B2B payments - An Untapped Opportunity
In the US, the expanding and buoyant business-to-business (B2B) market has always been underserved in its payments requirements. Consequently, a significant number of both buyers and sellers are finding themselves frustrated by the B2B payments process. Although many Financial Institutions (FIs) are targeting more middle market growth opportunities, they could do much more to address the middle market's payments key pain points.
In order to tap into this potentially lucrative and vibrant new growth opportunity, FIs must first ensure that their B2B payments provisions will help middle market organizations to manage the scope of their business challenges, in addition to tackling particular payments processing pain points. The adoption of this dual-focus strategy will become of increased significance, thanks to moves within the US to modernize its payments infrastructure and commoditize core processing proficiencies, while potentially disruptive new players act swiftly, as they attempt to secure more of this emerging, promising market.
Middle market potential
The US middle market forms a key part of the US economy. The sector is made up of businesses that between them generate a revenue between USD$50 million and USD$1 billion. The middle market continues to grow exponentially, now bringing USD$6.6 trillion into the US economy.
These middle market organizations have thus become prime targets for lending and banking service providers. Companies in the lower tier of the spectrum are of particular interest, as these firms’ average quarterly revenues grew by 6.6% year-over-year (YoY) in the second quarter of 2015 (2Q15). This compares with modest GDP growth of just 2.7%.
In the US, financial loans to SMEs represent one-quarter of the total bank business loans given, totaling USD$28.3 billion. In addition, the total number of employees at these middle market firms rose by 3.8% YoY, compared with just 2.1% total growth in the US economy’s employment figures for 2Q15. It’s also worth noting that middle market companies tend to have a relatively brief relationship with their banks, averaging just 15 years.
Challenges facing middle market companies
Middle market companies are now prioritizing aggressive growth, both at home and globally, in a continually changing competitive, regulatory, and technological environment. The key priorities of these organizations are: to manage organic growth, develop and introduce new services and products, and expand their market and client reach. So, middle market companies are simultaneously attempting to manage running costs, obtain and manage sufficient working capital, and recruit and keep employees. The future success of middle market businesses will be dependent on how effectively they are able to cope with these demands, increase their productivity, fine-tune operational efficiency, and enhance the customer experience.
Middle market organizations are finding that dealing with these major problems often leads to inefficient payment processing, which can cause both minor and major interruption to their routine business operations. Those FIs that make payment processing more efficient whilst tackling these larger bugbears can set themselves apart in the marketplace and compound successful and longer-term relationships with their middle market partners.
Given the emergence of new payments processing technologies and the expansion of online transaction processing capabilities, it is now essential that FIs “catch the wave” or risk being left behind by new disruptive players that are entering the marketplace in increasing numbers.
<b>B2B pain points and unaddressed requirements</b>
In order to FIs to remain competitive in the middle market payments processing environment, it is important that they understand the key challenges facing middle market companies.
High processing costs
Over one-third of businesses state that the high processing cost of traditional payment methods  presents them with a major challenge. Typically, the cost to an Accounts Payable (AP) organization of processing one single supplier payment is almost $8. In addition, 62% of costings arise from labor.
30% of middle market businesses state that the time taken in processing payments presents them with a major problem. Delays in payments can occur due to late payments from buyers or suppliers or because of slow processing methods. On average, it takes 30 days for a payment to be completed, and almost half of suppliers report being paid late for products or services they have provided. Late or delayed payments can present an insurmountable problem to some small businesses, especially in a challenging economic climate.
Manual AP processing
Buyers lack the capacity to handle automatic AP processing, usually because of lack of tech resources, limited back-office capability to generate electronic invoices and electronic payments, and problems in convincing customers and suppliers to move to using ePayments .
Risk of fraud
Each transaction has limited authorization controls, so the risk of fraudulent transactions being perpetrated is high. Also, some existing payment methods do not offer adequate security provisions for transactions that take place online. In a survey carried out in 2014, around 22% of middle market businesses reported that they suffered from fraudulent payments.
Limited transaction visibility
The fact that there is only a limited end-to-end view of each payment transaction that is associated with compound payment devices can result in companies incurring chargebacks, additional costs, delays, and disruption to the payment cycle.
Payment methods of suppliers
A challenge is also presented where there is a mismatch in the preferred payment methods of the supplier and buyers. Buyers’ choice of supplier can be heavily influenced by the payment methods used by that supplier.
Remittance data processing
A lack of back-office support for automated payment receipt methods, together with missing file data and a variance in file formats can cause problems with processing payment data received and reconciling multiple invoices.
FIs have been slow to recognize these key pain points in the USD$3.3 trillion middle market, focusing their attention instead on corporate payments that are aimed at big corporations, and on consumer payments. There are a number of factors that complicate middle market B2B payment processing, including:
• Payments processes in the middle market B2B sector are notoriously more challenging to automate.
• B2B payments must be integrated with diverse Enterprise Resource Planning (ERP)/AP platforms.
• Both suppliers and buyers are reluctant to move away from paper invoicing and payment methods to electronic solutions.
• Middle market companies are frequently restricted by their budget when it comes to investing in the technology required in order to automate their payment processes.
• The financial services industry, in general, has been heavily focused on addressing cost challenges, managing regulatory issues, and processing consumer payments. This has meant that the complex issues affecting middle market B2B companies have been neglected.
<b>The middle market is open to disruption by new players</b>
Although a few FIs have introduced B2B payment solutions to middle market companies, much of the segment’s tech innovation has been driven by fintech (financial technology) companies and other disruptors. These organizations are leveraging technology and business trends in order to come up with innovative solutions that effectively alleviate many of the aforementioned payments process pain points.
Meanwhile, fintechs have been developing solutions aimed squarely at peer-to-peer lending, invoice finance that addresses the needs of middle market businesses, and online trade finance . As a consequence, there are now over 30 non-bank platforms worldwide that provide the wherewithal for middle market companies to fund their operations and growth by raising capital up to USD$1 million.
For instance, Western Union recently unveiled a digital platform called WU Edge, which is designed to facilitate international trading for SMEs. Likewise, Receivables Exchange offers an online marketplace that trades in real-time, allowing medium-sized businesses to source working capital much more quickly and smoothly than can be achieved through traditional banking routes. InstaSupply from Spend Control is another new player in the marketplace, offering a facility that enables middle market companies to track and control purchase spend throughout their business.
So, now the time is ripe for FIs to take action if they intend to enter this exciting new growth curve. Any payment card companies and old-school banks that are too slow in their response will risk being pushed out by quicker-acting market disruptors. However, those FIs who are quick to capitalize on these trends and separate their offerings to middle market companies could be in a good position from which to take advantage of this newly anticipated B2B growth.
Influential trends on B2B middle market payments competition
There are a number of trends that are generating opportunities for non-traditional FI competition to better accommodate the B2B payment processing requirements of middle market companies:
Move to ePayments – digitization
Growth of B2B networks and move to digitization by B2B commerce
Within the B2B e-commerce sector, there has been a clear increase in focus on e-payments, rising at 7.7% CAGR and expected to achieve USD$1.13 trillion by 2020. Of today’s B2B buyers, around three quarters state that they research at least half of all work-related purchases online, with around 30% progressing these purchases through to completion .
Emerging e-marketplaces, including Amazon and Alibaba, are very appealing to distributors, wholesalers, and manufacturers, offering them access to new markets and providing much potential for growth.
The e-marketplace also offers a solution for those distributors and wholesalers who, for reasons of capability or budget, prefer not to build their own e-commerce platforms.
Move away from checks to other digitized payment methods
Although checks have long been the preferred method of payment for many businesses, this rather antiquated payment solution is now being spurned in favor of more modern and efficient remittance methods. 71% of companies are now able to make payments electronically, 93% of businesses make image deposits, and 17% of image deposits are made up of checks .
Differentiation through end-to-end contributions
Working capital and financing requirements
In order to improve the financial efficiency and lower the working capital needs of suppliers and buyers, the need for supply chain financing is growing. Supply chain financing enables buyers to extend their terms of payment whilst still offering suppliers better financing rates. According to a 2014 survey of mid-market company execs carried out by Deloitte , more than 28% of firms said that they aimed to grow their operations over the following 12 months by means of working capital lines of funding.
Discounting and incentivizing
New incentivized discounting systems are now offered, Taulia being a good example of such a system, where an online platform is provided that allows buyers to accept offers of early payment from suppliers and enables variable discounts to be applied to invoices, depending on the date of the payment and the amount accelerated.
Metrics and analytics
Advanced analytics are increasingly being used to gain insights into how suppliers and buyers can grow their businesses and assess their procurement-to-payment systems, identify potential issues, and improve the efficiency of their operations, (for example, cost management, reduction in fraud, monitoring of budgetary data, cross-selling strategies, and decision management). Almost 40% of respondents to Deloitte’s survey of middle market businesses stated that they use predictive analytics to forecast future influential business events and that this data was used to ensure business agility.
Take advantage of new technology and innovation in payment processing
At the suggestion of the US Federal Reserve, projects have been undertaken by a number of commercial payments bodies, including NACHA, ClearXchange, and The Clearing House, with the aim of accelerating electronic payments so that real-time or same-day payments are possible.
Emergence of blockchain
Blockchain is now emerging as a dynamic force within mainstream payment processing models in the B2B sector. Cryptocurrencies and cryptoassets, including Bitcoin, although still a “new kid on the block” in terms of a payment medium, is attracting interest thanks to the potential offered by their blockchain infrastructure to change the way in which payments are processed. Bitcoin is cheaper to process than a wire transfer, is quicker than traditional ACH transfers, and also bypasses costly bank charges and fees. Digital currency and the blockchain model also offer greater security within its payments processing mechanism than more traditional “hackable” processes.
In the same way as it has been readily adopted by B2C, the use of social media platforms, smartphones, and tablets is now commonplace in B2B. The primary challenge is to incorporate these new channels within the business’ existing e-commerce model, and many middle market companies have a dedicated IT department or staff member whose primary duty is the management and development of the company’s online functionality.
The Cloud allows businesses to use technology to share resources through a secure, off-site platform. Cloud facilitates the use of multiple channels, shared data, and shared applications. Businesses can conduct trade and communicate with buyers, suppliers, and clients externally, without incurring the expense of internal server and software upgrades. Deloitte’s recent survey found that over 21% of middle-market businesses actively use cloud-based solutions as part of their business model, while a further 43% are intending to do so going forward. ERP, invoice processing, and CRM that are based in the Cloud present direct implications for organizations that are keen to capitalize on this market.
FI value proposition enhancement
The ability to ease middle market B2B pain points within payment systems will be key for FIs looking to exploit this potential opportunity. With the US Federal Reserve pushing for faster and more universal payments, it seems guaranteed that payments processing will increasingly become commoditized. In order to become competitive and increase their attractiveness to businesses, FIs must also make positive moves to provide support and assistance to middle market organizations in managing their ongoing growth and business challenges. For example, the predictability of cash flow is typically adversely affected by the inflexible and unattractive payment terms that are offered by some suppliers. This can heavily impact on the availability of disposable working capital for both suppliers and buyers.
Almost 55% of middle market companies report experiencing difficulty in obtaining access to and maintaining adequate working capital for their business . In addition, there is a very real opportunity for FIs to provide important insights into business through utilizing payments information in combination with other data types; for example, payments data can offer an insight into supply chain performance, pricing, and asymmetrical contracts. FIs can set themselves apart from fintechs and other market newbies through the development of new and innovative payments products that effectively deal with the bigger picture of issues such as working capital. The ability to adopt this approach will become increasingly crucial to the exploitation of this emerging market as the payments process becomes more commoditized through faster, universal payment schemes. To prepare for this challenge and to present an attractive, greater value proposition to middle market businesses, FIs must consider the development of a strategy that is based around three pillars:
1. Core capability strength
FIs must address customer payments processing pain points and expectations across old-style payments methods through cost reduction, increased efficiency, and faster transaction times.
2. Bundled proprietary solutions
FIs need to understand the wider business issues that are faced by middle market organizations and provide solutions that exceed the provision of a seamless payments service in order to enable companies to take advantage of the interactions between business solutions and payments. These solutions will enable FIs to create the differentiation necessary to compete successfully in this market as payments mechanisms become ever more commoditized.
3. Utilize “greenfield” innovative developments
FIs must develop new B2B payments services and products aimed at the middle market, which make best use of emerging disruptive tech, including mobile, Cloud, real-time payments, and cryptocurrencies. Where capability gaps exist, partnerships must be cultivated between FIs and innovative fintechs.
Also, FIs must acquire or develop the ability to address those aforementioned middle market pain points. In order to do this, it will be important to address organizational gaps, to acquire the necessary capabilities via partnerships or acquisitions, and to invest in capabilities that must be created internally. Moving forward, growth strategies should focus on customers’ specific requirements, complementary services and products, and a clear differentiation based on three main principles:
Consider clients’ requirements as you would your own
FIs must place the emphasis firmly on their clients’ wider business requirements, not solely on their immediate expectations based on the payments process. An understanding of clients’ own business circumstances is essential, together with the ability and willingness to offer solutions that readily address these requirements, for example industry-specific solutions.
Maintain a presence within your clients’ sector
You must customize your products and services to customers’ behavioral characteristics, geographical location, social demographic, and business vertical. For example, many middle market companies are congregating around popular B2B marketplaces in growing numbers.
Integration of B2B payments processing into your existing portfolio of solutions
Be sure to develop products and solutions that integrate smoothly and seamlessly into your target market’s existing capabilities and systems. For example, FIs may seek to integrate their payment solutions into their client’s own ERP systems and procure-to-pay methodologies, bearing in mind possible constraints on HR within middle market businesses.
New opportunities for growth
The landscape of the B2B middle market payments environment is experiencing a period of rapid growth and exponential change. Ever-increasing numbers of service providers are emerging, offering highly specialized services and products that readily address buyer and seller pain points. As a consequence, traditional financial institutions may find themselves vulnerable to emerging disruptive competition that has never before been experienced in the core banking and lending service sector.
The emergence of new technology and disruptive business models has removed many of the traditional barriers, making the sector more accessible to the smaller player and placing larger, more established banks under pressure. FIs are now in a good position to exploit this new pathway for growth and expansion.
1 Electronic Payments and Card Solutions, Paystream, 2015
2 Electronic Payments & Remittance Data survey, Federal Reserve Banks of Minneapolis & Chicago, 2012
3 Deloitte analysis; The Unicorn list, CB Insights, 2016
4 US B2B e-Commerce Forecast: 2015 To 2020, Forrester Research, April 2, 2015
5 Electronic Payments and Card Solutions, Paystream, 2015
6 Mid-market perspectives: 2014 report on America’s economic engine, Deloitte, 2014
7 National Middle Market Summit, 2011