E-invoicing 2008 – Highlights of the European market description and analysis

Highlights of the European market description and analysis

Innopay and Euro Banking Association

The following article summarises the e-invoicing European market description and analysis presented by Innopay and the Euro Banking Association (EBA). E-invoicing is considered by many corporates to be an important potential development in their order-to-cash and purchase-to-pay cycles and it has been discussed as a potential benefit of SEPA. The following findings are taken from the Management Summary to the Report, which can be found at www.abe-eba.eu which we would encourage readers to download and discuss within your treasury association.

Finding 1: E-invoicing is growing fast from a low base but there are major unaddressed market segments

There are compelling forces at work to encourage the growth of e-invoicing. But although it has been in the early stages of development for over 20 years, it is reported that less than 5% of volumes are currently dematerialised. Annual corporate and public savings of up to e243 billion are projected across Europe as a whole. The adoption rate of e-invoicing is accelerating with varying growth rates per country. Countries such as those in the Nordic area, Belgium, and Switzerland have relatively greater traction, whereas in larger countries adoption is more diffuse. Domestic volumes predominate but cross-border invoicing will grow as market integration occurs at both a trade and enterprise level.

The end-to-end trade process should always be taken into consideration as the essential context for invoicing.

In general, the current focus is on outbound and inbound volumes from larger corporate entities, especially in the accounts payable area and mass-consumer invoicing initiatives from utilities and similar entities. The strong market power of these players is driving these developments. The role of the public sector is instrumental in some cases. The market for smaller companies and consumers is comparatively speaking unaddressed and an emerging opportunity in this space is clearly identifiable. By adopting generic solutions all market segments could benefit.

Finding 2: The European market for e-invoicing services is very fragmented, and reaching all potential e-invoice users is a serious problem, which banks could assist in addressing

A wide variety of e-invoicing solutions is offered by over 250 service providers focusing on varying needs and different market segments. ‘Consolidators’ and other players including banks overlap in functionality and reach. Service providers are often geographically oriented. There are many ways of exchanging invoices including 3-party and 4-party models. To try to deal with this fragmentation and the resultant lack of reach, a degree of interoperability has been created between some service providers, on the basis of ‘roaming’ models, but which only addresses the interface between a relatively small number of platforms. Bank-inspired models have also shown a promising ability to address the ‘reach’ problem with SMEs and consumers and indeed, where such models co-exist with other consolidator models, there is an encouraging trend of adoption. Banks have notable assets including trust and experience with payment networks. Other service providers have strong business integration and IT skills. [[[PAGE]]]

Finding 3: Among the drivers and inhibitors impacting the adoption of e-invoicing, are technical barriers, but also an underlying and under-recognised need at strategic management level to truly embrace e-business

Notable among the positive drivers and enablers are public policy encouragement, potential cost savings, quality and efficiency gains, financial management benefits including trade financing opportunities, customer advantages, new business process potential, the arrival of the Single Euro Payments Area, and corporate social responsibility arguments. Inhibitors and issues have been identified as commercial barriers among all economic actors, legal and VAT issues, trust and operational issues, lack of standardisation and the lack of consensus on business and cooperation models. Of all the inhibitors, it is clear that the issues around strategic commitment and widespread confidence building are very important, if critical mass in e-business is to be achieved. There is clearly a ladder to climb on the way to the truly digital economy, involving both efforts within enterprises and substantial collaborative activities. For many commentators, the barriers to be overcome lie in the area of readiness for change and preparedness to make and implement the business case for embracing new ways of doing business at a senior management and commercial level. This includes the need to have a high awareness of technology and in particular greater attention to data security and control. Other inhibitors such as legal, regulatory, standardisation and governance issues are by comparison more manageable and capable of resolution, through collective action.

Finding 4: E-invoicing and its context have been poorly defined with the result that the problems to be addressed are insufficiently understood

The open network environment should be independent of the entity domain.

A clear definition of the scope and overall context is crucial for understanding the challenges around e-invoicing, which by common consent deals with the invoice as the pivotal document in physical and financial supply chain processing. To approach the next step in terms of solutions there needs to be greater convergence on a common terminology preferably within a commonly accepted analytical framework. The full document makes a start in proposing an analytical framework, which could support a clarification process and at the very least promote debate and discussion. This framework addresses three levels: the end-to-end trade process, the invoicing process and the invoice itself. Invoicing is just one of the processes in the end-to-end trade process and has a strong dependency on all other processes, including taxation and contracting. Consequently, the end-to-end trade process should always be taken into consideration as the essential context for invoicing. Within the invoicing process, it is essential to clearly define the beginning and the end of the invoicing process, as invoicing tends to extend and blend into many other types of business processes within each trading entity. The entity domain and the exchange domain need to be clearly separated and well understood (see finding 5 below). Without the clarity provided by a common terminology, there is a risk of problems such as sub-optimal industry dialogues, poor guidance to standardisation efforts and inadequate allocation of resources toward the domains requiring attention.

Finding 5: The exchange or distribution domain should be clearly addressed as a priority item otherwise e-invoicing will not achieve widespread adoption

As trade involves all categories of entities (e.g. businesses of all sizes, consumers, government) trading with all other categories of entities, the separation and segmentation of models for the exchange of trade information is inhibiting participation by important market segments. What we call the exchange domain (or ‘distribution domain’) should be clearly delineated and treated as a collaborative space. The key components need to include a defined universal address space (or entity identifier) and an open and neutral network model. Re-use of existing models and infrastructures is likely to be the best way forward to create this exchange domain. The open network environment should be independent of the entity domain, by which we mean the internal space of sellers, buyers, service providers and all other entities. Consequently the exchange domain needs to be agnostic as to the categories of trading entities and their capabilities and internal processes (no distinction to be made between EBPP and e-invoicing).

The provision of business integration services is part of the entity domain. The entity domain is competitive and should be open (on the basis of a level playing field) for actors to craft their own distinctive value propositions without excessive intrusion beyond an accepted minimum set of standards requirements to permit essential interoperability. Such generic requirements should be minimum in the sense of ‘just enough’ to support interoperability without pulling in value added features. [[[PAGE]]]

Creating an accepted set of minimum common requirements for the exchange domain requires that stakeholders work on three principal aspects:

• First is the technical exchange environment.

• Second is the functional/content aspect, which is well covered by current work being done by various standardisation groups on data semantics and syntactical components.

• Third is the aspect of the appropriate business and governance model (clear roles and responsibilities and items such as schemes and rulebooks).

The converging work on data standards should be strongly encouraged.

Solving these issues will inevitably be challenging in such a heterogeneous environment. The creation of a well functioning exchange domain will provide reach and interoperability whilst preserving a pro-competitive environment for all market players, where market players are free to decide the manner in which they utilise the exchange domain (e.g. use of a generally available system or maintenance of a proprietary solution). Such an environment could stimulate important network effects and support the further exchange of other trade information and related documents in the supply chain.

Finding 6: Standardisation of the e-invoice as an exchangeable message is clearly needed, and there must be flexibility to meet industry specific and individual requirements

The current standardisation and harmonisation efforts are a positive movement toward a broader adoption of e-invoicing. These efforts are focused on the creation of generic cross-industry capabilities, whilst respecting the need for industry specific and individual requirements. One single standard for all invoices may be hard to achieve. The invoice will therefore need to be divided into a generic part (core), containing information about the trading entities and information relevant for tax settlement, accounting and payment initiation, and an industry specific part (extension) with details about the underlying trade and requirements of the authorities, which also require proper definition. Dematerialisation of the invoice should not be based wholly on existing practices for the current paper invoice. The e-invoice not only contains information relevant to the invoice, but also information relevant to the exchange of the invoice. Standardisation of a complete (invoice) ‘message’ is essential within any open exchange network. In other words, a distinction must be made between an ‘envelope’ containing a document and the ‘document’ itself. Widely accepted and common standards will clearly assist market development, but the current situation need not prevent immediate progress being made, given that implementation of standards is a protracted process.

Finding 7: There are some crucial regulatory and legal issues that need addressing if e-invoicing is to be widely adopted in Europe

E-invoicing has strong European political support but seems hampered by unclear legal provisions surrounding VAT rules, electronic signatures and archiving. The current applicable directives have led to different country implementations and as a result of this, various country-specific practices have emerged. These legal uncertainties affect the progress of e-invoicing on both a domestic and cross-border basis. Especially in the area of archiving, entities often revert to storage of paper copies. Re-assessment is required. The use of electronic signatures impacts the whole invoicing process, but there is a lack of clarity on the necessity for, the requirements for and around the practical use of this technology. The relevant directives and their implementation need revisiting, as part of a more holistic and pragmatic approach. Encouragingly, various EU bodies and initiatives, together with related Member State and expert forum activity, are addressing these issues as part of a strong public sector drive to support the growth of e-invoicing as part of the Lisbon strategy for growth and jobs and the creation of a Single European Electronic Market.

Finding 8: Not all stakeholders, such as tax authorities, are sufficiently involved, leading to the danger that only partial solutions will result

All stakeholders, especially end-users (corporates, public administrations, SMEs and consumers) and service providers in all their guises would need to be included in the collective dialogue, if partial solutions and further fragmentation are to be avoided. The environment should not rule out any party as of right in order to remain pro-competitive. All entities engaged in e-invoicing should develop a business case to underpin their investment. Tax authorities are key stakeholders in the invoicing process and need to be fully engaged in the collective discussion, in view of their integral role in the total end-to-end trade process. [[[PAGE]]]

Considerations for the future

• There should be a major effort to convince decision-makers of the benefits and business case for e-business in general, for redesigned processes and for e-invoicing in order to stimulate universal adoption.

• There should be a clear focus on inclusion and reach, especially towards small and medium sized enterprises and consumers.

• There should be no public sector-only requirements towards users, who need to benefit from consistent approaches.

• The major effort should be focused on domestic invoice volumes, but cross-border invoicing is likely to grow and should receive proportionate attention.

• Co-operation between service providers including banks should be encouraged as they have complementary skills and contributions to make. Banks have a major potential opportunity to contribute to the next stage of development.

• Where possible there should be a re-use of experience, existing infrastructure and a practical step by step approach so as to create an industrial scale environment.

• The exchange domain should be addressed as a collective priority with an emphasis on a universal address space (including ‘entity identifiers’) and an open network model operating within a carefully designed governance framework.

• The converging work on data standards should be strongly encouraged. Standards are needed for the envelope to be used in the exchange domain, a generic part of the invoice and a specific part for flexibility in meeting industry specific and individual needs.

• Efforts should continue to clarify and remove legal and regulatory barriers.

• All stakeholders should come together in bodies such as the European Commission Expert Group to progress solutions within a coherent framework and within an agreed timeframe.

• There should be a deliberate effort to create a common language and an analytical framework so as to support high quality dialogues among stakeholders.