What’s so Special About Business-to-Business (B2B) Payments?
B2B payments are not a new opportunity. The payments industry is littered with ambitious business payment solutions that have faltered. Past failures are largely due to an exaggerated focus on buyers (at the expense of suppliers), grandiose network affect expectations, and an incomplete understanding of the complex financial supply chain.
The broader payments industry has an on-again, off-again infatuation with B2B payments but they are currently in vogue. Recent announcements (PayPal’s various B2B APIs, Western Union’s acquisition of Travelex Global Business Payments, Intuit’s PaymentNetwork) and renewed B2B focus among industry players such as NACHA have fueled interest – and investment – in business payment solutions. I’ve been spending a lot of my time explaining what makes B2B payments so special and thought I’d share a few highlights.
Share your B2B payment perspectives – We’re looking at both big enterprise and small company angles, and at both users (companies) and providers (processors, networks, banks, service providers) as we refine our perspective on the Future of B2B payments. If you have evidence that the ePayment conversion rate is increasing – that we’ve somehow reached (or are reaching) a “tipping point” in B2B payments – we want to hear it. Learn more here.
When it comes to payments, transactions between businesses are very different than transactions between businesses and consumers. Here I’ve summarized some of the primary differences:
(You can download the image of this cheat sheet graphic here.)
- Billed? Consumers may or may not receive a bill from the seller
- Timing? Consumers typically pay at the time services are delivered or goods are purchased
- Pay one or many? Consumers typically pay for one bill at a time
- Pay in full? Consumers usually pay their bill in full
- Remittance? Consumers only provide an explanation of what they are paying for when they write a check to pay recurring bills (e.g. utilities) by mail; typically they tear off a coupon stub from the bottom of their statement and mail it with their check payment.
- Control? Consumers do not have control over payment timing; or rather, they can pay late but there may be consequences!
- Who pays to pay? The seller/merchant bears the cost of the payment, whether the payment is a check processed via a lockbox, a card payment at the point of sale, or cash.
- Electronic or paper? Electronic payment adoption is far greater for consumers, surpassing checks for bill pay back in 2007 and widening the gap each year. At the point of sale debit and credit have become dominant, although cash also remains popular.
- Payments ecosystem participants? Consumer payments are enabled by a wide array of bill presentment and payment solutions, POS merchant services, independent sales operators (ISOs) selling merchant accounts on behalf of banks, and gateway and shopping cart providers that serve the eCommerce market.
- Billed? Businesses always receive invoices from suppliers – not “bills” – and often the individual responsible for approving the expense is not the same person that initiates payment. This necessitates a workflow process to ensure invoices are routed to the appropriate approver. It takes weeks for the average company to review and approve vendor bills for payment. Yet, discounts are often available for paying within ten days (see “Timing” below).
- Timing? Suppliers typically grant their customers credit (assuming they believe they are credit worthy). Payment terms range from 30 to 120 days; although discounts are often available when payment is received within 10 days.
- Pay one or many? Business buyers often pay multiple invoices at a time – as few as half a dozen up to many thousands (think of a consumer packaged goods company selling to Wal-Mart, or AT&T providing phone service to thousands of employees of an energy company).
- Pay in full? Buyers do not necessarily pay the amount of the invoice. They deduct from the invoice amount when the quantity received isn’t the quantity ordered, when goods are damaged during shipment, or when they believe that the price should be different. And occasionally they short pay just because they can due to the relative power of big buyers vs. little suppliers.
- Remittance? Buyers provide an explanation of “what’s this payment for” along with their check payment to aid seller in applying funds against open invoices in accounts receivable (AR). The process of applying payment – cash application – can be tedious and painstaking. It’s very hard to associate electronic payments (ACH, wire) with unpaid customer invoices because the remittance data doesn’t flow through the payment networks reliably.
- Control? Buyers – particular large ones – exert control over payment timing and method. In recent years accounts payable (AP) departments have become advocates of purchasing cards because they streamline processes and pay an attractive (and addictive) rebate.
- Who pays to pay? The buyer usually bears the cost of the payment – typically costs associated with check processing. Although when payment is affected by a corporate or small business credit card the supplier absorbs the payment cost. This is one reason why many suppliers resist accepting card payment from their large buyers.
- Electronic or paper? The majority of business payments are still made via paper check. Checks will remain the status quo for the time being (refer to this Payments Views post to understand why).
- Payments ecosystem participants? The B2B “financial supply chain” ecosystem is vast – everyone from ERP vendors, commercial banks, billing and collections solution providers, business process outsourcing firms – participate in business payments. Individual industries often have bespoke solution providers, too. Plus there are a wide range of interrelated business processes (pricing and promotions, CRM, ordering, inventory management, etc.) that each have specific providers.
Solution providers that have deep experience in consumer payments often realize too late just how complicated the business payment landscape can be. Meanwhile, businesses are hungry for improved processes and the means to unlock key performance data (by customer, segment, product) that is often tied up in accounting systems inhibiting accurate reporting and forecasting.
If you are working on B2B payment innovations, or contemplating entering this complex but very large market, feel free to reach out to discuss business payments.