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B2B Payments, Understood

In an increasingly digitized world, why are business payments falling so far behind the curve, and what's being done to turn things around?

In brief

- Business-to-business (B2B payments represent a huge market of opportunity, worth an estimated $18.5 trillion in the US in 2016 alone. That figure is vastly above the predicted value of business-to-consumer (B2C) and consumer-to-consumer (C2C) transactions.

- Innovation is being hampered by complexity, when it comes to digitizing B2B payments. The multiple parties and steps involved in exchanging payments have meant that over half of B2B payments made in the US in 2016 were processed via check (according to the 2016 AFP Electronic Payments Survey).

- Change is underway, however. As digital technology takes over the wider payments space - particularly in the B2C market - client interest and investment in back-end development is only set to grow. The barriers are lowering to such an extent that 70% of businesses surveyed by AFP in 2016 thought it was 'very' or 'somewhat' likely that payments would be mostly electronic by 2019.

- Digitizing B2B payments is being seen as the next great frontier for payments firms, based on the size of the market and the progress already made by initial disruptors. Third-party startups, banks and card networks are taking an increasing interest. Western Union, a major player in the space, is already investing in the development of new platforms for B2B use. Others, like Fleetcor and Vantiv have been notably making acquisitions to buy into the technology required.

- Integration, however, holds the key to successful digital transformation. Although multiple firms have been partnering, building and buying into the technology needed to digitize B2B payments, big strides towards setting digital industry standards won't be seen until all the pieces of the puzzle - from transferring funds to invoicing - can take place on a single platform: a full-circle digital solution.


The B2C market has already seen waves of digital innovation. As consumers, moving from traditional payment methods like checks and cash, to digital channels, including online platforms and cards, was largely seamless. Somehow, businesses are still lagging behind, several years after this shift took place, leaving B2B payments reliant on analog, mostly physical channels. There are multiple reasons behind this delay, including the dynamic nature of B2B payments, where there are often multiple parties involved, with various terms. Platform providers have struggled to find a one-size-fits-all digital approach, let alone a full-circle offering that would put everything in one place.

Unlike when a consumer goes to a store, the process of money changing hands between businesses, suppliers and buyers, for instance, is far more complex. It currently relies on a paper trail of invoices, letters of credit and checks that can result in payment delays of several months - or more in some cases.

Change is coming, however. Innovations in the B2C payment market have boosted the level of digital payment technology now available, enabling some businesses to create crossover platforms that repurpose their consumer solutions. Platform providers and investors are also putting more into developing the necessary B2B technology, having seen the potential of the market - which dwarfs the consumer-to-consumer (C2C) and business-to-consumer (B2C) realms. Digitizing B2B payments represents an almost untapped golden opportunity that would reverberate on a global scale. This report will examine what has been holding businesses back, why and how things are developing now, and what everyone stands to gain from digitizing B2B payments, as well as exploring how firms can move into this new space, and the issues with creating a 'one-size-fits-all' solution.

Uncovering the B2B payments market

Payments between two merchants (such as a restaurant paying a wholesaler, or a retailer paying a supplier) define the B2B payments market, which is worth a staggering $18.5 trillion in the US alone according to data from BI Intelligence. By comparison, consumer-to-consumer payments (between two individuals, such as paying someone back, or splitting the cost of a meal) were worth just $709 billion, and business-to-consumer (such as paying for goods or services in a shop or online) had an estimated value of $5 trillion when assessed by BI in 2016. Between them, C2C and B2C payments take up less than a quarter of all payments. B2B payments make up the rest, and that share is only growing.

To comprehend why B2B digital automation has been so slow off the starting blocks, it's necessary to understand the complexity involved. In most B2C transactions, there is only one recipient and one sender. That's far from the norm when it comes to B2B payments, where firms may be in a constant loop of sending and receiving payments with multiple partners. The two key kinds of payments involved are:

1. Payables
This is the 'sender' side of the equation, where businesses are in debt to other businesses or organizations. Accounts payable refers to the 'amounts a company owes because it purchased goods or services on credit from a supplier or vendor.' This side of the industry is vast: an average organization in 2013 processed over 40,000 invoices a year on accounts payable - and this number has probably increased since then.

2. Receivables
Receivables sit on the other side of the table, where a firm has issued an invoice and waits for the payment in return. Accounts receivable are known as 'amounts a company has rights to collect because it sold goods or services on credit to a customer.'

B2B payments can also cross multiple borders, being either international or domestic. With a growing global marketplace and export relationships overseas, international B2B payments are becoming more prevalent, which in turn is helping to grow the market opportunity for payment providers and platforms. However, international payments often add more layers of complexity, including adding extra paperwork (such as letters of credit and taxation), making payments more complicated as the market scales.

Organizations use a wide range of solutions to manage accounts payable and receivables throughout the cycle. Software platforms such as Oracle and SAP help firms to keep track of invoices, so that payments are held in balance. Despite this digitization of bookkeeping and accounting, payments are still unlikely to be processed digitally. Lagging far behind other payment types, B2B payments are still largely paper-based.

Consumer payments have gone the other way: they're now highly unlikely to be physical or analog, and that transformation happened in a relatively short period of time. In 2012, nearly half of all US consumer payments were made by check or cash. That number has since fallen to 38% in a 2016 edition of the Fed's benchmark study. The shift has been to electronic forms of payment - where card and electronic payments rose by 10 percentage points over the same period.

Compare that to the data for B2B payments. In 2016, US commercial organizations were still making over half of their transactions via paper checks, according to the 2016 AFP Electronic Payments Survey. There are some positive signs of change: that number is lower than in 2004 when eight out of every 10 payments were analog, but some surveys have suggested that numbers have stagnated since 2013, showing that firms are still struggling to find the right digital solutions. In early 2016, over half of US businesses made 75% of their B2B payments with paper checks, according to another AP Now report.

Paper-based payments are complicated enough. When a consumer pays another consumer (splitting a meal, for example, or transferring monetary gifts), they often know one another. B2B payments often don't have personal relationships at their heart. Then there's the scale. The size of payments made between businesses can be huge. Multiple parties involved in a transaction may use different accounting systems and payment platforms, have different banks, and have different processes. Here's how it typically works:

1. A supplier invoices a buyer for goods or services. Even domestically, this can be complex. When crossing borders, this often involves additional steps like letters of credit, which extend the time, cost, amount of paperwork and steps involved to the process.

2. The invoice must be verified and approved or rejected. If it is rejected, the payment process ends there.

3. If the invoice is approved, the payer must write a check for the goods or services received. That check then needs to clear both the payee and the payer's banks, which may be separate institutions.

4. When the check has cleared, the payment is settled.

Older, larger industries are typically the most resistant to change when it comes to making B2B payments. That status quo is beginning to pose a problem in the following ways:

- Analog payments are far more time-consuming than their younger digital siblings. On average, it takes 30 days to complete a payment, according to figures from business consultants Deloitte. The wait is often longer, simply because businesses are taking more time to pay their suppliers. The larger the firm, the bigger this problem seems to be. Some major players wait around 120 days, according to data from the New York Times. That kind of delay can have serious ramifications for the business, particularly when they are unable to obtain lines of credit or loans from financial institutions, leaving them vulnerable to missing payments to other suppliers.

- Traditional payments are more expensive, in both directions. The average cost of processing an invoice is $5, according to Kofax, which rises and falls according to the size of the company. Invoice processing costs smaller companies more; for larger companies, where they are more likely to benefit from the efficiency of scale, that cost drops. Then there are the other costs, including the cost of processing checks, which can add up to around $360,000 a year for the average American firm, alongside any other payment fees.

- Paper-based payments are less likely to be secure. Over 70% of US firms have reported actual or attempted check fraud, according to the 2016 AFP survey. Checks are an obvious target: they can be forged.

These disadvantages associated with the current state of affairs for B2B payments disproportionately affect small to medium sized businesses (SMBs), who lack the resources to deal with issues on either the receiver or supplier ends. High costs, slow payment receipt, and the risk of fraud can have a bigger impact on these organizations, raising the stakes. It's also harder for SMBs to invest in digitization - leaving them most affected by the current situation, but least able to change it. The vast majority of businesses worldwide fall into the category of SMBs, hitting the economy as a whole hard when things go wrong. It's not uncommon for the largest, multinational firms to deal with smaller SMB suppliers within their supply chains on a regular basis. The scene is set for digitization, but implementing it is unfortunately far from straightforward.

Making and breaking adoption

Before exploring why B2B payments are so hard to digitize, it's necessary to understand how payment processes could be automated. These processes fall into three main categories:

- Digitizing processes
The gold standard for electronic invoicing is known as the Electronic Invoice Presentment & Payment (EIPP), where business are able to exchange transaction documentation, such as invoices, orders, and letters of credit. As the name suggests, everything is handled electronically and managed in one space, according to a report by D+H, who - along with Ariba - is one of the main providers of EIPP.

- Digitizing payments
Firms can choose to use electronic solutions over making payments via check, including commercial card products and wire transfers provided by their bank or networks like MasterCard and Visa. These shorten the time taken to process the payment significantly, allowing for the almost immediate management of funds.

- Consolidating communication and adding clarity
Software platforms are increasingly including features that reduce the amount of form-filling and paperwork required at either end of the payments process. By linking in digital banking, invoice tracking and letters of credit, the process can be kept in one place and monitored in real-time, rather than on separate platforms and half on paper, half online.

So, the potential is there, yet digitization is still far from the norm when it comes to sending and receiving B2B payments. Adoption is simply limited by the complexity of the process, and the idiosyncratic systems used by different firms and financial institutions. A number of players, with various accounting systems, different software, and banking institutions need to take a unified approach for digital payments to proceed seamlessly, according to Max Eliscu, the CEO of Viewpost.

Many businesses have an automated payments process on one side of the equation, but not the other, which creates stagnation. Innovation has been markedly faster on the payables side, but less so on the receivables side. Even when there is a solution for both sides, there's typically nothing holding them together, meaning that paper still plays a significant role until both sides are on the same cohesive, unified platform. Even more than that, this unified solution needs to be affordable and easily accessible to firms of all sizes and types.

Historically, affordability has proved to be a major stumbling block for businesses, as all the various tools currently needed to create a single digital system that can support all their accounts can come at significant upfront cost. Smaller to medium sized businesses (SMBs) in particular are unlikely to be able to support paying $20 to $50 a month per platform required. What's more, that lack of integration between systems means that firms often have to have multiple platforms in play to handle different areas of their business, or add-in services that create links between their own systems and those held by their suppliers and buyers. Smaller firms, where business costs are tightly controlled, are more inclined to avoid these kinds of processes, even if paper invoices and handling checks may cost them more in the long run. The costs aren't just limited to spending on new systems and software, however. Startup costs like changing processes and retraining employees can also dissuade businesses.

Similarly, payments companies also struggle to find the investment to build and develop new payment platforms, or acquire systems to move across verticals. Where demand is currently low from merchants, there is unlikely to be much investment in back-end technologies, which may be why many firms choose to adapt C2C or B2C systems to handle their B2B payments instead.

Tides are beginning to change. While the barriers of affordability, lack of technological investment, and seamless integration still exist, they are starting to erode as wider developments in digital payment technology filter across to the B2B market, sparking more back-end development and client interest. Around 70% of businesses surveyed by AFP in 2016 thought it was 'very' or 'somewhat' likely that most of their payments would be electronically handled by 2019. There are a few reasons behind this assumption:

- Business payments have historically followed the pattern set by consumer payment trends. Business owners are also consumers in their own right. Mike Massaro, CEO of Flywire, told BI Intelligence that, when consumers adopt products in favor of more convenience, they tend to bring those services back into their B2B roles at work. The huge developments on the B2C side of things must be having an impact on the availability of platforms for B2B payments.

- Card payments are now seen as the consumer status quo. Over 40% of consumer payments were made by card in 2012, rising to nearly 50% in 2015, according to data published in a Fed survey. That's having an impact which is starting to move over to B2B payments. The 2015 AFP report found that nearly 80% of businesses are issuing commercial cards to their employees, for buying goods or services on behalf of the business - which could translate into more supplier back-end payments handled digitally.

- E-commerce has taken off. American e-commerce retail sales are predicted to rise above $436 billion in 2018, according to BI Intelligence, in line with estimates set by the NRF. They're expected to topple $631 billion by 2020 - a rise of $385 billion on 2016. Increasingly, businesses are creating online supplier marketplaces, making it easier for payments to be made and received digitally between businesses, and mandating digital payment forms.

- Import/export commerce is on the rise. Delivery partner DHL expects cross-border e-commerce to top $900 billion by 2020. Likely to rise in line with increasingly digital consumer payment methods, cross-border B2B commerce is only set to grow. And, as international B2B payments are particularly complex, it is likely to drive innovation as businesses search for intelligent solutions to a growing issue.

The technology needed to facilitate truly digital B2B payments is becoming increasingly available and accessible. Once more, this is being driven by advances being made on the consumer payments side of things. Digital consumer payment technology provides a blueprint for firms looking for a B2B solution, which they can then adapt. That's bringing down many of the barriers, by allowing organizations to innovate by modifying existing technology, which in turn opens up the market to new tools.

Various types of technologies could be useful in creating cross-overs to B2B payment solutions. Cross-border platforms, which work to pre-empt bank fees by creating space for new transfer mechanisms - by blockchain or otherwise - could be one such example. Operating where merchants naturally communicate, chat-based payments could be another. The growing global popularity of credit cards will only help to boost adoption of corporate cards and digital banking systems. By far the best example, however, is faster payments and same day ACH.

The Fed are pushing financial institutions and banks to get on board with same-day ACH, which allows payment senders who use the ACH system to get hold of their funds more quickly. This is normalizing the technology and improving availability for businesses. Around 15% of ACH network volume could be attributed to B2B payments, according to 2016 data from the Electronic Transactions Association (NACHA). In 2016's last quarter, B2B represented the top vertical for same day ACH transactions by value. As other technologies take shape and go to market, similar trends are only more likely to emerge.

Businesses also have a financial incentive to develop B2B payment tools. For payment platforms seeing growing saturation in the B2C market, B2B could be the next big frontier for major players. If they get in early or find a profitable niche, the market opportunity looks huge.

Some of the available consumer payments technology is nearing the end of an adoption cycle, as seen in slowing trends reported across the industry. Since the wave of initial penetration and adoption, for instance, banks are seeing a slow down in the number of new digital banking customers, and associated developments - like mobile wallets - are also slowing down. For the B2C digital payment market, this could mean it's time to innovate again - or use the technology and apply it to new markets, like B2B. The uptake in consumer payment technology has meant that it is now in late-stage adoption, and no longer appears to be an area of high growth potential for payments major players.

The size of the potential digital B2B payments market could make it the next big 'greenfield' area. Early-stage disruption and the scale of the existing analog market make an appealing proposition for payment firms, banks, card networks and startups looking for the next frontier to cross. Some major players are already involved in developing or acquiring the necessary technology. Western Union, for example, recently announced it was developing a platform specifically for B2B payments. Vantiv and Fleetcor have also made acquisitions to buy into the space.

How digitization can become reality

Payments firms are taking a few different routes to entering the B2B payments space. Some major players are already making acquisition to buy their way into a share of the market, complementing their existing B2C or C2C offerings.

The biggest US payments processor Vantiv recently bought Paymetric - a platform which automates B2B payments and simplifies card transactions between organizations rather than consumers. They still have some distance to go to creating an all-in-one B2B payments solution, however. It is interesting to see that their intention seems to be to double their impact in a new vertical while remaining true to their main area of expertise: processing card payments.

Workforce payments specialists Fleetcor recently acquired Cambridge Global Payments who are responsible for processing in excess of $20 billion in cross-border B2B transactions. Fleetcor's customers include multinational corporate giants, so entering the B2B space with this acquisition allows them to offer a new product to a waiting existing market, defying claims that they were struggling.

Other firms are forging partnerships with businesses in the same space. For instance, market leader Paypal has partnered with B2B e-commerce company Oro to create a fuller payments service for Oro's customers. Oro's platform facilitates B2B e-commerce by offering a range of tools to manage the buyer-seller relationship, and automate the paper trail. Paypal also partnered with Xero - an invoicing platform - in 2015. That partnership allows merchants to be paid over Paypal for Xero-generated invoices, and enables invoice tracking in real-time. Both of these partnerships allow Paypal to continue to offer what they do best: payments technology, while also using partnerships to move across into lucrative B2B verticals.

Other firms are developing products to automate receivables or payables. Banks are bidding to simplify the payables process through digital automation. On the receivables side, Flywire (a cross-border payments provider enabling tuition payments from overseas) recently entered the B2B market. By applying its existing technology to the B2B market, Flywire is using its expertise in international payments to make cross-border payments less time-consuming and paper-heavy, without relying on bank wires. Their move places them ready to steal market share by being more versatile than existing players.

Third-party startups are innovating to unite all the various systems currently in play. A number of businesses are working to become the first to bind disparate payment processes together, creating a solution that would handle invoicing, payables and receivables seamlessly. One of these is Viewpost - a company that helps businesses already digitize their payment processes. Their flagship product is a digital interface that aims to 'talk' to most payment products on the market, bridging the gap, say, between a payee using one system and a payer using another. It's not simply a case of catalyzing the relationship between a bank and a business; it's about managing the whole connection, from business to bank, bank to bank, bank to card network, card network or bank to the other business. Just as you shouldn't need a new phone to download a Facebook update, you shouldn't need a new invoicing platform to go digital. Businesses need to find a third-party that will build that connection, baking in transparency and other services to simplify the process at the same time. Viewpost claims to offer just that, and is partnering with card networks and banks to build in more functionality.

So, why digitize?

The full impact of the digital revolution for B2B payments won't be felt until there is a clear industry-standard, end-to-end, affordable and available solution. Modernization will accelerate when all the key players can cooperate to put the pieces of the jigsaw together. On the consumer side, this came when third-parties like Stripe and Square focused on solving specific pain points, which made point-of-sale (POS) card transactions far easier.

The B2B market is likely to change in much the same way, with firms working to become the Stripe or Square of B2B payments. They need to focus on one issue, resolve it, gain customers, and then scale from there. No one business is likely to create a full-circle B2B payments system. Rather, multiple players need to combine their efforts by innovating in lots of smaller ways. All the types of innovation - innovation across payables and receivables, invoice tracking and streamlined communications - need to work in harmony to make full-scale automation a reality in the future.

Players must start with their own assets and existing expertise to best innovate. Payments businesses already know the consumer technology. They now need to find ways to modify and adapt that technology to create solutions that will work for the B2B vertical - which represents a huge and potentially lucrative market opportunity for early adopters. Additionally, finding ways to overcome the traditional barriers of affordability and availability are needed, to ensure new technology can permeate to small to medium businesses (SMBs) as well as larger firms.

Lee Pruitt