MOVING B2B PAYMENTS INTO THE DIGITAL AGEA Presentation To The Food Industry Credit Bureau

Presented by Marc LemieuxMarc.lemieux@fmc‐law.comSeptember, 2012

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THE CURRENT USE OF CHEQUES

• 960 million cheques are used to make payments in the aggregate amount of $2,800 billion annually (2009 figures)

• Cheques are used in 4% of all payment transactions and represent 16% of all payment values (2009 figures)

• 60% of all cheques are used by small‐ and mid‐sizedbusinesses, large corporates and governments

• Cheques are used to make 59% of all B2B payments in Canada while the corresponding percentages are 84%, 44%, 15%, 9% and 1% in Hong Kong, the US, Japan, the UK and Germany, respectively (2010 figures)

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PROBLEMS ASSOCIATED WITH CHEQUES

• Settlement is subject to countermand, sufficiency of funds, bankruptcy of the drawer and fraud

• Cheques involve settlement delays and potential delays in the availability of the proceeds to the payee

• Cheques may be forged, altered, fraudulently endorsed, mutilated, lost or stolen

• Above all else, cheques are inefficient: they involve manualsteps, keying in information, printing and mailing, physicalpresentment and reconciliation of payments and invoices

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NON‐PAYMENT RISK MITIGATION 

• Cheque images, Remote Replacement Documents, Clearing Replacement Documents and remote deposit capture

• Calling the drawee bank to verify the sufficiency of funds and the absence of a countermand

• Requesting a certification of the cheque or the issuance of a replacement bank draft

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ELECTRONIC ALTERNATIVES TO CHEQUES

• Forms of payment cleared and settled by the Canadian Payment Association:

– AFT Debits (pre‐authorized debits)– EDI Payment Items– LVTS Payment Messages

• Wire transfers through SWIFT or other electronic channels

• Credit and trade payment cards

• Emergence of the Immediate Fund Transfer (IFT)

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AFT DEBITS (PRE‐AUTHORIZED DEBITS)

• Payments initiated by the payor’s prior authorization thatresult in a debit to the payor’s bank account and a corresponding credit to the payee’s bank account

• AFT Debits are used to make 670 million payments in the aggregate amount of $580 billion (2011 figures)

• Most frequently used for recurring C2B payments but can alsobe used to make recurring and sporadic B2B payments

• Quicker settlement and better security than cheques but payment remains subject to revocation by payor, sufficiency of funds in payor’s account, bankruptcy of payor and reconciliation of payments and invoices

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INDUSTRY EXAMPLE OF AFT DEBIT

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EDI PAYMENT ITEMS

• B2B credits carried out via electronic data interchange

• 2,5 million payments for an aggregate value of $160 billion (2011) 

• Quicker settlement and better security than cheques but payment remains subject to revocation by payor, sufficiency of funds in payor’s account and bankruptcy of payor

• EDI payments also involve investment in support computer software and hardware and related operations expenses

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LVTS PAYMENT MESSAGES

• Irrevocable payment messages resulting in final and immediately available credits to the payee’s bank account

• Mandatory for domestic payments in excess of $25 million

• Available only for payments greater than $50K

• 6,6 million payments for the aggregate value of $39 trillion (2011) 

• Better security than cheques but involve reconciliation of payments and invoices

• LVTS payment messages also involve investment in support computer software and hardware and related operationsexpenses

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• Payment messages transiting through an encrypted electronicmessaging system

• Better security than cheques but SWIFT transfers are revocable and involve settlement delays and potential delaysin the availability of the proceeds to the payee as well as the reconciliation of payments and invoices

SWIFT FUND TRANSFERS

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• Branded credit cards and proprietary trade payment networks

• Payment subject to the availability of buyer credit, buyer creditlimits and chargebacks

• Payments also subject to fraud and involves the reconciliationof payments and invoices

CREDIT AND TRADE PAYMENT CARDS

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OCTET TRADING CARD

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TASK FORCE OBSERVATIONS

• 80% of small business payments are made by cheque becausethere is no accessible, reasonably priced electronic paymentalternative

• Large businesses want the capacity to process invoices and payments in real time but the existing infrastructure is unableto provide this service

• «The Task Force is not proposing abandoning chequesimmediately or altogether. […] A reasonable goal is to eliminate 80% of cheques by 2020.»

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TASK FORCE PROPOSALS

• Move to an electronic invoicing and payments system (EIP) to replace paper‐based accounting systems and processes

• Establish a state‐of‐the‐art mobile payments system for consumer

• Develop a robust digital identification and authentification (DIA) regime to generate the trust necessary to  embrace EIP and mobile payments and alleviate concerns about fraud, identity theft and system failures in online payments systems

• Create an inclusive, collaborative an flexible governance model to protect the public interest

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THE EMERGENCE OF THE IFT

• The ability to make an immediate payment between bankaccounts does not exist today in the US – at least not a convenient certain and low‐cost way

• The Federal Reserve Bank of Chicago is currently examiningthe potential of IFT in the US with cooperation from industrypartners

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The preceding presentation contains examples of the kinds of issues companies looking at Alternative Dispute Resolution could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.

Thank you!Marc Lemieux

Marc.lemieux@fmc‐law.com+1 514 878 8806