While B2C (retail) payments have seen disruptive and continuing innovation in recent years, modernization efforts for B2B payments have been barely perceptible. This is despite a 2018 Statista estimate placing the global B2B market to be worth ~USD 125 trillion (compared to just USD 52 trillion for B2C). But that was before the pandemic struck, forcing the workforce to remain indoors, and a growing clamour for digital could be heard in virtually every business domain. The ongoing pandemic has inevitably accelerated the digital shift for the B2B segment that needs to adjust to a sudden spike in customer demands through online and digital channels. Both purchases and returns must be dealt with swiftly, ensuring customer delight in a fiercely competitive market. Businesses are increasingly realizing the need to upgrade their legacy business practices and outdated payment methods – triggering a huge opportunity for FinTech worldwide.
A Quick Overview of B2B payments
Juniper Research defines B2B payments as any payment between businesses for goods or services, regardless of whether a payment is in one country or international and includes corporate expenses payments (such as business related per-diem or travel). B2B payments can be one time or recurring depending on the contractual agreement between the buyer and the supplier. Nowadays some businesses are also offering part payments to encourage pre-payment and reduce returns and cancellations.
B2B payments are far more complex than B2C payments since they require more time to approve and settle. Most B2B invoices typically require over 14 days to process assuming 2-5 signoffs from approving authorities. This can increase to a month for paper cheque payments which is still the method of choice for most businesses. Delays hurt businesses as they have to carry the fixed costs that in turn intensify cash-flow issues. This is in sharp contrast to B2C or P2P payments where real-time payments are becoming the norm.
It is important to bear in mind how B2B payments are different from B2C payments. Retailers usually buy goods from distributors and pay them only after the goods have been sold. Distributers buy the goods from manufacturers and pay as per agreed terms such as net-30: up to 30 days after delivery of a shipment. Manufacturers can take even longer (e.g., net-60) to pay their own suppliers (of raw materials for example). Flexible payment terms hurt the cash flow of suppliers but are important to boost sales and increase order size while retaining customer loyalty. The management of the supply chain (Investopedia defines it as the network between a business and its suppliers to produce and distribute a specific product to the final buyer) is a crucial process for businesses because a well-designed supply chain can significantly reduce costs while speeding up the production cycle. Of this, the order-to-cash (O2C) order processing cycle which covers all steps from initial order placement to invoicing, is especially important because the quicker a company can transform their raw materials into saleable products, the less cash will be tied up in the various stages of inventory, releasing the resources needed for reinvestment and growth.
Businesses thus deal with multiple entities with whom they do business, and usually have Accounts Receivable (AR) and Accounts Payable (AP) teams to manage payments. AR is the balance of money due to the business for goods or services delivered but not yet paid for by buyers. AP represents the money owed to suppliers.
B2B Market Segmentation
The following schematic outlines the channels and value-added services for domestic and cross-border B2B payments:
While Markets and Channels in the above representation are self-explanatory, value-added services are clarified below:
Today, many businesses are using value-added services to manage payments and optimize cashflow:
• To manage cash flow, many businesses resort to Invoice financing (also called AR financing) whereby they borrow money against their AR from a third-party lender by paying a percentage of the invoice amount to the lender as a fee for borrowing the money. Businesses also take resort to factoring, where they sell their open invoices to the factoring company (“factor”), and the factor collects payments for the invoices directly from its customers against a fee.
• Businesses are also automating AP processes that are complex and require considerable manual intervention. With automation, paper invoices are scanned to extract and store the data in the cloud, then matched with purchase orders and automatically routed to the approving authority after which they are sent to the ERP or accounting system for payment. All Invoices are securely archived for financial audit purposes. Complex business logic and functionality in the ERP and accounting systems used by enterprises are cited as one of the key reasons why B2B payments have not caught up with B2C in the move to digital.
• Businesses that are into international commerce use Trade Financing to minimize risks such as currency fluctuations, non-payment, political instability and so on that are typical for cross-border trade and commerce. This involves introducing a third-party to remove the supply and payment risk – for e.g., banks may issue lines of credit to help importers and exporters, or insurance can be used for shipping and delivery of goods and protect exporters from non-payment by the buyer.
Key Challenges of B2B payments
Fraud: Large value payments combined with complicated paper-based interactions between businesses lead to fraudulent activity going undetected in the many levels of financial dealings. Invoice fraud is widely prevalent thanks to the widespread use of paper-based manual processes to approve and pay invoices. Business Email Compromise (BEC) is a typical B2B fraud, where email systems are compromised by fraudsters (often internal employees) who manipulate invoices and redirect payments to make money or avoid paying taxes. The pandemic has in fact intensified internal fraud. Some companies had to let remote working AP teams take cheque-printing machines to their homes, thereby leaving the door open for cheque fraud. For those using real-time payments, Authorized Push Payments (APP) fraud is as much of a problem in B2B payments. It is very important to assess the financial reliability of vendors and partners at the time of onboarding. This can be done by collecting credit information and past financial performances to ensure that new suppliers can pay on time.
Disparate Systems: Businesses also face challenges in integrating with the myriad systems followed by different companies and their varied payment preferences. These complexities make B2B payments very difficult to reconcile.
High Costs and Processing Delays: Large amounts of money transfers at frequent intervals mean high charges of making payments. Coupled with the considerable time taken to process different types of payments, it may be difficult for businesses, especially smaller firms to absorb these overheads.
Tracking Pains: Due to these complexities, B2B payments can be difficult to track. The world is slowly moving towards instant payments messages with additional remittance data, but it will be some time before businesses can adopt the new standards.
Technology to the Rescue
Many B2B companies are now moving to automate their largely manual processes using new technologies to lower costs, increase speed and minimize errors. Businesses are employing AI-driven Robotic Process Automation (RPA) that automates manual tasks such as reading invoices and adding details to payments systems.
Companies, especially SMBs burdened with poor cash flow arising out of net-30 or net-60 payment terms are using Credit-as-a-Service (CaaS) solutions that streamline payment and credit management systems. CaaS helps digitize B2B commerce by addressing the typical challenges of the B2B segment such as high AR costs, increasing DSO (Days Sales Outstanding – the average number of days taken by a company to collect payment from customers after completion of a sale), lack of payment options for customers, inability to scale and so on. Businesses can outsource their AR to CaaS, get risk-free credit lines and funding to counter high credit-card fees and rising DSO. Importantly, CaaS provides customers the freedom to pay when they want, how they want and where they want.
Billing is another area that can benefit from technology. By moving to a subscription mode of payment, firms can use technology to save costs and streamline the payments experience. FinTechs are already disrupting this area with Intelligent Subscription Management Systems that enable businesses to manage bills from a central hub, leading to a frictionless B2B bill payment process that is no longer prone to human error.
Cross-border B2B and Payment Orchestration Platform (POP)
Businesses face a growing friction while selling overseas as they must meet the payment preferences of buyers and conform with local regulations in addition to facing the usual complexities of legacy cross-border payments practices like correspondent banking and manual processing.
To address these pain points in a world that is seeing a surge in cross-border commerce, a Payments Orchestration Platform (POP) market has emerged where POP service providers are unifying all components of a business’ payment flows into a single technology layer. Payment orchestration is a technology solution that empowers merchants to create their global payment setup from a single access point, giving them the freedom to choose from the best payment partners worldwide. This helps to remove integration complexity with multiple PSPs by enabling merchants to add or switch payment part¬ners in one click and localize their checkout with preferred payment methods in different regions.
The POP market is expected to grow 20% annually between 2021-2026, according to a report from pymnts.com
Role of Blockchain in B2B Payments
The complexity of the supply chain logistics for any business makes it a good candidate for B2B Blockchain. The complete records for all transactions from order tracking, raw material purchase and shipment, manufacturing, quality checks, return processes for damaged products and so on can be fully documented and safely stored in a blockchain, giving businesses the means to track and check any part of the process at any time. Walmart is already using blockchain for tracking goods and suppliers.
Smart contracts on blockchains provide the power to execute instructions based on predefined triggers without any manual intervention. The results that are recorded on the blockchain are immutable. Blockchain Supply Chain Networks leverage Blockchain to track each stage of the supply chains that can be linked to payments via smart contracts to automatically release funds when certain conditions are met.
For cross-border B2B payments, businesses are utilizing Blockchain Trade Finance Networks. The immutability, transparency, traceability, smart contracts, and network consensus mechanism of blockchains are used to tamper-proof trade finance records and ensure automated execution of contractual obligations.
Leading B2B Solutions and Industry Initiatives
In 2018, Mastercard introduced Mastercard Track Business Payment Service, one of the first open-loop commercial solutions. It is an Azure-based B2B platform that connects buyers and suppliers with networks, banks, and solution providers. The solution streamlines and automates the procure-to-pay-process – enabling businesses to efficiently manage compliance and payments. More recently, Mastercard has enhanced the offering with a new supply chain finance capability by unlocking a network for working capital that covers businesses and global corporations alike. Mastercard partners can now provide their business customers with access to affordable working capital.
In 2019, Visa announced its Visa B2B Connect, a first of its kind cross-border B2B payments network that removes friction on cross-border corporate transactions by facilitating transactions from the bank of origin directly to the beneficiary bank. The network’s unique digital identity feature tokenizes an organization’s sensitive business information, such as banking details and account numbers, giving them a unique identifier that can be used to facilitate transactions on the network.
In 2021, global payment technology company Splitit announced Splitit Plus, a new service enabling merchants of all sizes to offer payment installments to their customers in minutes. Any merchant can now activate Splitit through the Splitit Plus gateway, or any integrated gateway partner supported by Splitit.
Back in India, players like Visa-backed Paymate are offering full-stack B2B payments solution for businesses of all sizes. This includes payments automation, e-invoicing, e-procurement, e-discounting, and working capital optimization. To ease access to liquidity for the 60 million underserved Micro, Small & Medium Enterprises (MSME) segment in India, the Rajya Sabha has passed the Factoring Regulation (Amendment) Bill in July 2021 to widen the scope of entities that can engage in the factoring business. This enables 9,000 non-banking financial companies (NBFCs) to participate in the factoring market, instead of the previous seven, boosting cash flow to small businesses.
The Federal Reserve and the Business Payments Coalition recently announced the E-invoice Exchange Market Pilot and the Remittance Delivery Assessment Work Group, two industry efforts aimed at accelerating the modernization of B2B payments in the United States. While the former team will work to advance the development, testing, implementation and oversight of an e-invoice exchange framework, the latter will help determine the viability of a framework to support the exchange of electronic remittance information across all payment types. The objective is to establish an operational B2B invoice exchange framework for the U.S. market in 2023 that efficiently delivers and accepts electronic remittance information for B2B payments.
Due to its very complex nature, B2B payments will take time to progress to the level of digitization attained by retail payments. Banks and Fintechs have already started to provide digital channels to take advantage of the huge B2B payments market, but the intricacies are too many. Moving away from legacy manual processes will take specialized know-how to establish a digital infrastructure that businesses can rely on.
There is considerably more money in the B2B segment due to the massive transaction volumes flowing between businesses. However, when compared with the B2C space, there are relatively fewer B2B transactions and mostly with a loyal customer base. The larger transaction sizes also expose them to fraud, requiring extensive risk management. These factors could make the B2B market less attractive to FinTechs. Therefore, while the funding and cash flows may continue to be handled by banks and FIs, technology is likely to be better utilized for orchestrating payments by POP service providers.
We are sure to see innovative new fintech and challengers come up with disruptive new services to take advantage of this growing market in the days to come.