By Patti Murphy
Business-to-business (B2B) transactions represent a large and growing opportunity to expand card payments and improve the way companies manage cash flows and trading partner relationships.
"Replacing paper check payments with electronic payments creates a host of benefits for merchants, including faster payment delivery, reduction in fraud and manual errors, streamlined accounting with paperless payments and reconciliation," said Blair Jeffery Chief Operating Officer at Noventis Inc., a financial technology firm specializing in billing and invoice support for small and midsize businesses.
"The advancements in merchant receivables automation create opportunities for companies that sell acquiring card services to add more value in their relationships, or to offer lower pricing based on growing volume for the merchants," Jeffery added.
Steven Langlois, Director of Sales and Business Development for B2B at BillingTree, added, "Any business that is utilizing paper invoices and paper checks could get an uplift in terms of processing efficiencies and DSO [days sales outstanding] efficiencies" with card payments. BillingTree works with integrated software vendors to support payment processing in healthcare, property management, accounts receivable management and other B2B verticals.
Dean Leavitt, Chairman and CEO of Boost Payment Solutions Inc., is keen on the opportunities B2B payments present, but he cautioned that it's not a pursuit traditional ISOs, with their focus on POS transactions, will undertake.
"The B2B market is very specialized," Leavitt said. It's not just about moving payments, he explained, adding that of equal importance is the ability to provide remittance detail in a format that can be used by enterprise resource planning (ERP) systems. "To properly service B2B, you need to be a bridge between accounts payable and accounts receivable," Leavitt said. "It's really a place for fintechs [financial technology firms]." Founded in 2009 as a merchant acquirer, New York-based Boost bills itself as a payment facilitator that works with ISOs and acquirers.
Steve Murphy, Director of Commercial and Enterprise Payments Advisory Services at Meractor Advisory Group Inc., agreed B2B payments are not a traditional ISO play, but he said B2B market opportunities are not out of reach for ISOs, either. "The ISO opportunity is in making implementation easier and taking friction away from suppliers," he said.
B2B payments today outstrip all other types of payments and are on a steady growth trajectory. BI Intelligence estimated B2B payments totaled $18.5 trillion in 2016, compared with $5 trillion in business-to-consumer payments and $709 billion in consumer-to-consumer payments.
According to the Federal Reserve 2016 Payments Study, consumers spent just over $3.1 trillion using credit cards and about $2.5 trillion using debit cards at U.S. businesses in 2015. Meanwhile, the consulting firm Deloitte reported that B2B payments have been expanding at a combined annual growth rate of 5.8 percent over the last several years and will exceed $23 trillion by 2020.
Unlike consumer-to-business payments, where credit and debit card acceptance is often posited as a necessity of doing business, companies often shun card payments from trading partners. Nearly half of all B2B payments in the United States in 2016 were made by check, compared to 32 percent by automated clearing house (ACH) transactions and 11 percent by credit and debit cards, according to NACHA – The Electronic Payments Association.
The most widely used cards for B2B payments today appear to be purchasing cards, which are used by 73 percent of firms participating in the Association for Financial Professionals 2017 Payments Fraud and Control Survey. But this number belies the dearth of payment activity: the consultancy Celent LLC estimated that just 1 percent of commercial payment flows today are made using purchasing cards. Travel and entertainment cards are the second most used business card type (used by 45 percent of firms in the AFP survey); virtual cards ranked third with 31 percent.
The reasons why checks are preferred for B2B payments vary, but generally they fall into two categories: pricing and perceived workflow efficiencies.
"The [interchange] rate structure of cards was not designed for B2B transactions, which carry much lower risks," said Flint Lane, founder and CEO of Billtrust. Interchange rates for business cards are significantly higher than those for consumer card purchases – 200 basis points, or more – according to experts.
That's because most merchant POS devices are not configured to capture Level 2 and Level 3 card data, which renders the process less vulnerable to fraud. Level 2 data includes details like merchant name and zip code, transaction amount and date, tax amount, plus customer code or purchase order number. Level 3 data includes shipping and destination ZIP codes, invoice and order numbers, item product and commodity codes, item descriptions and quantities, and other details.
Unlike card acquiring, check collection is rarely priced explicitly by banks, and when it is (as with lockbox collections), seldom do the fees top $1 per transaction. Perhaps of greater importance to corporate finance officers, most receivables workflows evolved around check payments, which generally are accompanied by documents detailing invoice and customer numbers, purchase descriptions and other information similar to Level 2 and Level 3 detail, and support proper crediting of payments to customer accounts.
Evolving technologies and mounting pressures to improve operational efficiencies have forced many companies to rethink their allegiances to checks, however, BillingTree's Langlois said. BillingTree has a direct sales staff and works through ISOs and other channel partners. "We've seen more movement in the B2B market in the last two years than we saw in the previous 10 years," he added. "People are really seeing the opportunities."
There's no one vertical where B2B card payments are a draw, Langlois pointed out. "It's very diverse," he said. Examples include distribution, broadcasting, manufacturing, waste management and hard goods companies, as well as government agencies. "We're interested in exploring revenue opportunities with companies that are the right fit," he said.
The opportunities for making inroads with B2B have not been lost on the card companies. "Visa and Mastercard are both going after B2B payments," Lane said.
Visa partnered with Billtrust to advance virtual card payments. It also has a "strategic investment" in the firm. According to Taira Hall, Visa Vice President of U.S. Partnerships and New Initiatives for Business Solutions at Visa, the arrangement with Billtrust aims to help banks streamline B2B payments for corporate clients. "One of the key pain points for companies is the time and resources it takes to process payments," she said.
Lane echoed this sentiment. "You can't solve this problem just by changing the cost structure," he said.
As the name implies, virtual cards are not plastic cards. Rather, they are accounts that generate 16-digit numbers for individual transactions and reference transaction-level detail (think Level 1 and Level 2 detail) that gets sent to a supplier's bank account using a file-based process. Ideally, they should support integration with B2B portals and other accounting systems to deliver something close to straight-through processing (STP).
While they hold promise, virtual cards have been slow to gain traction, Lane noted. Murphy said that's because most virtual cards miss the mark. He estimated that 95 percent of virtual card payments today are supplier-initiated. These "pull payments" require suppliers to email information to buyers where staffers key in data for each transaction. This can be particularly labor intensive for large companies, such as giant telecommunications firms with thousands of buyers, many with unique technology and process protocols, Leavitt added.
The pull-payments approach also puts companies at risk of noncompliance with Payment Card Industry (PCI) requirements for securing card data, added Sayid Shabeer, Chief Product Officer at HighRadius Corp., which specializes in integrated receivables solutions. HighRadius works with Noventis to support STP for virtual card payments.
Both Murphy and Leavitt feel buyer-initiated (push payment) virtual card schemes better address B2B requirements. "Push payments is where the opportunities really lie" for virtual cards, said Murphy.
Leavitt said the Boost Intercept platform was built to respond to this "massive pain point" for large companies. He likens the platform to a "virtual card lockbox" that translates email or file-based payment notifications into STP payments and simultaneously transmits remittance details to the requisite accounting systems. Boost partnered with Mastercard; this year, the two firms began working together in the Caribbean to support that region's nascent commercial card market.
In 2017, Mastercard unveiled the Mastercard B2B Hub a push-payments approach to automating accounts payable processes at small and midsize firms, offered through card-issuing banks. Mastercard's technology partner in the project is AvidXchange, a company specializing in invoice and automation for virtual card and ACH payments. AvidXchange claims integrations with more than 130 accounting and other back office systems across 5,500 customers in North America.
Micahel Praeger, co-founder and CEO of AvidXchange, estimated there are over 350,000 underserved businesses in the company's target market. Mastercard holds a minority stake in the company. Fifth Third Bank, which also holds a minority interest in AvidXchange, was the first card-issuing bank to join Mastercard's B2B Hub.
"The conversion of paper to automated information opens the door to STP, which has eluded many small businesses," said Jeffery. STP eliminates time-consuming manual entry of payment and related information, thereby streamlining receivables processing, Jeffery explained. "These benefits enable merchants to extend their acceptance of card payments beyond the sale of goods and services, and into the arena of accounts receivables," he added.
But most B2B card solutions today stop short of being truly straight-through, Murphy said. "If [the industry] wants the card share of the B2B market to increase, they are going to have to figure out a good STP scheme," he insisted. "That's where all the real growth will come in the next five years."
While businesses should be drawn to the potential operating efficiencies and cost savings B2B card payments offer, there also are cash flow and working capital considerations. Accepting card payments allows suppliers to reduce DSOs, as many business customers are willing to pay earlier when using cards. "As corporate treasurers prioritize working capital management during challenging economic times, commercial cards can defer payments while offering early payment to suppliers," Patricia Hines, a senior analyst in Celent's banking practice, wrote in a report last year.
Additionally, many suppliers offer early-pay discounts of up to 2 percent for traditional (check and ACH) payments. Those discounts can be eliminated when offering card payment options, Leavitt noted. That, in turn, can drive down the effective cost of card acceptance.
Another benefit to businesses of B2B card payments is the potential to generate new revenue streams and cost offsets in the form of card issuer rebates. These rebates (which like consumer credit card rebates are calculated as basis points on each dollar spent) can amount to tidy sums for companies that rack up millions of dollars a year in B2B card payments. "The combination of getting rebates and the working capital improvements is a very powerful one-two punch," Leavitt said.
Card payments also provide businesses with better fraud protections. "Compared to traditional payments, cards offer extensive fraud controls that traditional payment methods lack," Hines wrote. "The card networks and banks are continually improving fraud and security [controls]."
The potential motivations for using cards for B2B payments is not limited by company size. The potential benefits are achievable across the board – from the largest companies down to smaller firms.
A Mercator survey of 1,600 small businesses in 2017, for example, found eight in 10 have credit or charge cards. The survey also revealed that small businesses are less likely to pay off credit card balances each month than are consumers. "Managing cash flow is a top concern for small businesses," said Karen Augustine, Manager of Primary Data Services at Mercator.
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