Understanding B2B Payments

Business-to-business (B2B) payments represent a huge market of opportunity, worth an estimated $18.5 trillion in the US in 2016 alone; vastly above the value of business-to-consumer (B2C) and consumer-to-consumer (C2C) transactions.
Digitizing B2B payments is being seen as the next great frontier for payments firms, based on the size of the market.
Although multiple firms have been partnering, building and buying into the technology needed to digitize B2B payments, big strides won’t be seen until all the pieces of the puzzle — from transferring funds to invoicing — can take place on a single platform: a full-circle digital solution.
Introduction
The B2C market has already seen waves of digital innovation. As consumers, moving from traditional payment methods like checks and cash, to digital channels, including online platforms and cards, was largely seamless. But, businesses are still lagging behind, several years after this shift took place, leaving B2B payments reliant on analog, mostly physical channels. There are multiple reasons behind this delay, including the dynamic nature of B2B payments, where there are often multiple parties involved, with various terms. Platform providers have struggled to find a one-size-fits-all digital approach, let alone a full-circle offering that would put everything in one place.
Unlike when a consumer goes to a store, the process of money changing hands between businesses, suppliers and buyers, for instance, is far more complex. It currently relies on a paper trail of invoices, letters of credit and checks that can result in payment delays of several months — or more in some cases.

The State of B2B Payments
Payments between two merchants (such as a hotel paying a wholesaler) define the scope of the B2B payments market. To comprehend why B2B digital automation has been so slow off the starting blocks, it’s necessary to understand the complexity involved. In most B2C transactions, there is only one recipient and one sender. That’s far from the norm when it comes to B2B payments, where firms may be in a constant loop of sending and receiving payments with multiple partners.
The two kinds of payments involved are:
Payables — the ‘sender’ side of the equation, where businesses are in debt to other businesses or organizations. Accounts payable refers to the ‘amounts a company owes because it purchased goods or services on credit from a supplier or vendor.’ This side of the industry is vast: an average organization in 2013 processed over 40,000 invoices a year on accounts payable — and this number has probably increased since then.
Receivables — where a firm has issued an invoice and waits for the payment in return.
Organizations use a wide range of solutions to manage accounts payable and receivables throughout the cycle. Software platforms such as Oracle and SAP help firms to keep track of invoices, so that payments are held in balance. Despite this digitization of bookkeeping and accounting, payments are still unlikely to be processed digitally. Lagging far behind other payment types, B2B payments are still largely paper-based.

Consumer payments have gone the other way: they’re now highly unlikely to be physical or analog, and that transformation happened in a relatively short period of time. In 2012, nearly half of all US consumer payments were made by check or cash. That number has since fallen to 38% in a 2016 edition of the Fed’s benchmark study. The shift has been to electronic forms of payment — where card and electronic payments rose by 10 percentage points over the same period. Companies like Zelle and Venmo have helped to drive this.
Compare that to the data for B2B payments. In 2016, US commercial organizations were still making over half of their transactions via paper checks, according to the 2016 AFP Electronic Payments Survey. Paper-based payments are complicated enough. When a consumer pays another consumer (splitting a meal, for example, or transferring monetary gifts), they often know one another. B2B payments often don’t have personal relationships at their heart. Then there’s the scale. The size of payments made between businesses can be huge. Multiple parties involved in a transaction may use different accounting systems and payment platforms, have different banks, and have different processes.
Here is how it typically works:

1. A supplier invoices a buyer for goods or services. Even domestically, this can be complex. When crossing borders, this often involves additional steps like letters of credit, which extend the time, cost, amount of paperwork and steps involved to the process.
2. The invoice must be verified and approved or rejected. If it is rejected, the payment process ends there.
3. If the invoice is approved, the payer manually creates a payment file or check for the goods or services received. That then needs to clear both the payee and the payer’s banks, which may be separate institutions.
4. Once cleared through these institutions, the payment is settled.
   That status quo is beginning to pose a problem in the following ways:
   Offline payments are far more time-consuming. On average, it takes 30 days to complete a payment. The wait is often longer, simply because businesses are taking more time to pay their suppliers. The larger the firm, the bigger this problem seems to be. This kind of delay can have serious ramifications for the business, particularly when they are unable to obtain lines of credit or loans from financial institutions, leaving them vulnerable to missing payments to other suppliers.
   Traditional payments are more expensive, in both directions. The average cost of processing an invoice is $5, which rises and falls according to the size of the company.
   Paper-based payments are less likely to be secure. Over 70% of US firms have reported actual or attempted check fraud, according to the 2016 AFP survey.
   These disadvantages associated with the current state of affairs for B2B payments disproportionately affect small to medium sized businesses (SMBs), who lack the resources to deal with issues on either the receiver or supplier ends. High costs, slow payment receipt, and the risk of fraud can have a bigger impact on these organizations, raising the stakes. It’s also harder for SMBs to invest in digitization — leaving them most affected by the current situation, but least able to change it. The vast majority of businesses worldwide fall into the category of SMBs, hitting the economy as a whole hard when things go wrong. The scene is set for digitization, but implementing it is unfortunately far from straightforward.
   How digitization can become reality
   The B2B market is likely to change in much the same way, with firms working to become the Stripe or Square of B2B payments. They need to focus on one issue, resolve it, gain customers, and then scale from there. No one business is likely to create a full-circle B2B payments system. Rather, multiple players need to combine their efforts by innovating in lots of smaller ways. All the types of innovation — innovation across payables and receivables, invoice tracking and streamlined communications — need to work in harmony to make full-scale automation a reality in the future. Finding ways to overcome the traditional barriers of affordability and availability are needed to ensure new technology can permeate to small to medium businesses (SMBs) as well as larger firms.

If you’re interested in PayBlok, and want to find out more, you can explore the PayBlok website at:
https://payblok.instasupply.com.
In addition, you can find the PayBlok white-paper at:
https://payblok.instasupply.com/documents.html.