3. Overview of Schemes of Business-to-Business Electronic Payment

3. 1 Three Schemes in Business-to-Business Electronic Payment

There are mainly three schemes in the business-to business electronic payment: F-EDI, VAN-EDI (Value Added Network EDI), and Internet EDI. Each scheme has advantages and disadvantages (Table 3-1).

• F-EDI: Banks provide the F-EDI service, and user companies are connected directly to banks. The network is private network of banks and considered secure, but the implementation cost is high.

• VAN F-EDI (V F-EDI): Financial data is sent via a VAN (Value Added Network). The network is also secure and implementation cost is not so high, but the cost per transaction is high.

• Internet F-EDI (I F-EDI): Financial data is sent via the Internet. The implementation cost is low, but reliability and security are low.

3. 2 F-EDI

3.2.1 Marketplace Structure

The F-EDI user marketplace can be segmented into three main categories:

• Major EDI Players: Organizations with more than 100 trading partners. Typically, these are large companies with high sales volumes and hundreds or thousands of employees.
• Mid-Level Players: Organizations with more than 10 but fewer than 100 trading partners.
• Small Players: In general, these are smaller organizations with lower costs and fewer than 10 EDI trading partners.

3.2.2 Major Players

Large organizations have driven the development of F-EDI for corporate-to-corporate trade payments. They have led the migration away from paper-based (check/invoice/U.S. mail) systems to automated electronic payment systems. According to a Phoenix-Hecht 1996 survey of 1,300 companies with sales exceeding $100 million, the number of companies using F-EDI increased from 25% in 1994 to 40% in 1996. In 1994, two-thirds of companies with sales exceeding $2.5 billion utilized F-EDI. In turn, half of the companies with sales between $1 billion and $2.5 billion used F-EDI. For companies with sales less than $250 million only 35% utilized F-EDI. Of those companies surveyed in 1996 that were not utilizing F-EDI for exchange of trade payments and related information, 38% responded that they planned to do so within the next two years (See Figure3-1, 3-2 for the growth of no. of companies and transactions).

3.2.3 Advantages and Disadvantages of F-EDI

Advantages of F-EDI are:

• Low Transaction Cost
• Secure and reliable network

Disadvantages of F-EDI are:

• The high implementation cost
• Participating companies are limited to large companies
• The inability to connect to smaller companies via F-EDI because of the reasons above

3.3 VAN-EDI

3.3.1 Factors for VAN-EDI Emergence

Most exchanges of F-EDI were made via direct mainframe-to-mainframe communications between two trading partners when EDI was first introduced. This means that companies have to use similar hardware and communications protocols, at the same transmission speed, and transmit at the same time of day. As the number of EDI exchanges increased, complexities and diversification of F-EDI increased. Value Added Networks (VANs) evolved in response to these problems.

3.3.2 Key Players

GEIS, AT&T, and Sterling are among the largest VAN service providers in the U.S. marketplace. The majority of larger corporations currently utilize VAN services.

3.3.3 Advantages and Disadvantages of VAN-EDI

Advantages of VAN-EDI are:

• Low Implementation Cost
• Secure and reliable network

Disadvantages of VAN-EDI are:

• The high monthly connection and transaction fees
• The inability to convert smaller trading partners to EDI (due to the previous factor)

3.4 Internet-EDI

3.4.1 Expectations for Internet Based EDI

As the number of companies using Internet for their business goes up, it is natural to think that these companies try to use Internet as an EDI network. According to Forrester Research Inc. of Cambridge, MA, 57% of 40 large companies they surveyed consider the Internet as EDI network, and 7% of them are already piloting. On the other hand, still 36% of them do not consider Internet as an EDI network. Although this numbers include both electronic payment and non-payment exchanges, this means there are still some concerns about Internet security and reliability among companies (Figure 3-3).

Figure 3-3: Portion of Companies Considering Internet as EDI Network

A lot of companies are expecting Internet to be the replacement of current F-EDI and thinking that the Internet will play a significant role in the growth of business-to-business electronic commerce and the use of EDI/F-EDI. The Internet offers benefits that provide the solution for EDI's current shortcomings. The comment by B.Edelman, VP of Marshall Industries represents this corporation's perspective:

"We've been involved in EDI for 15 years . . . EDI never provided the ultimate solution we wanted because of the cost of setting it up, the sophistication required to set it up, the lack of ability to do any spontaneous transactions, and the lack of proliferation and connectivity to some customers."

3.4.2 Key Players

PNC Bank, Banc One and Bank of America started providing Internet based F-EDI services. TransLink Services, TSI Software, Softshare are software vendors who provide services from data mapping to EDI management and translation systems.

3.4.3 Advantages and Disadvantages of Internet-EDI

Advantages of Internet-EDI are:

• Low-cost gateway to reach thousands of new suppliers and buyer
• Nothing more complicated than an Internet connection and a Web browser

Disadvantages of Internet-EDI are:

• Security and reliability remains a major concern of corporations that are determining how to integrate the Internet into their F-EDI systems (Figure 3-4).