Credible Solutions: The Search for Online Settlement

The two inevitables, death and taxes, were joined by a third in 1998: e-commerce. Last year, you couldn’t turn around without bumping into projections from Forrester Research gurus that showed growth curves for online sales, with business-to-business transactions leading the way, that looked like the sheer north face of rock-climbing mecca Half Dome.

Suddenly, both buyers and sellers were able to go global with the click of a mouse, and the markets they worked in were expected to improve efficiency. Sellers rushed to convert their Web sites to take orders. Buyers wrote six-figure checks for the latest e-procurement packages from such vendors as Ariba, Clarus, Commerce One, and ProcureNet. Third parties scrambled to introduce new industry-specific many-to-many marketplaces. Doing business online was better than sliced bread, better than indoor plumbing, maybe even better than pizza delivery.

But the catch was that e-commerce had no settlement feature. The autobahn ended when the buyer and seller shook hands electronically, returning them to the dirt road of paper invoices and mailed checks. Yes, settlement could be made with a corporate purchasing card, which was quick, convenient and reliable, but p-card transactions socked the seller with a fee worth about 2 percent of the transaction, which was hard to swallow in e-markets where a healthy profit margin might not run much higher than that.

Where was the settlement engine everyone needed? Developing this technology was a tall order. Such a system had to satisfy a complex universe of corporate buyers and sellers who didn’t know and had no reason to trust one another. In some markets, the payment system had to maintain buyer and seller anonymity by means of a three-way settlement process with an agent in the middle that bought from the seller and sold to the buyer. At the same time, many buyers with strong balance sheets clung to the notion that they deserved open-account treatment with standard credit terms. Providing credit to unknown buyers who expected to close online transactions instantly was dicey. How can a company perform a reliable credit check in a fraction of a second?

“Obviously, it’s better for sales to give the first-time buyer credit approval at the point of sale than to tell him to go get a line of credit and come back when he has one,” says Aaron McPherson, research manager at International Data Corp. of Framingham, Mass. “That prospect won’t come back.”

The ideal solution, says Craig A. Jeffery, senior vice president and practice leader for e-finance and automation at Wachovia Treasury Consulting in Atlanta, Ga., would be automated and would require little effort on the part of the buyer and the seller. It would be flexible, providing a variety of options to accommodate the circumstances of the deal. It would allow for flexible pricing to support the sales effort. And it would be frictionless, involving only systems that are fully integrated.

Paying for such a system creates another quandary for developers of settlement technology. Financial institutions want to be cut in so that they can sell trade financing. But sellers wanted to protect their already thin profit margins from the fees levied by third parties.