Automating payments

The invoice is in the post, but for how much longer will the postal service be used? Philip Hunter takes stock of mobile payments and digital billing and looks at the significant advances made in the area of micro-payments.

Electronic billing sounds an obvious step forward to save money, boost customer service and tap new online markets, but delivery has proved surprisingly elusive, particularly for small businesses.

It is now more than 15 years since electronic data interchange (EDI) appeared on the scene, yet most businesses still issue huge quantities of paper bills with handling costs that can significantly eat into the profit margin of smaller transactions.

This is especially the case for online services, where the cost of delivering the product via the Internet is minimal, so that obtaining financial recompense becomes the predominant overhead. Credit cards have become the prevailing mechanism for settling bills over the Internet, but because it is not practical or admissible to settle bills of less than £5, there has been little business case for a number of otherwise potentially exciting applications involving large numbers of low-value transactions.

Fortunately, there has been a breakthrough on this micro-payment front with the launch in February of Vodafone's m-paybill platform for settling online transactions of between 5p and £5. Vodafone's immediate target is online information services, for delivery via the Internet as well as mobile devices, but the move opens the door for other forms of online payment, notably for tickets and items from vending machines.

Despite the interest generated by the m-pay bill launch however, a less well-publicised development will be of greater interest to most businesses. Companies will no longer be required to produce paper versions of bills for goods on which VAT is levied. For although in time mobile payments will touch just about every enterprise, initially the main focus will be on business-to-consumer (B2C) transactions affecting mainly companies in the business of online information or interactive games.

Most companies are VAT registered and EDI has until now been handicapped by the legal onus on businesses to process and retain paper copies of VATable invoices to satisfy Customs & Excise. This clearly mitigated the cost savings that could be achieved by electronic invoicing because it was still necessary to print, post and archive paper copies.

The relaxation came about partly as the result of negotiations between the UK electronic invoice delivery service company Open Exchange and Customs. The company's service, called OB10, can now be used without any need to print out invoices. As well as eliminating the cost of printing, posting, and storing paper invoices, such end-to-end automation also brings the potential of reducing the time taken to settle bills, says Alain Falys, chief executive of Open Exchange.

Rules governing payment cycles and penalties for late settlement can be agreed between the parties and incorporated into the system without the need for time consuming telephone calls to resolve disputes and chase up accounts departments.

The system also offers the potential to improve service to both customers and suppliers by making it possible to obtain online information about ongoing transactions and query their status. The payment cycle can be properly tied into the overall supply chain so that it works in harmony with related processes, such as ordering and dispatch.

But all this can only happen if payment clearing services such as OB10 are properly integrated with the relevant enterprise resource planning (ERP) accounting systems. Also needed is active agreement between the parties to ensure that rules governing the payment cycle are implemented and enforced.

The latter can only be accomplished through agreement between the trading partners concerned, but the onus is on third parties such as Open Exchange to ensure that the technical integration issues are resolved. Falys says OB10 supports all the main data formats and can translate electronic invoices into the form required by the principle ERP systems.

These are early days for such services, with OB10 still at the trial stage in the UK following completion of an inaugural test last year with Fisher Scientific to assess the VAT capabilities. In the rest of Europe negotiations are ongoing with tax authorities, but it is likely that approval will not be long in coming.

Such systems are designed for business-to-business (B2B) transactions between established trading partners, and, although automated, they rely on up-front agreements and conscious decisions to implement payment procedures. They do not address the issue of casual trade, which is relevant not just for B2C transactions but increasingly for B2B as well. The ability to surf through online markets seeking the best prices and deals is contingent on being able to trade casually with companies without any established relationship.

Such casual trade is being hampered by the difficulty of integrating existing billing systems with emerging customer payment portals, says Dennis Ladd, chief technical officer of B2B software supplier StreamServe. The complex nature of EDI meant it was only suitable for higher value transactions and trading groups dominated by large players. "A large chunk of businesses have been left out of the game," he says.

The solution lies with XML, says Ladd, because this is becoming the standard for exchanging detailed business information such as invoices, and unlike EDI is designed for the Internet and is less complex to implement. But it is only a stepping-stone, and there is still a need for personalisation and effective information management. It is important that billing systems have the flexibility to meet a variety of customer requirements for presentation, including hard copy.

But at least there has been substantial advances on the micro-payments front, and this will enable companies to expand the range of their electronic billing activities and tackle new online markets for low-value services. Until now credit or debit cards have been the predominant mechanism for consumer online payments, and these are not practical for small transactions. Issuing banks often impose a minimum transaction charge making it uneconomic to sell anything for less than £5.

The demand was for a clearing house capable of billing customers for small items and then passing the money on to the merchant. ISPs looked like possible candidates, but they lack sufficiently sophisticated or scalable billing systems. Telecommunications companies on the other hand have for some time been able to measure and bill for small bundles of call units, and had the potential to expand their systems to cope with other types of service.

However, it is mobile operators that are making the running, because they have the greatest potential, and need, to generate revenue from micro-payment services. Mobile users are accustomed to being charged for everything they obtain via their phones, and so are more likely to be willing to pay for services than fixed Internet users, says Anil Malhotra, co-founder and director of micro-payment software specialist bango.net. "Mobile users even pay for 0800 numbers," Malhotra says, "and there is the advantage of instant gratification on a mobile."

The main initial target of Vodafone's m-pay system is the fixed Internet because that is where most of the desirable content is. "In the first year we expect the majority of transactions we handle will be delivered to the PC, and initial customer behaviour is reflecting that," says Vodafone's head of mobile commerce, and architect of m-pay, Jim Wadsworth.

But Wadsworth expects this to change when third-generation services come along with the greater data transmission capability needed to download content such as MP3 music files and video snapshots, such as a goal being scored. Wadsworth hinted that Vodafone's internal forecasts reflected significant uptake of such services from 2003 to 2005.

Initially though, m-pay is aimed at conventional digital content such as news, interactive games, and other entertainment. There are already some innovative services that Vodafone itself failed to conceive of, says Wadsworth. These include a call screening service that allows users to specify which callers can be routed straight to them and which should go to voicemail.

Services linked to the m-pay bill platform are charged to the customer's Vodafone account. "We then deduct the funds from that account, and settle in aggregate level with the merchant community," says Wadsworth. By aggregating multiple small items into single larger transactions, albeit still with an itemised statement, the cost of servicing the micro-payments is reduced, avoiding the problem faced with credit cards.

At present the benefits of m-pay bill are limited to Vodafone subscribers, reducing the appeal for merchants. This is where companies such as bango.net come in, by starting to create mechanisms for billing via other mobile networks such as Orange and Cellnet. Neither operator can yet bill for digital content, but a variety of options are emerging, says Malhotra. "You can buy a sum of money in the form of a Pin from a Web site, entering your credit card, or by dialling a premium number," says Malhotra. "In the near future you'll be able to buy top-up cards to load your phone with money to spend on premium Wap content."

None of these are totally satisfactory, and it will not be until mobile operators get together with a standard industry-wide solution that the mobile payment market will really take off, says Anders Holst, director of the new generation telephone carrier Telecom One. "Mobile payments won't work because there is currently only one payment system available [Vodafone], which only accounts for 25% of the mobile market," says Holst. "Mobile operators never communicate with one another so they will never come up with one definitive payment solution which works across all the networks."

This view is perhaps overly pessimistic, given that mobile operators have co-operated on services such as reverse charge SMS, which is available on two networks, and soon will be on the rest. This allows SMS messages to billed to the recipient, allowing companies to offer SMS as a service option to customers for reporting faults, for example.

In entering the mobile payments field, operators must co-operate with the financial services community. Wadsworth insists that Vodafone will never become a bank and will work in tandem with financial services companies, scoring by taking a percentage of all transactions that pass through m-pay bill.

But Chris Erickson, co-founder and managing director of 724 Solutions, a supplier of secure mobile transaction software, says a number of operators are trying to become banks in the hope of gaining additional revenue through provision of financial services beyond the handling of micro-payments. "The issue for Vodafone is if it is doing no more than handling payments, they add little value, so how can it justify taking more than a tiny percentage of the transaction," he says.

Whatever the outcome, it is clear that a new era is beginning for online payments, with the potential to sell not just low value online information and entertainment, but also to use mobile devices for a range of ticketing and vending applications. The remaining stumbling blocks are not so much technical as regulatory and particularly commercial.

It also remains to be seen, as Wadsworth agrees, whether the security is sufficient to provide the level of confidence needed for online payment to really take off. Consumers will want to be confident that rogue micro-payments that may not readily be spotted do not get added to their bills. Similarly for B2B billing, a major concern remains the authenticity of invoice content, if payments are to be processed automatically with less human intervention or checking.