The introduction of Mastercard’s Payment Gateway, coupled with JPMorgan/Xign’s AP Trac into the Accounts Payable and B2b world carries with it a striking promise, the promise of Buyer Initiated Payments (BIP).

In the traditional card transaction, the seller/vendor/supplier end is the initiating event that starts the payment process. In BIP, the transaction is initiated by the Buyer. Some in the industry call this Accounts Payable Purchasing Card or AP P-Card or Buyer Push Card. Let me give an extremely contrived example to illustrate the difference in a buyer initiated payment:

When you’re buying your triple Venti nonfat half-caff soy latte with 1 pump mocha, 1 pump caramel and 1 pump peppermint (if it’s the holiday season), low foam, non-fat whip, steamed milk at 185 degrees, 2 packets of Splenda (shaken, not stirred), 3 drops of half & half and an extra protective sleeve, coffee drink from Starbucks, the moment the gears of payment begin is when you swipe your card. The card company pays Starbucks, and you pay the card company, plus interest, when Starbucks alerts the card company that you have made the purchase.

Buyer Initiated Payments turns the traditional seller initiated transaction workflow on its head - The example being, in a BIP transaction, you could, from home, enter your card info, tell it to send $4.36 to Starbucks, head to your favorite Seattle-inspired bistro, and have your coffee waiting. In the BIP world, once the invoice is approved on the buyers system (after Starbucks Shipped your coffee) the AP accounting system sends the payment directly to the sellers merchant processor.

BIP promises to lower “transit” time of payment. Now, this is obviously contrived - But imagine if you weren’t ordering just one drink, but 10,000, and Starbucks wasn’t going to ship your 10,000 drinks (quick math - 10,000 x $4.36 = $43,600, a considerable chunk of change). Well, if that normal check payment process used to take 6 days, you, the buyer, could either initiate the purchase and payment ahead or pay for the drinks upon reciept to ensure that this check payment delay time is all but eliminated.

Equally (if not more) important, the BIP system should provide a far more automated transaction, visibility towards the remittance details and increased rebates. That is to say, a BIP-based system is the first step towards allowing the buyer to achieve a discount in the form of a rebate from the card issuer.

Challenges

Of course, there are several major issues here. First, this discount came out of the pocket of the seller in the form of a merchant discount fee or “interchange”. Further, unlike a typical card Seller Initiated Transaction, the buyer could in theory pay the invoice 30 days after it was due and still get a “discount”. The seller would be very happy about that, eh?

Further both you the buyer and the supplier (e.g. Starbucks) have to be in a system that automatically initiates delivery of goods or services. So both the supplier and the buyer have to be on the system. In the past, these partnerships have been difficult to achieve on a large scale.

Simultaneously, supply chain financing is a major part of this whole operation. What good is the regular usage of BIP if the buyer doesn’t have the funds? Generally, the advantage of vendor/supplier-initiated-payments is that it allows the use of traditional systems of purchasing card including credit-based cards. Payment, in this system, can happen later because billing takes place after financing has taken place. E.g., Starbucks is paid by the card company, and the buyer pays off the card. In the BIP scheme, the financier must be in a position to provide financing at the point of invoice approval.

The technology required to make these payment systems work together is both sophisticated and until now unproven. However, the intersection of tools like AP Trac, Mastercard, and JPMorgan are promising the possibility of increased use of cards, more while the seller gets reduced DSO, level-three data capture, and 6 Sigma analytic tools. Not bad for a day at the coffee shop.

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