The Problem with B2B Payments

by Carol Coye Benson on April 2, 2009

in AFP, B2B Payments, Banking, Carol Coye Benson, Commercial Payments, NACHA, Visa

Carol Coye Benson - Glenbrook Partners

It’s springtime, and annual payments statistics are starting to bloom. A good time, perhaps, to consider the state of business-to-business (B2B) payments. NACHA recently released figures showing that ACH CTX transactions grew by 15% in the fourth quarter, compared to the previous year. Earlier, Visa disclosed that their fourth quarter commercial volume was 13% ahead of the prior year. Nice growth numbers, particularly in these challenging times.

But for those of us with long histories in B2B payments, it’s still not enough. We all know that the bulk of B2B transactions are still made by check. An AFP survey at year-end 2007 showed that 74% of business payments were still checks. The NACHA and Visa statistics tell us things are changing – but why isn’t the transition from paper to electronic business payments happening more quickly? After all, almost all corporate surveys show that corporations – on both the paying and receiving side – see the benefits of electronic payments and intend to implement them. Here’s our view of some of the myths and realities about why movement is slow.


THE MYTHS

“It’s too complicated.” A lot is made of the fact that the B2B payments environment is complex. We don’t disagree. There are complex, interwoven processes, systems, and business relationships. There is messy data. But although this accurately describes the business payment environment, it does not explain why checks persist. In many instances, electronic payments can replace checks without greatly increasing complexity or disturbing current practices. These current practices, by the way, often aren’t all that great. The problem is that many people think that migrating to electronic payments will somehow “solve” the whole complex environment. It won’t.

“The hub controls the spoke.” Many discussions about B2B payments revolve around the myth of the all-powerful customer dictating how it will pay its small suppliers (and occasionally, the reverse: a powerful supplier dictating how customers will make payments). Although undeniably true in some cases, it does not describe most situations. Businesses often have tens of thousands (or hundreds of thousands!) of counterparties. It’s a many-to-many world. Businesses trying to standardize their A/R or A/P processes struggle to meet the demands of a single customer or supplier who demands “pay this way”. Expecting that uber-efficient “hubs will lead all businesses to electronic payments is simply wishful thinking. They won’t make it happen; and they aren’t why it’s not happening.

“Banks are dragging their feet.” This argument holds that banks are making so much money from check payments that they are actively resisting conversion to electronics. Common sense and anecdote both refute this. Bank profits from pure check float are eroding in any event with the advent of image clearing. The real money is in winning and maintaining business deposit accounts – which remains the case when payments are made electronically. Smart banks are figuring out that the lockbox opportunity – capturing and transmitting remittance data – is still there with most electronic payments.

THE REAL PROBLEMS

“It’s all about the money.” The float argument, held against banks, applies more accurately to businesses. But people are again missing the point when they insist that this is keeping the practice of checks in place. The real driver, for payers and receivers alike, is the time value of money. Payers want to control the timing of their cash outflow; receivers want to accelerate collection. Electronic payments do not diminish control over timing; they just alter the mechanics somewhat. Card payments for B2B transactions are gaining vogue in part because some suppliers see this as a tool for more rapid and more certain collection of payments due. Whether this is true depends on the model (there are both buyer-initiated and supplier-initiated card payments) and how it used by the initiating party. The lesson for bankers? Talk about how electronic payments tools can be used in conjunction with terms negotiations and payment policies to advance the cash flow interests of your customers.

“Where’s the phone book?” Checks are awfully easy for the payer – all they need is an address. All other solutions require getting payments details – account numbers, card numbers, etc. from your supplier. Once received, this information needs to be safely stored, maintained, and updated. Imagine: all over America, the same data about an individual supplier’s payment preference is being stored in the vendor master files of their thousands of customers. Why can’t a customer simply look up the payments instruction for a vendor? Surely in this age of Internet databases and data security the industry can find a solution. NACHA is working on it, and the card networks have it – sort of. But don’t we need some kind of cross-payment system solution? Why can’t you look up ACME Widget Co. and find out what kind of electronic payments it supports, and how to make them?

“What’s this payment for?” The remittance data problem, sadly, is all too real. Here are the components of the problem. (1) Getting the data from the buyer (remittance data includes listing of the invoices paid, the amount paid for each invoice, explanations for short pays, and justification for discounts and promotional deductions). (2) Associating this data with an inbound payment. (3) Getting this data into digital, system-readable form. (4) Matching the data receivables data and posting the payment against open balances for the customers in A/R. Checks solve the first two problems by simply putting the document in the same envelope as the check. ACH CTX solves the first three problems, but only 4% of ACH B2B transactions use the CTX data-carrying format. How is remittance data handled for those other ACH (and many buyer-initiated card payments)? Usually, by some form of email or fax. The lesson for bankers: there is a problem here to be solved – and your customers might pay you for it!

The fourth component, A/R integration, is a problem of increasing focus. Glenbrook Partner Erin McCune, who works extensively with corporations on payments integration issues, says “it’s hard to over-emphasize the pain that this problem is causing A/R departments across the country. Initiatives such as the EPN STP 820 will help, but the active cooperation of software vendors is critical. I’m pleased to note that many are making attempts to modify their solutions to ensure that electronic payments – both ACH and cards – can be more easily posted by corporations of all sizes.” And toward the end of next year, when robust remittances come to wires, there will be an opportunity to address those incoming payments as well.

Summary

So now that spring is here, what can bankers – and the industry as a whole – do to encourage the growth of electronic payments? Our advice is to concentrate on helping customers solve the real problems, and not to be overwhelmed by the myths. A case, perhaps, of making sure that we don’t miss the forest for the flowers. Let us know what you think!

7 Responses to “The Problem with B2B Payments”

  1. Chip says:

    Carol,

    Thanks for the post. The myths that you mention are, in fact, what we hear most folk discuss when they think of the B2B space. In particular, I was intrigued by the following statement from Erin McCune:

    ““it’s hard to over-emphasize the pain that this problem is causing A/R departments across the country.”

    There are few sectors where this statement is more true than in the SMB sector. While there is proper focus on enterprise adoption, in many scenarios/solutions the SMB is simply ignored (perhaps as a result of the “hub and spoke” issue).

    If any of your readers are interested, myself and David Keenan from BankServ will be presenting next week at the NACHA payments conference. The session is entitled “ Payments Integration for Small Businesses – B2B Case Study” and is scheduled from 1:45 – 2:45 on Tuesday (as part of the Payments Biz track). In the session we discuss much of what you have identified in this post as well as providing a case study on trends and research as it relates to the SMB community.

    Cheers,

    Chip Kahn
    CEO, IP Commerce

  2. Erin McCune says:

    @Chip, I’ll be in Orlando next week and will try to catch your presentation (I’ve got an appointment that overlaps the first 15 min, so I will be late). Reach out to me directly to connect in person some other time during the conference. Just this afternoon I was exchanging messages on Twitter with Marshall England and Tyler Hannon – I met Tyler at Finovate Startup last year. – Erin

  3. John Hayes says:

    Carol,

    Good points. We think the fundimental problem is that the industry is trying fit B2B parties to the current payment systems, rather than making the systems work for the B2B parties. The granting of trade credit (A/R, A/P, and the payments) has been part of commerce for thousands of years. A/P is critical to business — it is the largest source of capital for more businesses in America (more than bank loans and ower’s equity) primarily because it is both free and flexible on the time of payment. Any changes in B2B have to honor the traditional requirements. This is the reason that the modern credit card system has captured only about 3% of B2B trade credit transaction ($600 billion of $20 trillion). While this is about 30% of credit card volume in the U.S., it is only 3% of trade credit. Thanks. John

  4. Alistair Duncan says:

    I totally agree with John Hayes. In all cases where I have seen the banks and card companies implement B2B especially Buyer initiated payments, infrastructure/system changes are needed to implement the solutions. The Acquiring party is often the one with the most changes and they are the ones who see the smallest short term benefits. There are ways to implement solutions using the existing networks but they mean changing the business model or possibly bypassing some players and the industry is reluctant to make those radical moves.

    Alistair

  5. Jason Olson says:

    Hello Carol.

    I found your article to be a good analysis of the issues facing businesses in their efforts to transition from check (cheque, in Canada) to electronic payments.

    I happen to work for an electronic payment processing company in Canada called TelPay Inc. Our company actually developed the first electronic payment systems way back in 1985 (initially by telephone). That aside, we have developed an electronic payment software for business payments which removes many of the technical ‘hurdles’ you mention in your article.

    I won’t go into detail but one of the major hurdles our software overcomes is the collection and management of suppliers bank account information. With our software, businesses are not required to collect (or manage) their vendor’s bank account information nor are they required to notify their supplier of the payment (our system will automatically notify the vendor by email or fax). Our software enables a business to pay any business expense electronically, thus removing the requirement for checks entirely.

    For your interest, here is a link to our software demo http://www.telpayforbusiness.ca/ecomm/

    It is not available in the United States (yet) but it can facilitate payments from the U.S. into Canada and vice versa.

    If you have any thoughts or comments I would appreciate hearing from you or your readers.
    Thanks,
    Jason

  6. Dean Procter says:

    As a developer of payment systems, I read the issues with interest. It seems clear that a simple mechanism to enable buyers to pay is the best option. Ideally there should be no account details to store and the interface (the invoice) must give the buyer the traditional options. ie. pay now = x% discount, pay in 30 days (give credit and set the action in place automatically), pay by card = X% surcharge/discount etc.

    If the interface, or invoice (electronic) is smart enough, then the choices are clear for the buyer/payer and the outcome clear to the seller. It is really mostly about knowing where the money is, then you can control your cashflow/credit.

    I assume the idea of multiple choices which could include ‘contact me’ would be well received.

    I see interfaces like twitter potentially being useful for simple contact, and the phone is always present.

    It is all about making it easier for the user, not limiting choices, perhaps offering more choices and a very simple (and secure) method of performing/authenticating the choice. This allows the boring, risky and time-consuming parts of the process to be eliminated for the users.

    The old ‘store the bank account details’ and all that routine is really not the business of business and the banking system is rather flawed in that regard, leading to unpalatable risks for business. Any advanced payment system, either B2B or P2B should really be looking for alternatives which simplify business processes, reduce costs and improve the relationship. The current approach is bound to end in tears for someone.

    Ultimately I see offerings whereby the wholesaler might even be paid the instant one of their supplied items is purchased by the the retailer’s customer, perhaps even along with the tax man, if that made it easier for business. The whole supply chain process could be made more efficient.

    There will certainly be some strong offerings in the pipeline as the potential is virtually untapped and there are a lot of dollars consumed by the existing processes, and the means to improve them is certainly at hand.

    Best regards
    Dean Procter

  7. Jon says:

    This is a great conversation. Are there industry reports or market research that provide an updated overview of the B2B payment solutions market that you recommend?

    Appreciate the help.

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