans include the use of credentialed service providers (CSPs) to verify the information uploaded to the directory, and ensuring a “KYC-type of validation to ensure the accountholder is bonafide, [and] that the account is legitimate before any information goes into the directory,” explained Buettner. Validating payee information ensures that payers are confident that the information they are accessing is legitimate, which is key to cutting down on fraud.
The other key distinction for the BDPA’s initiative is to include robust information to facilitate remittance for accounts receivable personnel. Not only will businesses be able to upload the payment information and preferences their customers need to make payments, they will be able to include requests for additional information and documents when payments are made.
Now that Discover Financial Services has been tapped to help develop the directory, the BDPA is making progress in its product roadmap. Discover’s participation revealed another key strategy for the directory, however: the use of distributed ledger technology to operate and maintain information.
“Our solution is a distributed federated network of directories,” explained Buettner. “Each one of our service providers has its own directory, and blockchain is the interconnectivity between those databases.”
The technology enhances the security of information stored, and Buettner noted that the directory will not use a public blockchain to function — meaning the information won’t be available to just anyone. Data security is also why, though it’s is a viable technology for data management, blockchain may not yet be ready to actually facilitate movement of money.
“In a public blockchain there is too much visible information that people don’t want disclosed,” he said.
There are dozens of elements that are going into these efforts to develop a successful B2B directory, as recommended by the Fed: enhancement and enrichment of data, blockchain technology, anti-fraud measures — and all with a payments rail-agnostic approach. Despite the complexity, Buettner said a proof of concept is slated for November, with plans to launch the directory early next year. Looking ahead, there will be more questions, of course, about corporate participation in the directory, effectiveness of data privacy and security measures, and functionality of DLT. But if the directory can move the needle on electronic B2B payments in the U.S., the Fed will have taken one more step forward in its efforts to improve the nation’s payments system.