Payments have never been easier or more convenient to initiate and settle than they are today, especially on an individual basis. Payment companies, banks, and FinTechs finally are approaching the intersection of technology capability, frictionless experience, and ubiquity with the introduction of innovative payment solutions. Person-to-person (P2P) solutions such as Venmo and Zelle are revolutionizing how consumers interact with and pay each other. Venmo even has begun to achieve that coveted synecdoche status shared with only the most rarified of brand names. It’s no longer just the name of an app; it’s also a verb synonymous with making a payment. There’s a good chance that someone has asked you to “Venmo” them some money.
Only 11% of consumers say they prefer to pay with cash, with 40% saying credit cards and 35% debit cards.
Even consumer interactions with businesses have evolved to not only ease the friction of consumer-to-business (C2B) payments but also to improve every aspect of the point-of-sale (POS) experience. PayPal has become synonymous with online consumer payments, and helps businesses of all sizes to accept multiple forms of electronic payment. It was the first innovator to develop an alternative online payment option for consumers, and now holds enjoys a comfortable lead as the #1 online payment technology service provider in the e-commerce space.
Apple has Apple Pay, which aims to enrich the in-person C2B experience at the POS by streamlining the payment process and wrapping it in an augmented layer of security. For businesses that have a high volume of transactions, such as fast-food restaurants, Apple Pay increases the rate at which consumers make in-person payments, which can increase the business’s revenues and operating efficiency. There has yet to be widespread adoption of Apple Pay among consumers and retailers (or other solutions provided by competitors such as Samsung and Android, for that matter). One reason for this could be the limited number of brick-and-mortar businesses with POS systems capable of accepting these solutions (such as restaurants, gas stations, and retailers). If that’s true, consumer utilization of these mobile pay solutions likely will increase as businesses upgrade or replace their in-person POS systems over time.
Collectively, there are numerous competing payments solutions that have had a substantial impact on the way people interact and transact business, both in the U.S. and globally. And although cash is still king, it’s far less necessary to carry cash today than it was in the past, which is especially true for millennials and Generation Z. According to the a consumer payments study recently published by TSYS, only 11% of consumers say they prefer to pay with cash, with 40% saying credit cards and 35% debit cards (Note: 2016 U.S. Consumer Payments Study, TSYS).
Although P2P and C2B payments have evolved rapidly in recent years, business-to-business (B2B) payments still seem to dwell in a relative Stone Age of innovation and efficiency. As one of the leading payments infrastructure providers in the U.S., The Clearing House (TCH) recognizes this problem and is taking steps to address the challenges and pain points that continue to create inefficiencies in today’s B2B payments and cash management ecosystem. To best approach this issue, TCH is endeavoring to fully identify each of the contributing variables (that is, pain points and other contributing factors) that need to be considered when designing a solution that fully addresses the challenges in today’s B2B ecosystem. Even more important than identifying what each variable is, TCH is also striving to understand how each of the different variables affect the complexity of the problem and why these challenges have not been effectively solved in the past.
The Differences between Consumer and Commercial Payments
Over the past year, TCH has started to explore how it could leverage its unique position as a central payments infrastructure provider to address B2B challenges. Through performing market research, consulting with market participants, and engaging solution providers, TCH has developed a firm understanding of the complexity of the B2B payments challenge and the accompanying pain points that need to be resolved.
The absence of a standardized format for remittance advice and invoice information limits the ability of buyers and suppliers to connect and transact business because of fragmented payment networks.
Beyond identifying what pain points exist in today’s B2B payments and cash management ecosystem, it is also important to understand why these pain points exist, how the market has attempted to solve these challenges in the past, and why many of these attempts have failed. To begin, it is relevant to first understand how the full B2B transaction life cycle differs from P2P and C2B payments and assess how these differences contribute to the complexity of commercial payments.
Key differences between the transaction life cycles of B2B payments and P2P/C2B payments include:
- Difference in involvement and awareness: Because the number of businesses pale compared with the number of consumers, there is significantly less impetus driving the evolution of B2B payments. Virtually every person participates in P2P and C2B transactions on a regular basis, whereas the percentage of people directly involved in B2B transactions is much smaller. This is significant from an awareness standpoint, as most people don’t realize how inefficient B2B transactions are and therefore are indifferent to B2B payment innovation.
- Difference in time elapsed during end-to-end transaction life cycles: P2P and C2B transactions occur in very short periods of time from start to finish. Regardless of settlement, the customer experience of the transaction itself can take only a few seconds, while the average B2B transaction life cycle takes 34 days in the U.S. market (Note: 2016 Payment Practices Barometer Survey, Altradius). Relative complexities and formalities required of a B2B transaction itself help to explain why it takes substantially longer: generating a purchase order (PO), sending the PO to the supplier, processing the PO and generating an invoice, sending the invoice back to the buyer, processing the invoice, obtaining payment approval, sending the payment to the supplier, and, finally, awaiting remittance advice.
- Difference in the number of people involved in a transaction: P2P and C2B transactions typically require no more than two individuals to be directly involved in the average transaction, whereas B2B transactions typically require a chain of people to be directly involved at different stages of the transaction life cycle, increasing the overall complexity. The more people who are involved in the transaction (which is influenced by many variables, such as size of the buyer/supplier organizations) often requires more people to have greater access to transaction information about the payment, as well as formalized procedures that follow at each stage of the transaction.
- Difference in transaction volumes at any given time: Partially because of short transaction times and partially because of the inherent nature of the transactions, P2P and C2B transactions almost always complete the full transaction life cycle before initiating another transaction, allowing for easy tracking, processing, and reconciling. When it comes to businesses, however, it is common that numerous B2B payments coincide and exist at different stages of the payment life cycle in parallel at any given time, making it substantially more difficult to efficiently track, process, and reconcile each payment. Coupled with the average transaction life cycle spanning 34 days, it is simple to see how the process can be riddled with inefficiencies (Note: 2016 Payment Practices Barometer Survey, Altradius).
B2B Needs Differ Across Organizations
Adding another layer of complexity to solving the B2B challenge, there are substantial variances in the tangible needs across organizations that must be considered by any B2B solution provider when putting together a business case for a solution. Unlike consumer payments, where the needs of an individual are relatively uniform from person to person, the requirements that businesses value in a payments solution vary widely based on numerous factors, such as the market segment of the business, the industry in which it operates, and the audience it serves. Further, businesses are much more sensitive to the economic viability of their payment solutions, which is influenced by an organization’s specific needs, the amount of money it is willing to invest in a solution, and the benefit realized by the organization after integrating a solution.
From the perspective of a B2B solution provider, there are many factors that must be considered and addressed when designing a solution, including the following:
- B2B needs are largely influenced by market segment (i.e., small-to-midsize businesses compared with large corporations): Just as there are significant differences in the operating models of small businesses compared with large corporations, there are significant differences in the types of payment challenges that face organizations across different market segments within the same industry. There are unique considerations that need to be accounted for when developing a B2B solution to meet the needs of large corporations that don’t necessarily apply to middle markets and small businesses, such as the ability to integrate with an array of different legacy enterprise resource planning (ERP) systems and platforms. Similarly, there are unique considerations that apply to small businesses that don’t apply to middle markets or large corporations, such as the tendency to rely more heavily on manual and/or paper-based processes for back-office accounts receivable and payable functions. From the perspective of the solution provider, it’s easier to build a business case around a solution that addresses the needs of large corporations over the needs of small businesses, because large corporations have more money to invest in a solution and generate revenue for the solution provider.
- Different industries have unique B2B needs, varying levels of market saturation, and significant maturity of standardized practices and processes: Payment volumes can differ drastically from industry to industry. For example, take a goods retailer that purchases inventory from many different suppliers and has a high rate of inventory turnover. It will originate a greater volume of transactions than a small consulting firm that sells services to a smaller number of clients. Additionally, many of the more mature and established industries have operated in somewhat closed niche ecosystems over the years, resulting in varying degrees of B2B payment maturity and B2B solution saturation across industries. This is evident in developed industries, such as healthcare and manufacturing, which have seen the establishment of industry-specific payment networks, B2B solutions, and even standardized remittance messaging formats.
- Designing a solution to meet the needs of a specific target market (i.e., segment or industry) vs. the needs of the market as a whole: Because there are many unique variables to address across different market segments and industries, it’s substantially easier for solution providers to develop a B2B solution that meets the needs specific to a particular market segment or industry as opposed to developing a solution that meets the needs of the whole market. For this reason, there have been a plethora of different FinTechs and service providers that have tried bringing their own unique solutions to market to try and solve individual pieces (i.e., pain points) of a larger puzzle. Although this approach has helped improve B2B practices for some market participants, it also has resulted in a fragmented market where many businesses and payment networks operate in isolation from one another, often requiring businesses (primarily in the middle market) to enroll in multiple networks in order to perform transactions with all of their trading partners.
Pain Points Limit B2B Innovation
After breaking down the fundamental differences between B2B payments compared with P2P/C2B payments and sizing the complexity of factors that affect an organization’s B2B needs, it becomes easier to understand why the current state of the B2B payments ecosystem is filled with pain points, inefficiencies, high costs, and limited capabilities. Although there are many B2B solutions already, many of which perform niche functions, there still doesn’t seem to be a complete end-to-end solution capable of winning over the whole market. The simple reason for this is that none of the solutions are able to effectively meet the needs of the market, resulting in relatively low market saturation. Until a solution exists that more effectively addresses the needs of the market and increases the marginal benefit for end users through eliminating pain points, increasing the return on investment, simplifying solution integration, etc., businesses are likely to be reluctant to invest in solutions.
Several of the key pain points in the B2B payments ecosystem that need to be resolved to achieve greater B2B efficiency and facilitate innovation include:
- Lack of reliable remittance advice for electronic payments: The absence of a standardized format for remittance advice and invoice information limits the ability of buyers and suppliers to connect and transact business because of fragmented payment networks. It’s costly to process payments manually, and this is often required when remittance advice is received in an unfamiliar format. According to the 2016 AFP Electronic Payments Survey, over 50% of all businesses are unable to utilize straight-through processing (STP) for any payables or receivables, while less than 10% of businesses process more than 80% of their payables and receivables via STP (Note: 2016 AFP Electronic Payments Survey, Association for Financial Professionals).
- Heavy reliance on paper checks and difficulty convincing customers to pay electronically: Fifty-one percent of B2B payments continue to be made by check,5 according to AFP’s 2016 Electronic Payments Report, up slightly from 50% in 2013 (Note: 2016 AFP Electronic Payments Survey, Association for Financial Professionals). There are many reasons for this (including familiarity, convenience, reliability of remittance advice, and internal resistance to change) despite the higher costs associated with checks compared to Automated Clearing House (ACH) payments, which can reduce accounts receivable and payable costs up to roughly 50% to 60% compared with the cost of processing check payments (Note: 2016 E-Invoicing/E-Billing Digitization & Automation Report, Billentis and Tungsten Network). Additionally, unlike remittances received from electronic payments, checks continue to be an extremely reliable source of remittance advice. Although many businesses struggle to reconcile electronic remittances, reconciliation of check payments can be much easier because of the reliability of lockbox services.
- High processing costs associated with checks: High processing costs associated with traditional payment methods (i.e., checks) were identified as the leading payment management challenge facing their business by 35% of respondents to PayStream’s 2015 electronic payments survey (Note: 2015 Electronic Payments and Card Solutions in 2015, PayStream Advisors). Additionally, the businesses that rely most heavily on check payments for the majority of payments are also less likely to change their payment management strategies by transitioning to electronic payments compared to other organizations (Note: 2015 Electronic Payments and Card Solutions in 2015, PayStream Advisors).
- Market fragmentation caused by disparate B2B solutions and payment networks: As previously mentioned, the B2B payments ecosystem is highly fragmented and is largely made up of many different solutions that operate in isolation on closed-loop networks, unable to effectively interact and connect with other systems. The types of B2B solutions contributing to the fragmentation can include anything from ACH payment portals, ERP solutions, e-invoicing and e-billing solutions, treasury management hubs, or commercial cards. The different types of B2B solutions often leverage unique messaging formats, processes, system compatibilities, and capabilities across different industries and market segments. As a result, interoperability can be a huge challenge when two organizations that use incompatible payment solutions try to transact business with each other electronically.
- Lack of integration between electronic payments and accounting systems: STP can substantially reduce the costs associated with manually re-entering the same pieces of information repeatedly over an entire sequence of events – however, the high costs associated with integrating a solution prevents many organizations from making the investment. As a result, 69% of organizations cited lack of integration between electronic payments and accounting systems as a leading barrier to electronic payments adoption (Note: 2016 AFP Electronic Payments Survey). Because of disconnected systems, organizations often complete duplicative invoice processes across multiple departments. A limited end-to-end view of transactions associated with multiple payments methods results in extra costs, delays, chargebacks, and payment cycle disruption, all of which reduce the benefit to the end user (that is, the buyer/supplier).
- Growing businesses have difficulty scaling B2B payment solutions and processes effectively: As an organization grows over time and becomes more complex, there are often difficulties scaling its B2B solution. If a business does not invest in a scalable B2B solution to fit its needs, it may be incurring high procurement/invoice processing costs that threaten their ability to maintain a competitive edge in the marketplace.
Guiding Principles to Facilitate B2B Innovation
As a leading payments infrastructure provider in the U.S., The Clearing House recognizes it is uniquely positioned to be a catalyst for innovation in the B2B payments ecosystem by making changes at the core of the payments infrastructure to address many of the pain points identified above. More specifically, TCH hopes to develop an industry utility that would run in parallel with core payment processing systems and allow B2B solution providers, banks, payment network operators, and ERP solution providers to easily interact with each other. Essentially, the utility would act as a means of securely accessing buyer- and supplier-side transaction information (for example, match associated invoices and remittance information) to enhance the B2B capabilities for the end users (including buyers and suppliers).
While the conceptual framework for such a utility is still being refined, informed by input from many stakeholders, the guiding principles being used to design the utility have been ratified, including:
- Collaboration with banks and other B2B solution providers is key to achieving the necessary reach: Because TCH is owned and operated by the largest 25 banks in the U.S., it is uniquely positioned to engage and seek market input. Likewise, the utility would not be a replacement of existing B2B solutions because it will not be an end product or provide any service to the end customer. Rather, TCH hopes to provide equal accessibility to any bank, solution provider, or payment network that chooses to connect with the utility to enhance its B2B capabilities across its existing product suite and network.
- The utility should have a flexible architecture and simple design: To achieve both success and sustainability, the B2B utility would need to be as simple and flexible as possible. It would need to avoid “heavy,” overcomplicated solutions that lead to complicated development life cycles as enhanced capabilities are layered in and complementary features are developed to work with the industry utility.
- Minimizing impact to the existing business models of suppliers and buyers is critical to maximize participation: One of the primary reasons that previous initiatives to solve for B2B pain points have not succeeded is because the market tends to reject solutions that have a high degree of impact on the operating model and associated processes of buyers and suppliers. With this in mind, the utility should allow for effective integration without extensive updates to existing B2B solutions.
- Ubiquitous solution application for all market participants and payment types: Although demand and application of the B2B utility will vary from industry to industry because of different market ecosystems, all B2B market participants should be able to leverage the B2B utility for all types of payments, including traditional paper checks.
The Clearing House is far from the first organization to try and solve the fundamental B2B challenges that create substantial macroeconomic inefficiencies across the market. There have been many previous solutions and initiatives that have tried to address B2B challenges, but they have experienced only limited success. Although these previous initiatives have somewhat improved the B2B ecosystem and capabilities over the years, there still isn’t widespread adoption of B2B solutions and macroeconomic improvement across all industries and segments.
We must focus on the end-user pain points of reconciliation, access to electronic payment methods, and bridging the market fragmentation that currently exists.
By researching past B2B initiatives, identifying characteristics of historically successful (and unsuccessful) solutions, and engaging with market participants to understand what the market needs, the following have been identified as critical outcomes for a successful industry utility:
- Enhanced buyer/supplier connectivity: Providing a more accessible and efficient means for buyers and suppliers to connect and transact business electronically regardless of payment type, solution, or network used.
- Increased value offering of existing B2B solutions for end users through enhanced reconciliation capabilities: By providing a means for B2B solution providers to easily access reliable transaction data through the utility to enhance payment capabilities of existing solutions, especially reconciliation, the marginal value for end customers would increase in relation to the cost.
- Increased utilization of electronic payments for B2B payments/reduced reliance on checks: If the industry is able to successfully enhance the convenience, efficiency, and accessibility of electronic payments for B2B transactions, utilization of electronic payments would increase, thereby reducing reliance on traditional check payments.
- Increased accessibility to B2B solution capabilities for small-to-midsize businesses: If the utility is able to provide easier access to buyer- and supplier-side transaction data for associated remittances and invoices through readily accessible channels, the effort required to enable basic payment capabilities such as reconciliation could be reduced, resulting in greater accessibility to B2B solutions for businesses with limited access to adequate capital or resources
As an industry we are far from solving the B2B problem. It will take some time and effort to achieve the scale necessary. We must focus on the end-user pain points of reconciliation, access to electronic payment methods, and providing sound capabilities that can be leveraged across market segments. The Clearing House and its owner banks will continue to work with the industry to identify how it may play a role in addressing any or all of those issues.