Business to Business (B2B) payments: Taking care of business9 min read
For years, payments investors focused on consumers’ switch to digital and mobile payments. More recently, investors have shifted to business to business (B2B) payments, where analysts see huge opportunities for process improvements that will save time and money. James Wood dusts off his suit and heads for the boardroom…
Ask the average person what a payment is, and they’ll probably talk about credit cards, or cash, or digital wallets. And that’s because the business-to-business payments market is a mystery to them.
Yet this market dwarfs consumer payments in size and complexity. Until recently, it was also quite staid, experiencing only modest incremental change since the introduction of the earliest credit transfer technologies in the late 1960s.
Now a surge in investor interest and the application of new digital technologies are combining to drive a wave of change every bit as powerful and far-reaching as the revolution consumers have experienced in the move to contactless transactions, alternative payments and digital banking.
B2B: big business
Research from Sapphire Ventures shows the scale of the opportunity. According to Sapphire, the global B2B payments market is worth around $125 trillion, more than double the size of consumer payments, while McKinsey’s 2020 Global Payments Report ranks growth in B2B payments around a third higher than consumer payments in all world regions except North America.
Much of this growth is being driven by an increasingly digital and cross-border business environment, even after COVID.
However, much of the world’s B2B payments traffic remains mired in paper invoicing and manual processing: Levvel Research claims that only 10 percent of European SMEs – companies that collectively make up around half of that continent’s GDP – are using fully-digitised document and financial management systems, with almost half still using manual invoicing, processing and payment systems.
“Just under half of Europe’s SMEs are still using no digital payment systems whatsoever.”
B2B constitutes a bigger market than consumer payments with rapid growth and rich opportunities to digitise – put like that, it’s not hard to see why investors are interested.
Venture investments in B2B have grown steadily in the last five years, with deals over $20 million reaching more than $1.2 billion in total for 2020. Most recent headline deals have included Melio’s raise of $250 million, bringing their valuation to around $4 billion, Airwallex’s raise of a total of $300 million, and Capiter’s raise of $33 million.
Pressure on the pain points
According to Deloitte – and consistent with Levvel Consulting’s findings – mid-tier firms struggle with high fraud risk, slow settlement times and the challenge of switching over from manual processing when it comes to payments.
These difficulties explain the rapid growth we’re seeing in payments platforms for business, where innovative FinTechs offer a “take and do” option for companies which handles everything from acceptance in digital channels through to invoicing and processing.
“Innovative FinTechs are now challenging banks’ traditional dominance in the B2B payments market.”
CEO David Liu stands at the helm of Truevo, a FinTech offering low-cost payments for small businesses using card rails to transfer funds between a business, its suppliers and customers which can then be spent direct from that card. His firm offers small businesses reduced fees by balancing out incoming and outgoing transaction fees charged by banks and card networks.
Such innovative approaches are springing up across Europe and North America, and look set to challenge banks’ traditional dominance in B2B transfers.
Liu says that while his product suite aims to save small businesses time and money, the next step is to achieve integration between payments on the one hand, and a company’s inventory and accounting systems on the other, realising significant efficiencies in the process.
Combining for efficiency
According to Chris Wassenaar, Chief Risk Officer and General Counsel at Versapay, a provider of automated accounts receivable solutions for business, there’s a fundamental shift driving change in the B2B market: “Typically, people’s payments experience at home is more digitised than their experience at the office”, he says.
“This is one factor leading people to seek more integrated, smoother business-to-business payments. However, B2B payments are much more complex than a simple consumer transaction, with more data required – not to mention compliance requirements and, typically, much higher transaction values.”
Wassenaar believes the critical opportunity in B2B payments lies in combining different aspects of the payment and accounting process which are currently separate and sub-optimally co-ordinated.
For Wassenaar, Enterprise Resource Planning (ERP) should be combined with Accounts Receivable (AR) and payments processing. “Right now, 85 percent of all payments processing in mid-market firms still retains some manual element”, he says.
“As well as integrating these back-office functions, it’s possible for companies to look at how they could make compliance linked to payments more effective – by automating elements such as sanctions list checking, export controls and others into the payments process.”
“85% of B2B payments retain some manual element.”
Getting the switch to digital right can deliver massive efficiency gains for mid-market firms.
Jed Rose is General Manager for EMEA at Airwallex, an Australian company focused on providing digital payments solutions for companies working across borders.
According to Rose, Airwallex clients enjoy cost reductions of up to 80 percent by working with Airwallex to reduce their reliance on traditional corporate banking services.
Rose notes that PSD2 – with its requirement for banks to share their Application Programming Interfaces, or APIs – lit a fire under the liberalisation of banking services in Europe, allowing mid-market firms to integrate non-bank payment services far more easily.
Despite such efforts to foster competition in payments services by regulators, evidence suggests that when it comes to even the most basic services, such as foreign exchange, most companies think they are getting a bad deal.
2020 research from banking infrastructure provider Banking Circle showed less than half of European corporates felt they got a good deal from their bank for foreign exchange rates, while 85 percent said transaction fees were too expensive.
For all the potential that exists to make B2B payments more efficient, there’s still the sense that we won’t see substantive change until the world’s biggest companies fully digitize their systems. As Jed Rose notes, “the majority of payments volume still rests with the world’s major companies – and this segment has the biggest opportunity to achieve automisation and digitisation at scale.”
Cross-border B2B transactions represent a huge area of opportunity when it comes to improving efficiency and reducing cost. According to Juniper Research, cross-border transactions dropped slightly in the run of 2020 as COVID raged, but are projected to recover and grow to $35 trillion by the end of 2025, representing growth of 30 percent in the next three years.
“Less than half of European companies felt their bank offered a good deal on forex rates.”
As cross-border transactions recover, it’s likely we’ll see firms take a hard look at how they pay. At present, around 70 percent of cross-border business transactions are conducted via wire transfers, which can be both slow and expensive, depending on the markets involved.
Meanwhile, the ever-present spectre of fraud remains: globally, companies are estimated to have suffered around $26 billion of fraud in the corporate payments market last year, or just over one percent of all value transacted.
The high cost companies pay to do business across borders, coupled with the potential for efficiency gains and the need to reduce fraud risk, are just some of the reasons industry experts believe we’re on the cusp of major change in the way firms pay internationally.
Brandon Spear, CEO at B2B payments specialists Trevipay, predicts fundamental change in how businesses transact with each other: “There’s a massive move towards improving the interaction model between buyers and sellers in corporate markets.
Whether you look at replacing the old system of correspondent banking, or reducing currency risk in longer duration invoicing arrangements, there are opportunities – and in that, there’s a parallel between what’s happening in the B2B market and the changes we’ve seen in the consumer world.”
In particular, Spear predicts we’ll see a shift away from credit transfers as the main rail for B2B payments. “As we’ve seen in consumer payments, we’re going to see greater flexibility in B2B payments, with more flexible payment terms, and a proliferation of new payments methods.
Companies will be able to choose which invoices they pay, and when, more easily – and these changes are going to be driven by digitisation and automation.”
Chained to the future
The heightened data requirements and complexity of the B2B market, plus the need to improve transaction speeds, suggest that blockchain could have a powerful role to play in the future.
Brandon Spears concurs, noting that “Blockchain is an interesting and powerful frontier for B2B, in particular the capacity to integrate the tracking and delivery of digital goods such as software and media products with the payments process.”
In the last three months, US-based CoreChain Technologies has announced an $1.25m seed-funding round to develop a blockchain-based payments network which it claims will dramatically reduce settlement times, administrative burdens and costs.
Meanwhile, China recently announced that 208 domestic companies had successfully settled 638 cross-border transactions worth $508m via blockchain, and said that the average transaction time from request to pay to settlement had been 15 minutes.
With such dramatic improvements in prospect, investor interest in blockchain for B2B payments is understandable. However, Versapay’s Chris Wassenaar cautions that challenges remain: “Blockchain is a fascinating area for B2B payments.
That said, the challenge of identifying all parties to a transaction quickly and accurately via blockchain remains, as does the question of where to allocate settlement risk if value is moved [between fiat and crypto] over the blockchain.”
In the next five years, it’s likely we’ll see B2B payments go through a transformation as dramatic and far-reaching as what we’re seeing in the consumer space, including the automation of back-office processes, a continued switch from paper and cheques to digital processing, and dramatic improvements in terms of faster settlement and lower costs.
If there are clouds in this landscape, then they could come in the set-up costs companies face – especially SMEs – to access these services and indeed in the triggers required to facilitate widespread adoption of end-to-end digital processes in B2B.
If the digital revolution is going to reach small business, services will need to be flexible, affordable and scaleable to be attractive to mid-market firms who will be watching every penny coming in – and going out.
“Some investors are late to the party” – Justin Main, BillTrust
Justin Main is VP of Integrated Systems at BillTrust, a provider of advanced accounts receivable (AR) solutions based in the US. In an interview with PCM, Main noted the huge potential of the B2B payments market, not least because of its size, which he estimates to be in the region of $120 trillion or around twice the size of the consumer market.
Given this potential, Main said he was surprised that “some investors are late to the party”, though he notes that a historical low level of investment in B2B payments technology, plus the fragmented nature of B2B payments might be reasons for this.
“Given the number of systems used to move money in a business-to-business environment, it has been difficult for companies to use one provider to pay all of their vendors.”
As the digital era emerges, Main agrees that we are beginning to see traction outside the “magic circle” of FTSE 100/Fortune 500 firms. “Progress has varied depending on the size of client company, and region we’re looking at”, he says.
“In Europe, digitisation is more advanced, while we’re definitely seeing a significant fall in paper-based transactions in North America compared to two years ago.” Main cites Europe’s high level of buyer protection legislation as one potential challenge to further digitisation, with another being the need for at least some digitisation between counterparties to a transaction before we can do away with paper for good.
Justin Main’s comment that digitisation will only be realised when players of all sizes see the benefits is an important insight. Especially for the smaller businesses that constitute up to 60 percent of any country’s economy, it’s vital that digital AR systems be made as affordable as possible to encourage widespread use.
Many will know that chip cards were available for decades before they became widely used, given banks’ concerns about the costs of chip and migration. While the benefits of digitising B2B payments are clear in terms of accuracy, time and efficiency, access to these benefits has to be pitched at a price point smaller businesses can afford.