The check is in the mail is a classic payments aphorism; with long payment cycles and little transparency into payment progress, in the world of business payments that statement doesn’t inspire trust or provide any assurance.
Unfortunately, while many forms of payment are now instant or near instant, the world of business-to-business (B2B) payments often still relies on checks. According to Mercator Advisory Group, in 2018, 47 percent of the value of B2B payments was by check. Considering that in 2016 the value of B2B payments was $18.5 trillion, that’s a lot of money that is being delayed, slow to process and difficult to manage.
While there’s been progress — an estimate a few years ago had checks accounting for 90 percent of the value — the complexity, number of parties involved and plain old inertia are hindering uptake. Another factor is the length of the payment lifecycle; in B2B payments all the touchpoints add up and the duration can be up to 90 days.
Complex payment ecosystems
Depending on the organization, payments might have to go through a purchase order process, invoicing, accounts payable, various data entry points and disbursement — and that’s if everyone matches up. If there are clerical errors, missing fields or information, or any additional questions, the process is stalled and sent back for clarification.
The issue is multiplied when dealing with the large number of payments that larger organizations must process. The flow of payments across the cycle, as well as cross-border issues, various different payment standards and all the permutations required by compliance, legal and accounting presents an intertwined maze of demands that must all be kept on track.
For companies that are in financial services or other regulated industries, there are Anti-Money Laundering (AML) and Know Your Customer (KYC) laws that require consideration. Before any payments are sent, the account requires identification and verification of company records to help ensure validity of the account information. Further enhanced due diligence measures might also be required, including AML checks of the business through international watch list sources, uncovering the Ultimate Beneficial Ownership (UBO) structure, and performing instant electronic identity verification for all individuals deemed to be UBOs.
Beyond compliance requirements, there are fraud prevention considerations; accounts payable fraud is, according to ACFE and Hiscox studies, “among the most ubiquitous and damaging of frauds that affect businesses of all sizes,” The absence of effective measures to verify accounts and track payments accurately, especially when the speed of payments increases, is an opening for a multitude of fraud schemes.
The cost of payments
Besides the significant inconvenience of waiting for the payment, checks are a costly way to transfer money. It starts with invoicing; without digital payment systems, invoices must often be printed and sent by post. While not directly tied to the payment, the invoice is part and parcel of the activity. Add on to that the printing and mailing of the check as well as all the costs to process and manage the payments, and the costs are significant. Analysis by Deloitte suggests that it costs a typical accounts payable (AP) organization nearly $8 to process a single supplier payment.
The reliance on paper often necessitates manual processing, which leads to errors and delays and contributes to the occurrence of fraud. According to Vijay Ramnathan, senior vice president of product management and strategy at Comdata, B2B payments experience an 18 percent error rate.
Checks are not the only game in town. However, other popular forms of B2B payments also involve high costs. For example, wire transfers have processing fees that can amount to $14 per exchange. Debit cards have their fees, which can be as much as 1.5 percent of the transaction. For the intended receiver, who just wants to be paid, and the sender, who wants to ensure the proper controls, the whole B2B payments space is a big mess.
Significant payment opportunities
Adopting new processes is always an uphill battle; there are reasons why existing systems are in place and it’s imperative for any new technology to understand what is working. Paper has been around for thousands of years, is simple to understand and doesn’t require an additional adoption cost or learning curve. The paper trail includes all the information required to audit and reconcile payments, without concern for integration or compatibility. There’s also the fact that it’s advantageous to the payer to have slow payments — they have the money on their books that much longer to either collect interest or to even out cash flow.
Of course, any time there is a financial process that is slow, complex and expensive, there’s an opportunity for fintech. Especially as the vertical involves massive amounts of money and has serious pain points, fintech is delivering a variety of solutions and promises to deliver innovations.
All three of the largest credit card systems in the world are updating or introducing new B2B payment solutions.
The Mastercard Track™ Business Payment Service “is the first global open-loop commercial service built to simplify and automate payments between the world’s suppliers and buyers.” Mastercard states it is a $125 trillion market and suggests that having multiple payment options through one system and decreasing inefficiencies will improve and simplify payments.
Visa B2B Connect focuses on cross-border business-to-business transfers, using blockchain technology “to facilitate faster, more transparent, and more secure payments.” It’s designed to decrease the use of intermediary banks, allowing payments to go from the payer’s bank directly to the receiver’s bank.
Among various other initiatives, American Express is offering virtual Card payments which provide the ability for companies to “see, analyze and monitor spend for both the buyer and supplier to review payments, see what’s outstanding … all of that makes it more secure and easier to manage spend, and reduce fraud and processing times.”
Fintech enabled solutions
Other payment companies are implementing new solutions. There’s the PayPal Commerce Platform, which enables “sellers to accept payments from 286 million PayPal customers, in over 100 currencies and across 200 markets, with advanced Fraud Protection and unprecedented control.” Square is making inroads into the area with initiatives such as collaborating with companies such as Handshake and Ordoro. Stripe secured a $250 million round to continue to expand its B2B payment services.
Different payment companies are promoting numerous selling points, including advanced payment analytics, fraud prevention, electronic invoicing, risk management and cross-border payment networks. Companies as diverse as Worldpay, Ayden and Alipay have significant, and growing, plays in the space.
Know your business
While there are many innovations and opportunities in B2B payments, effective account onboarding processes are crucial. Helping ensure that proper compliance and fraud prevention steps are in place mitigates the risk of having bad actors use payment channels as a path to fraud or to launder illicit flows of money.
Properly verifying business accounts should not come at the expense of a reasonably quick and seamless onboarding process. Effective business verification delivers the necessary security and compliance measures, without unduly interrupting the account opening, allowing the payments to start to flow quicker, easier and with less friction.
From industry giants to new startups, B2B payments is an industry that is ripe for innovation and is attracting a lot of investment as a result. For suppliers, it promises quicker payments and lower friction. For purchasers, the offer of streamlining payables simplifies complex transaction chains. Perhaps one day in the not too distant future, people will think of checks the same way they think of cowrie shells for payment, as a relic of payment systems consigned to history.
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