Expert Insights: B2B Commerce: A Backgrounder on How We Got Here and Where We Are Going

By Eric Thomson, Principal, KYC Systems, LLC
kycsystems.com

If you’ve attended ETA meetings or conferences in the last few years, you will have noticed that today’s ETA members work in many different and diverse segments of the business community. The ETA has become a much larger, comprehensive, and more inclusive community from the days when it evolved from the Bankcard Services Association. In those early days of credit card processing, many members came from Independent Sales Organizations, their sponsoring banks, and terminal manufacturers, and the focus was enabling merchants to process consumer credit cards at point of sale.

Many of today’s ETA members were not around in those early days, but when I meet them, they are always curious and want to know how this all came about. We are going to try to provide an answer in this short piece. A lot of the history is related to technical innovation, and of course this is still the case today. Let’s start at the beginning.

A good case can be made that our industry, which started as credit card processing,  got its real start in 1969 when IBM project manager Jerome Svigals, (“The Father of Magstripe Technology”) devised a workable technology for a credit card with a magstripe on the back. A year later IBM ran a pilot with American Airlines for self service ticketing for reservations and purchases at an airport kiosk. Interestingly, the whole idea of the magstripe was originally conceived as an ID device for the CIA!  The airlines, mass transit, and banking industries had different schemes to store data on a magstripe, and to satisfy them the decision was made to have multiple tracks on one stripe.  Svigals was a good project manager, and saw that IBM, the American Bankers Association, and the airlines all worked together for the common good. In 1971 The International Organization for Standardization certified the IBM standard for the magnetic stripe on the back of the card, and we were off to the races.

Prior to the magstripe card, a merchant had to place a multiple part carbon paper form in an unwieldy imprinter, called a “knuckle-buster,” to capture the raised letters on the card, and then physically take the multiple forms to their acquiring bank, where the individual pieces of paper would go to the appropriate parties. Svigal’s work made it possible to take the mountains of paper out of the equation, but now the merchant needed a swipe device hooked to a terminal to provide real-time authorization, capture, and settlement. As if this was not enough, somebody had to find a way to deploy millions of card-swipe terminals to American merchants, a monumental task.

This is where the next technical breakthrough came in. In 1981, a simple credit card terminal typically cost $900, which would be $2679 in 2020 dollars!   Many merchants, who were not thrilled about paying the discount rate to begin with, balked at spending this kind of money, particularly if they had multiple lanes in a store or multiple stores. But in 1981, the card brands began to offer discounts to merchants who used a swipe terminal for all purchases greater than $50. And in 1984, another breakthrough: Bill Melton at Verifone brought the Zon terminal to market, priced at $125!  By 1988 Verifone had 53% of the POS systems market, and by 1989 had placed their first million terminals. Melton made it happen.

As mentioned, somebody had to find a way to physically call on the merchant at their store or headquarters, get their attention, sell them a terminal, underwrite them, get them account approval at an acquiring bank, collect and submit all the paperwork to the acquirer, and then configure the terminal to work with their telephone system (remember, no Internet or cell phones back then). This is where the ISO/MSP industry was born, the foundation of the ETA. Interestingly, in these early days the major banks were more interested in issuing cards than the acquiring side of the business, so ISO’s had to find regional or community banks that would agree to board merchants in different merchant category codes. Subsequently, another big effort was devoted to bringing what was called the “card not present” industry onboard, and then of course the ability to handle internet purchases, but that took another twenty years. It is hard to imagine the immensity of this effort, to get millions of merchants up and running on the new terminals.

Since this is about the path our industry took from processing consumer card transactions at POS to processing B2B transactions, this brings us to the next technical innovation, Electronic Data Interchange, or EDI for short. EDI is the predecessor to what we call today B2B.

The “Father of EDI” is Ed Guilbert. Ed developed a standardized shipping manifest for the military during the 1948 Berlin Airlift. This enabled the structured transmission of data between organizations by electronic means, an electronic message format for sending information about cargo. In 1965, Holland American steamship line first sent shipping manifests using telex. The message was converted to magnetic tape to be loaded into a mainframe computer. In 1973 the file transfer protocol was first published, and two years later the first Value Added Network, a commercial packet switching network, was established by Telenet.

In 1978, the Electronic Data Interchange Association is chartered by the American National Standards Institute, and this became the ANSI X12 committee, responsible for the development of EDI standards henceforth. In 2001, the AS/2 standard was implemented to enable transmission of data over the Internet with the HTTP protocol. Today, large enterprises such as Lowes and Target use the AS/2 standard for B2B, and require their suppliers to use it too. Now, 90% of the Fortune 500 companies use EDI, and over 100,000 U.S. enterprises as well, so we are not now concerned with inventing B2B, just making it work for the merchants who are not using it now. I view this as pretty encouraging news, since ETA members have tackled and conquered similar challenges in the past.

The idea of automating B2B transactions and bringing B2B to Main Street merchants can be intimidating to some people, so let’s try to simplify it here. In some respects, it is similar to what happened when merchants replaced paper-based card processing with a swipe terminal to automate the payment process.

There are three things going on here in the B2B world. First is the effort to replace the manual sales and ordering process that is now carried out by field salespeople and tele-sales departments, and implement e-commerce/e-procurement in its place. The second is procurement automation and integration, which can happen with a buyer-seller network. The third is timely, accurate, and automated reconciliation of purchase orders to invoices and goods received.

Fundamentally, we are talking about matching the PO to the invoice. We want to ensure that the PO is fully vouchered, that it matches the voucher, and that it is timely. You want to match what you ordered, what you got, and what you were charged. This means matching the line items on the PO to the line items on the invoice for the correct count and amount, and then matching this to the goods received report. You are looking for errors, incorrect invoices, paying for product not received, and fraud. You want to avoid paying the wrong price, for the wrong quantity, with the wrong shipping costs, and missing the discounts. Problems include missing paperwork, paying incorrect invoices, having to remedy inventory errors, and delays.

Now the very large enterprises have an ERP platform that integrates the sub-systems automatically. All documents are standardized, including the Purchase Order Acknowledgement (POA) and Advanced Shipping Notices (ASN).

Here, we are concerned with the millions of Main Street merchants who do not have a large enterprise ERP system and want to automate their B2B transactions. These are the merchants that ETA members want to serve. There are two ways to do this. First is to create custom integration for each supplier – not realistic in most cases for the SMB market. You want to help your merchants avoid lengthy IT projects and expensive manual processing interfaces!  A supplier might use dozens of different e-commerce applications, and a buyer is only going to integrate “topline” suppliers anyway.

The second solution is to use third party integration, what is called “Platform as a Service,” (iPaaS). This means using a managed cloud platform provider that can support hundreds of e-commerce platforms. The provider has a set of rules and procedures that allow developers to create algorithms (API’s) to access features and data of other systems, and a RESTful API to access a payments channel. There are a multitude of suppliers out there who can do this, including a few ETA members.

Increasingly, Main Street merchants are involved in cross-border transactions, which adds a whole ‘nother level of complication. Cross-border adds an additional step of KYC and AML validity and compliance. Plus, there is an increased likelihood of fraud. There is an increased need for transparency, since it will likely go from the merchant’s local bank to that bank’s upstream correspondent bank. Further, even banks in the same country have different requirements for approval and compliance. What is needed, of course, is a universal standard for technical and compliance needs, similar to the way that NACHA sets the rules for ACH transactions. Commentary on this subject always seems to mention the “high risk of wire transfer,” which in reality is fairly negligible, since banks know that wire transfer is their highest risk product and take steps accordingly, to meet the inspection requirements of multiple bank regulatory agencies. What is really important is the cost of wire transfer and the additional costs imposed by the banks involved in the transaction, and that can be a serious subject to a merchant. After all, what we are after here is reducing cost and increasing efficiency.

Since ETA was founded, members have been on the forefront of providing innovative payments solutions to their merchant clients, and the current B2B focus is no exception. If anything, the urgency has been increased by the current pandemic, because SMB’s find it difficult to produce and mail paper checks when employees are working from home. I am confident that ETA members will step up to the plate and provide their merchants with the attention and solutions that they have always been able to muster over many decades of service.