JPMorgan Chase Launches New Corporate Payments Vehicle

Last week, JPMorgan Chase & Co. launched ExacTrac, a new card-based corporate payments vehicle designed to be integrated into a company’s purchasing systems.

The product issues users a unique credit card number, complete with spending limits, for particular events. The system automatically reconciles the transactions connected to that event and includes that special account number on all bills and payments connected to it, and populated within company books.

Bryan Clancey, chief financial officer of Embryon Inc., has been using ExacTrac for a year to control spending on his pharmaceutical marketing firm’s conferences and roundtables. Clancey says he likes the system because it allows him to closely track his expenses—and because it’s free.

“I like it because I have no administration,” he says. “When that record comes in, it goes right into my system. We send out a request for a unique card, and when that transaction is passed back to us and the transaction has occurred, Morgan passes the same meeting ID back to me, so I can automatically load it into my system.” Clancey describes that system as a financial supply-chain logistics program that was developed in-house seven years ago. Using the product, he adds, meant writing a lot of customized security software to protect the interface with the bank.

Clancey also likes the JPMorgan Chase product because of its perks. “I get rebates (when using ExacTrac),” he says. “I pay face value on the bills, and get 100 to 145 basis points back on total annual value spent.” Embryon was one of ExacTrac’s beta sites; it’s been using it since last July. Another, unidentified company has been testing the product for about 18 months. The product which JPMorgan Chase issues under both Visa and MasterCard branding is part of its PaymentNet core payments processing system.

Clancey says he pays for thousands of meetings in restaurants every year, and to have a major credit card issuer like Morgan Chase forgo a lucrative revenue stream like that may sound unusual. But Frank Dombroski, a Morgan Chase vice president of commercial card solutions, says one of the reasons for launching ExacTrac was to reinforce Morgan Chase’s card business.  He also confirms the rebates.

Because it would be a poor CFO indeed who carried an interest-earning credit card balance, clients would typically use it only as a transaction account, meaning that Morgan Chase earns only between 55 and 100 basis points per transaction—not much more than the program’s administration costs.

“We do make money on it,” says Dombroski. “The margins are thin in this business, much more so than four or five years ago, but for us, it’s a numbers game and (allows for) efficiency of processing and automation.”

That may be true, says Christine Barry, a research director at Aite Group, but it’s hardly the only reason Morgan Chase chose to promote a card system like this: It’s mostly a matter of shifting priorities, and of meeting the competition wherever it happens to be.

“There’s been a lot more investment by banks, recently, on the corporate side, instead of the retail side of their business,” she says. Barry estimates that until now, about 60 percent of bank technology expenditures have been on the retail side of the bank.

“They’re shifting focus, and a lot of the new investments they’ve been making don’t necessarily result in cost savings for the bank, or even new revenues being generated,” she adds. “It’s been a big focus on providing more service and convenience to customers. It’s the customers that are getting the benefits, and not the banks, except on paper.” (Contact: Embryon Inc., Brian Clancey, 908-231-6000; JPMorgan Chase & Co., Frank Dombroski, 212-270-7013; Aite Group, Christine Barry, 917-546-9180)

Identrust, Under New Management, Widens its Focus

A group of private equity investors led by former Apple CEO John Sculley bought Indentrus last fall and have expanded its business goals. If they’re successful, the order-to-pay business, also called financial logistics, could get a needed shot in the arm.

Identrus—now called Identrust—had been a so-called root certificate authority, selling digital certificates to financial services companies. Under its new ownership, Indentrust will also be selling a managed, turnkey certificate capability to order-to-pay companies and their customers.


Digital certificates are the standard means of securely identifying online parties to each other, and if they’re widely adopted by the order-to-pay community—a group now confined to large corporations like General Electric—they could greatly expand that community by ensuring that the counterparties are who they say they are and minimizing the prospects of fraudulent transactions.

That would conceivably encourage more companies to use the concept, and if order-to-pay does finally get a significant foothold in the treasury-management operations of many corporations, it could transform the payments industry by automating a large fraction of the payments that shuttle back and forth between those firms.

Since most of those payments are expected to be sent via the automated clearinghouse, widespread adoption of order-to-pay would squeeze many business checks out of the payments system.

It would also accelerate the velocity of payments, since order-to-pay systems—there are at least ten of them, including products from US Bank, Bottomline Technologies, Harbor Payments and Xign—pay invoices when presented, instead of within as many as 90 days, as the game is currently paid.

That, in turn, would take the broader economy in unknown directions, since it would increase the liquidity and transparency of the users’ balance sheets, and make more money available to those companies for business purposes. That phenomenon is a good example of how technology not only improves business operations, but also changes both the nature and effects of that business.

The key to broadening order-to-pay has always been the authorization issue; it’s simply too easy to send the wrong person millions of dollars. Digital certificates are the standard solution to that issue, but the technical and administrative challenges they present to users have put a crimp in certificates’ widespread adoption outside of the financial services arena.

Resolving those technical and administrative problems is how Identrust plans to make its living, says Andrea Klein, the company’s chief marketing officer.

“The company has been re-focused on the corporate market,” she says. “Companies can put in a system themselves, but so far, we’ve seen that they want us to run it for them.” Identrust will use its large data center to administer those certificate operations for its customers, she adds.

Indentrust was created in 1999 as the Global Trust Organization by a group of large banks, including CitiGroup and ABN AMRO, to be their root certificate authority, or basic issuing organization. In 2002, it bought the Digital Certificate Trust Company from Zions BanCorporation and the American Banker’s Association. Fifty-five financial institutions use Indentrust digital certificates.

The company was supposed to have been profitable, but never really got there, despite its long reach into the financial services community and the company’s later expansion into issuing certificates to the U.S. government. “They just couldn’t figure out how to be profitable,” says Klein. “Their expertise is in how to do the business of banking, not in launching entrepreneurial companies.”

The new ownership—all entrepreneurial business people—may change that. Last summer, an investor group including Rho Capital Partners—where Sculley is a venture partner—and Enterprise Partners bought the company for $20 million from the original owners. Sculley is chairman, and Karen Wendel, Identrust’s long-time CEO, kept her office. Enterprise is represented by managing director Carl Eibl. Jean Levine, an independent investor, is also involved, and Zions retains a stake in the firm.

One indication Identrust now has a good shot at profitability: TWIST (the Transaction Workflow Innovation Standards Team) has incorporated Identrust’s digital certificates into their supply chain standards. TWIST is a nonprofit group that sets global, XML-based standards for wholesale financial transactions, commercial payments and collections, and cash-management processes.

The combination of the new ownership, its expansion into order-to-pay, and Identrust’s willingness to administer certificates for their customers may turn the company around, says Penny Gillespie, president of Gillespie International.

“If the market isn’t ready (to widely adopt certificate authentication), it should be, but two things have had to come into alignment for that to happen,” she says. “The market has had to realize it has a need, and the product has to be easy to use. It just can’t be as cumbersome as it has been in the past. If (administration) is outsourced, and not cumbersome to the user, it could be a very good idea.” (Contact: Identrust, Andrea Klein, 415-848-2527; Gillespie International, Penny Gillespie, 703-815-0706)

Paper Checks Remain “Business as Usual”

BizchecksWhen the last paper check is dropped in the mail, it will be a business check. All signs point to that day being over the horizon.

Not that no efforts are afoot to squeeze business checks out of the payments system. At least a dozen companies around the world are trying to automate business payments with so-called order-to-pay software systems, including, in the U.S., Bottomline Technologies, Harbor Payments, and Xign Corp.. Various business payment card systems continue to emanate from the nation’s banks. And advocates of routing business payments through the automated clearinghouse have been working diligently at the task for years.

But checks remain stubbornly alive: According to the Federal Reserve's landmark 2004 Payments Study, total check volumes between 2000 and 2003 only declined from 41.9 billion items to 36.7 billion items. And according to the US Census Bureau's 2005 Statistical Abstract of the United States, consumer payments made by check between 2000 and 2003 only declined from 28.8 billion items to 26.8 items. The 10 billion item difference, says a Fed spokesman, can be considered business checks. This suggests some little progress in squeezing paper out of the system, but no reason to write checks’ obituary.

The most progress in eliminating paper checks is seemingly being made in online bill payment. According to the American Banker’s Association, less than half of all consumer bills—49 percent—were paid by check in 2005, compared with 72 percent in 2001. Since bills represent a large fraction of consumer checks written, this suggests an accellerating trend away from consumer checks,.

But if civilians seem to be edging away from checks, business is apparently sticking to the tried-and-true. This is actually counterintuitive, since businesses would seem to have a lot to gain by giving up paper checks, if only for efficiency’s sake, while civilians, who get free checking, have no such incentives.

As usual, things look different once you’re in the weeds. In this case, a superficial analysis ignores simple balance-of-power and treasury-management issues, not to mention the tyranny of sheer habit.

Aside from sheer convenience, consumers have little to gain from paying their bills online, but as indicated by the numbers, that matter alone–combined with minor carrots and sticks from billers and banks–seems to have turned the tide.

Businesses, on the other hand, not only have a lot more power in their financial relationships than a typical consumer, but also are loath, to say the least, to abandon a treasury-management game that businesses have been playing since prehistory: demand immediate payments (even prepayment), but don’t pay yourself until the sheriff is coming up the driveway; meanwhile, use the float for a hundred purposes.

The irony is that the vendors of order-to-pay software systems can make a very good argument that discarding those old-fashioned treasury-management techniques is good business. Companies using order-to-pay systems, they say, free up working capital from their balance sheets, and that what they lose in float, they more than gain from being able to pinpoint exactly how much money they have on hand.

Tom Glassanos, for instance, president and chief executive of Xign Corp., points out that 19 Fortune 500 companies use his firm’s order-to-pay products, including Charles Schwab & Co., MetLife, Pacific Gas & Electric, and The Williams Companies.

But even he will concede that not every company thinks order-to-pay is a good thing. "There are good reasons why this hasn’t happened yet and continues to go slow,” he says. “There’s a certain (business) population that would like to get on board, but can’t get remittances across. And there’s a lot of work involved in telling your suppliers that you’re going to pay them via ACH instead of by check.”

The result, says Glassanos, is that “Just to get it to work, they find out, seems to them to be a lot more work than the value they get back, and they also have to deal with losing some float. So when they add the plus and negative columns, it doesn’t come out to be all that different, and they decide to go with what they’ve been doing.”

Banks are likewise not overly enthusiastic about the order-to-pay idea, except for US Bank, which has a patented order-to-pay product it calls PowerTrack. Even Glassanos concedes that only one bank uses his stuff, JP Morgan Chase & Co., which uses Xign in conjunction with Vastera, the trade receivables system which it bought early last year. Glassanos says two other big banks have recently signed on, but that he couldn’t disclose their names at NB’s press time.

Why the slow uptake at banks? The reasons are pretty simple. Banks make too much money from the various fees attached to business checking to embrace order-to-pay; for one thing, when you can charge your customer for removing every paper clip in a pile of checks, it’s a hard business to give up. For another, there’s no reason to expect checks to be disappearing anytime soon, so there’s little reason to close a profitable department, especially when most banks’ revenues are under pressure in the first place. And, banks tend to view change as something that has to be adapted to the bank’s interests, leading banks to come up with ideas that make sense for the bank, and not necessarily for the customer.

Card-based corporate payments systems, like Bank of America’s new ePayables product, are a good example. Cards would seem to answer a lot of problems for corporations, including digital data streams, easy tracking, and a means to mimic traditional pay-at-the-last-minute treasury-management games.

There’s only one fly in this particular ointment: The payee has to pay to get their money, in the form of interchange. The alternative would be to accept a discounted invoice in order to get paid early. “If you’ve been paying cash or check or anything for a transaction, the payor has been footing the bill, but here the recipient is paying for the transaction,” an unappealing prospect at best, says Penny Gillespie, president of Gillespie International, and one that payees can easily block.

Looked at this way, it’s not surprising that checks will likely linger—some would say malinger—for many more years. But there’s another reason, one that many overlook: Most businesses aren’t the Williams Companies or Pacific Power & Lights of the world. According to the U.S. Census Bureau’s 2001 Statistics of U.S. Business, only 26,000 companies had sales over $50 million, out of a total of 5.5 million; and only 103,000 of America’s 4.9 million firms that have any employees at all had more than 100 employees, although those larger companies employed 74 million of the nation’s 115 million workers.

That’s the real rub. There are some 5 million companies in the U.S. that have little time to  automate their accounts payable and receivables departments, which means that trying to sell them an order-to-pay system is a waste of time. At a minimum, the annual return on such a system is not enough to make a compelling case for expensive, complicated software. And payment cards likewise have little application, since smaller companies tend to pay higher discount rates.

This being the case, banks aren’t foolish to hold on to their business checking departments. And your local Postman probably isn’t headed for the unemployment line. (Contact: Xign Corp., 925-469-9446; Gillespie International Inc., Penny Gillespie, 703-815-0706)