Recently Ariba/SAP and Discover announced that they intend to “transform” commercial payments. AribaPay is either the most significant B2B payments news in decades or just one more courageous entrant into the discouraging battlefield of B2B payments networks.
We’re optimistic, and encouraged to see two strong players enter the fray. We hope they will tackle head-on some of the obstacles that have suppressed the adoption of electronic B2B payments. But it all depends on what AribaPay actually is.
Who Are the Players?
Ariba is a procurement network – engineered to help enterprises improve the efficiency of their processes. Ariba is the largest of the B2B supplier networks – largely because it is focused on non-strategic spend, the stuff that all businesses buy, regardless of industry. This enables them to reach a wider range of suppliers than networks that are focused on industries with tight supply chains (e.g. chemicals, semi-conductors, automotive, transportation, etc.). There are now nearly 1 million participants in the Ariba network.
Today, Ariba focuses on all but the “pay” part of procure-to-pay, enabling the procurement and AP departments of large buyers to streamline the process for conducting RFPs, issuing purchase orders, reviewing incoming invoices, matching against purchase orders and approving payment. The end result are files of payments transactions, variously submitted to check printers (internal or external), or to banks (for ACH or wires).
Ariba’s customers are an impressive set of large enterprises, and its close relationships with these firms are undoubtedly part of what drove SAP to acquire Ariba in 2012.
Discover, of course, is the “other card network”, and the only major network that has historically not had much B2B focus. But this may actually be in AribaPay’s favor, as Discover is thereby unconstrained by the dominant B2B card business model. Unlike the other card networks, Discover doesn’t have a lot of stake in commercial card interchange. Discover has also recently demonstrated commitment to opening the card rails to innovators such as PayPal. This most recent announcement clearly indicates Discover’s desire to capture value from the disjointed B2B payment value chain.
Before we continue, a brief tangent to explore The B2B Challenge:
Business supplier payments from corporate buyers to their vendors are an enormous opportunity for paper-to-electronic conversion. To this day, however, checks are still the primary method used for these payments – particularly to the “long tail” of less strategic suppliers that most enterprises have to cope with. The payments industry has tried for years to come up with solutions that scale – and has failed repeatedly. See Glenbrook’s post on “The Problems with B2B Payments” – published in 2009, sadly it is still an accurate view today.
AribaPay – What We Know
AribaPay is clearly the new SAP/Ariba’s effort to enter the “pay” piece of the procurement value chain. This has been long expected (pre-dating the acquisition), so we were fascinated to see it come to life.
As we understand it, in the new AribaPay scenario, approved payments would sent to Ariba, who, in partnership with Discover, would determine their handling. The buyer will determine the payment timing – according to the terms it has negotiated with suppliers or according to its cash flow needs – and Ariba will maintain a cross-reference table mapping each supplier’s ANID (Ariba Network Identifier) and the supplier’s merchant ID on the Discover network. The buyer’s bank account is debited, crediting a clearing account at Discover, who in turn credits the supplier based on the merchant ID. The supplier receives funds in their bank account via ACH or FedWire, just as merchants do when they are funded for purchases made from them with Discover cards.
AribaPay is NOT a card payment, as the product’s FAQs make abundantly clear: “AribaPay is not a commercial card, p-card, buyer-initiated card, or any other version of card product” and Discover’s Roger Hochschild emphasized when we spoke. Suppliers will not have to establish a merchant account with Discover to accept payments via AribaPay. But presumably AribaPay will take advantage of the size of the existing Ariba supplier base.
Remittance data (which explains to the supplier what the payment is for), will be conveyed from the buyer to supplier in a variety of formats. Obviously the supplier can log into the Ariba network to find it, but Peter Lugli at Ariba explained that there will be options to request information in XML, EDI, the short-form EDI STP 820, or CSV. The extent to which the AribaPay solution integrates with supplier accounting and ERP solutions to facilitate receipt of remittance information is unclear. But presumably, it will be very easy for SAP suppliers to integrate with AribaPay. And, of course, the supplier can elect to receive an email with the remittance data attached.
AribaPay – What We Don’t Know
What’s the pricing model?
Pricing for the service has not been announced yet. If Ariba and Discover are taking such pains to make it clear that AribaPay transactions are not card payments, then perhaps we can presume they will not involve card-like merchant discount fees. The market seems to have settled on a 50-cent fee for eChecks in the SMB market (via Intuit PaymentNetwork, PayPal’s pilot B2B pricing, solutions like Bill.com), while large corporates are accustomed to paying mere pennies to originate an ACH. So, relative to existing solutions, there isn’t a lot of room for significant per transaction revenue.
The real question is whether there will be an “ad valorem” (percent of value) fee model. Cards have it, ACH and checks don’t. What will AribaPay do? In our view, a better way to earn ad valorem revenue on these transactions would come from offering early payment terms to suppliers in need of working capital financing. So far, the description AribaPay hasn’t mentioned this – we think it is an area of opportunity.
What exactly is Discover doing?
Ariba already has a network of suppliers, and the technology and systems to route procurement and payment information between suppliers and buyers. What does Discover add? Here are some possibilities:
- Discover card-accepting merchants are automatically enrolled as suppliers on the Ariba network. (Discover indicated that it will use its network rules to ensure that the top acquirers, who account for much of Discover’s coverage of merchants, accept this “new transaction type” – but it is not clear what this means.)
- Discover takes over the message routing and handling between buyer and Ariba, specifically handling the crediting of supplier/merchant accounts via ACH
- Discover merchants are auto-enrolled as buyers in the Ariba network (we know, that is far fetched – but possible)
What about current Ariba network suppliers?
Will current Ariba suppliers have to opt-in to AribaPay or will they be auto-enrolled and receive a “you’ve got money” message? This would be similar to PayPal where the supplier would simply have to log in to provide instructions on where to deposit the funds.
Requiring suppliers to sign up can creates an enormous amount of friction. On the positive side, we believe Discover will be viewed by suppliers as a relatively reliable and secure place to have sensitive bank account data stored, perhaps more secure than having customers store this information directly.
We’ll be watching closely. In the meantime, you can learn more about AribaPay here:
