The business-to-business (B2B) transaction world is immense: over $2 trillion in annual sales in the U.S. alone, American Express Co. estimates. Traditionally, businesses that sell goods or services to other businesses use invoice-based systems in which customers make payments by check. But the benefits of accepting credit cards and other forms of electronic payment are increasingly apparent.
These include reduced chance of default, streamlined accounting and payment in as little as three days versus 45 or more days. Enhanced by the widespread use of credit cards for other business-related expenses, such as travel and entertainment, the transition to bankcard payment systems has been gaining momentum.
According to Celent LLC researcher Alenka Grealish, it is nearly inevitable that over half of all B2B transactions will be made electronically by 2012. But "the pace is extremely slow, encumbered by manual processes, legacy systems, proprietary formats and other priorities."
Still, $1 trillion in annual sales offers huge opportunities for ISOs and merchant level salespeople (MLSs) who break into B2B markets. "Research indicates that there are more than 650,000 cash-only merchants in the wholesale category, clearly a major opportunity for American Express and the card industry," said Kirsten Neuman, Vice President of B2B Industries at AmEx.
Aaron Bills, Chief Operating Officer of 3Delta Systems Inc., said this market is "tremendous, and under-served. You're looking at 35% to 40% growth in a year in B2B. You can't find that in retail. There are fewer transactions in B2B, but they're bigger transactions. In retail the average ticket may be $35; in B2B it's $750."
AmEx revealed that 49% of American Express Small Business or Corporate Card members have used their cards to spend $10,000 or more on a single occasion.
"B2B payments make up about 35% to 40% of total payments," said Nancy H. Atkinson, Senior Analyst at Aite Group LLC. "Consumers make more payments because there are more of them, and they tend to pay individual invoices with a single payment. Businesses, on the other hand, tend to combine invoices and make a single payment for multiple invoices from the same supplier."
The dilemma is that the infrastructure investment required to deploy electronic payment systems can be steep. And the reasons for accepting cards or electronic payments are not as pressing, or as clear-cut, as they are for the retail or hospitality businesses ISOs and MLSs are accustomed to serving. The B2B market is less competitive, but more complicated.
Bills admits the learning curve for selling in the B2B sphere is steeper, but he said the rewards are well-worth the extra effort. "It's more of a consulting approach," he said. "You have to be more fluent in more topics. Transactions in retail are pretty standardized; you hand over your card at the register.
"In B2B you'll find many more card not present transactions, and one business may sell in multiple ways and in multiple locations. So you'll probably spend more time getting to understand your clients' business models upfront. But this is value-based selling, which is much more interesting _ and lucrative _ than price-based selling. B2B processing isn't commoditized."
Atkinson said by using purchasing cards (p-cards), suppliers can reduce days sales outstanding (DSO), which is the average number of days a company takes to collect payment after a sale has been made.
However, she noted suppliers "have to pay the interchange, and that may not be acceptable if they offer significant pricing discounts to their clients. It is a much harder job to convince suppliers to accept p-cards than it is to get a buyer to want to use one."
The current number of electronic transactions is just the tip of the iceberg: Twelve percent of B2B transactions are card transactions; another 18% are automated clearing house (ACH). Just under 7 billion B2B transactions, or more than 70%, are settled by check annually.
"With over 4 billion B2B transactions migrating to e-payments over the [next] six years, the land grab for transaction volume will be intense," Grealish said.
Atkinson expects card payments will continue to grow because of the increasing online activity of B2B trading partners. "Plus, the movement from paper check payments will lead to more card payments as well as conversions to ACH," she added. "I estimated that p-cards made up about 2% of noncash B2B payments in 2006 and will grow to 5% of total B2B payments by 2010."
Neuman said it will take movement on both the acquiring and the issuing sides to tip the scales. "American Express' potential to provide value to B2B buyers and suppliers is supported by the unique competitive advantage we have of being a closed loop network," she said.
She added that AmEx has "direct relationships both on the issuing and acquiring side of the business, allowing us to leverage these relationships with the merchant and the cardmember, and being able to provide merchants with unique business insights and marketing capabilities."
Celent's research shows that companies are in transition, migrating from checks, investing more in e-payment systems and lowering their payment processing costs. The research also revealed that 88% of the companies surveyed are investing in payment system improvements, setting the stage for future electronic payment growth.
"The role of technology and third-party providers in adoption of e-payments is profound," Grealish said. "Advanced technology is enabling rationalization of labyrinthine payment systems, sophisticated least-cost routing, improved automation (like the auto correction of exception items), and ultimately 99% straight-through processing.
"The ideal state of payment processing is an integrated payment gateway supported by a smart decisioning engine. Although such a gateway is still more vision than reality, the technological pieces and players are gradually coming together."
Accounting departments are handling increasing numbers of electronic transactions, including debit or credit card use for gasoline, travel and entertainment expenses; conference registrations, books or subscriptions purchased online; and prepaid card use for payroll, benefits or incentives.
Systems must be improved to accommodate these electronic payments. And Bills noted that once companies have upgraded their operations, the switch to electronic payments will be relatively painless. "Many companies are already investing in p-card systems, and these systems can convey enormous amounts of information efficiently," he said. "The tracking abilities and the efficiency gain warrant the interchange fees pretty easily on that level."
Grealish said ghost cards (virtual cards) and p-cards integrated into accounting systems (like the MasterCard e-P3) are "breathing new life into the p-card and are raising the value charged on p-cards.
"One top issuer reports that the average 'ghost card' transaction is $3,000 compared to $200 or $300 for p-cards. Companies that weren't interested in managing plastic cards are showing interest in ghost cards."
Atkinson reported that large corporations and middle-market companies are using p-cards to streamline smaller-value repetitive purchases. "Purchasing cards are growing at about 20% year over year," she said. "When used for purchases, data about the purchase is automatically captured and provided to the procurement manager at the company.
"The use of these cards can be restricted to approved vendors, and single transaction or period of time amounts can be controlled."
According to Atkinson, the biggest card issuers are striving to integrate purchasing cards into companies' normal procure-to-pay cycles as an alternative to cutting checks. And, banks are encouraging larger p-card purchases by offering rebates and helping companies target suppliers to enroll in p-card acceptance programs.
To control the extension of credit, she added, banks provide online, real-time limit adjustments automatically after each purchase. In addition, p-card capabilities provide accounting efficiencies for merchants and acquirers.
Grealish said a number of factors are coming into play that may speed up the adoption of electronic B2B payments: the demise of check float, for example. In her report "Crossing Frontiers in Business-to-Business Electronic Payments," she writes:
To put a dollar figure on the value of float, Eccho [Electronic Check Clearing House Organization] estimated that if 100% of transit checks (checks collected by a bank from another bank) were replaced by ACH, banks would incur a loss of float balances of US $7.5 trillion, which translates into about US $1 billion in indirect revenue.
Revenue opportunities from negative float will be eroded regardless of e-payment adoption because check image exchange is expediting check processing, and eventually competitive pressures will force banks to provide improved availability and give much of the float to their corporate customers.
Grealish also pointed out that as consumers increasingly bank and pay bills online their comfort level grows, which may increase their interest in using similar systems in the workplace.
"Small businesses (under US $10 million in annual revenue) are increasingly embracing online banking and online channels," Atkinson said. "Online users are very likely to use card payments.
"There is continued convergence of issuing and acquiring activities, and this convergence creates opportunities for ISOs and MLSs."
The biggest reason for the sluggish move to electronic payments in B2B is that the investment in payment system improvement is perceived as large, and the benefits are perceived to be small.
Additionally, the movement toward electronic payments will likely hit critical mass only when accounting departments of large corporations demand it. And this is a group not prone to make drastic or experimental changes.
Also, the efficiencies in electronic payments are hard to quantify, while increases in interchange are readily apparent. "There are some tax reporting challenges for businesses that accept credit card payments," Atkinson said. "The interchange and fees need to be calculated, categorized and reported."
Grealish said pioneers in e-payments "have tended to come from the A/R [accounts receivable] side and have had the clout both with their trading partners and banks to migrate over 60% of their collections to ACH and wire.
"These pioneering companies move slower on the A/P [accounts payable] side because they typically want to study the impact on float and evaluate their payment options, like p-card and buyer financing."
Finally, widespread adoption of B2B electronic payments will take an almost unprecedented collaboration between banks, card issuers, ISOs, technology and system providers, and businesses. But it will occur, experts say. It's only a matter of time. 
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