What do Big Blue (IBM), Batman (1960’s television version starring Adam West) and B2B Payments have in common? Why, shared technology of course!
But in order to explain, allow me first to take you on a very brief journey through the history of B2B payments. In the interest of time, I’ll skip barter and the advent of coin and jump straight to paper checks.
A brief history of B2B Payments: Paper Checks
According to a 2008 paper by the Federal Reserve Bank of Atlanta, one of the first recorded uses of a paper bank instruction was by one Nasir-i Khosrau, an Iranian merchant traveler to the city of Basra in the early 11th century AD. It’s a safe bet Mr. Khosrau didn’t know he would begin a trend of settling business transactions by paper checks that would sweep across the globe in the coming centuries and still hold sway over more than 50% of B2B payments in the US in 2014!
Paper checks remain popular with businesses because, even though terribly expensive, rife with fraud, desperately slow to settle, and horribly opaque with regards to forecasting settlement (“The check is in the mail…”), they do offer a unique advantage from a b2b perspective.
In a b2b environment goods and services are often delivered weeks or months prior to payment, and multiple invoices are often settled with a single payment. As a result, detailed remittance information is critical to those receiving payment. Paper checks excel here because there is no limit to the number of pages of descriptive info that can be included after the check perforation (as any vendor receiving reams of consolidated payment info can attest!).
But while the value of the detailed remittance delivered with paper checks is difficult to overstate, there is this little matter of paper checks being terribly expensive, rife with fraud, desperately slow to settle, and horribly opaque! Because of these weaknesses, along with the growing proliferation of checks in the late 1960s, the stage was set for the next evolution of payment in the US: ACH
ACH Electronic Payments: B2B Payment enters the modern age?
Electronic payments in the US began in 1972 with the advent of SCOPE (No, not the mouthwash…the Special Committee on Paperless Entries). Out of this was formed NACHA (the National Automated Clearing House Association) in 1974 which would become, and still continues to be, the official rule-making body and standard-bearer for the vast majority of electronic payments in the US[1].
One of the first actions NACHA undertook was to standardize the format of electronic payments to ensure common acceptance and use. And so in 1975 was born the 94-character format now known simply as the NACHA format. This format, still the standard today contained enough data in those 94 characters to identify the originating and receiving accounts and the amount of payment and allowed banks for the first time to execute electronic payments. In other words, it provided ample information to settle simple credits and debits electronically and allowed US payments to enter the modern age.
But what about B2B payments with the need to send the large amounts of remittance information at which checks were so good? This is where ACH falls short, with only a single 80-character field within the overall 94-character file to deliver the information that is critical to a B2B payment[2].
Big Blue, Batman and B2B Payments
So why did NACHA choose a format allowing for only 80 characters of payment related data within a 94 character limit? Why that number of characters? Why not a larger one that would allow for more B2B data?
First, B2B payments were not in scope at the time (pun intended). NACHA was established and developed its format specifically for the purposes of enabling government and payroll electronic direct deposit[3], which were served fine by the format. So the needs of B2B payments were an afterthought not even addressed until the advent of corporate payment types much later in the mid 1980s.[4]
Second, and more cogent to the question of what Big Blue, Batman and B2B have in common, is that NACHA utilized the technology of that era for computer data entry and built their standard around that commonly established at the time. Anyone care to guess what that technology was?
Wait for it….
“In 1975, to make ACH input file structure uniform, NACHA establishes a 94-character format. It is based on the maximum length of a fixed-field record that will fit on a punch card. The format becomes a standard.”[5]
That’s right, the punch card! The “Hollerith” punch card made standard by IBM in 1928, and made famous (at least in pop-culture) by the then state of the art Bat Computer in the late 1960’s TV series.[6]
As Robin might say, “Holy fossilized technology, Batman!”
Networked Economy or Pre-Depression Era?
So as we come to the end of our journey through B2B payment history, I leave you with two simple questions.
With the advent of the Networked Economy and the ability to connect people & processes to detailed, mission critical information, why are B2B payments still dependent on pre-depression era technology?
Rather than truncating the remittance in order to attach it to the payment, why not flip the priority over and attach the payment to the source of the full, rich remittance?
This is what we are doing at SAP with AribaPay. Click here to learn about the next stage in B2B payments evolution and what it can do to help you finally bring settlement an information together to make B2B payment certain, secure and simple.
[1] According to the 2013 electronics payments survey conducted by the AFP, over 31% of all B2B payments in US are ACH, with wire transfers accounting for 15% and other methods such as Pcard taking about 4%. The remaining 50%+ of B2B payments are, alas, still paper check.
[2] This is one key reason why, outside of European style government mandates of electronic payment, the Paper check continues to be the payment method in over half of all US B2B payment transactions
[3] This and other references to NACHA history are taken from the wonderful online timeline history produced by NACHA on the occasion of their 40th anniversary earlier this year, and can be found here:
[4] CTP & CTX for you ACH geeks like me.
[5] 1974 section of this timeline.
[6] Not to mention Infamous by the “hanging chad” debacle of the 2000 US presidential election!
