The Problem With B2B
At Glenbrook, partners Erin McCune and Carol Coye Benson have been tracking the slow but steady electronification of B2B supplier payments for many years. There’s been a lot of speculation – and endless conference presentations and studies – as to why B2B payment conversion is so slow, and why checks are so stubbornly pervasive. We have our own opinions, which we share below.
Want to read more of our thoughts on B2B payments?
So, What’s the Problem with B2B Payments?
It’s true – business processes within large companies, and among large and small companies – are intensely complex and (perhaps even more significantly) highly variable by industry vertical. A related point is to recognize that “it’s a many to many” world: most businesses have many customers and suppliers. It is not unusual, for example, for a large B2B company to have hundreds of thousands of suppliers in their vendor database. So some of the complexity in the industry is simply a factor of size and scope.
So why do we say this is a myth? Because advocates of electronic B2B payments tend to think that conversion to electronic payments needs to be a part of a larger (and highly elusive!) conversion to “STP” – or straight through processing. But this is not a necessary – or even an attractive goal for many companies (we’ll explain the “why” of that in a later post!). In fact, conversion to electronic payments can be done by simply substituting an electronic payment for a check payment – without necessarily changing related invoicing or purchase order processes.
Unquestionably, large corporations have power over smaller suppliers and, often, customers. Many large companies have successfully imposed payments or payments-related policies on their smaller counterparties.
So why do we say this is a myth? Because this is, and will continue to be, the exception, rather than the rule. Most B2B transactions, and even most dollars, continue to flow through traditional processes, controlled by each company – not their counterparties.
For almost all supplier payments, the payer determines the timing and method of payment. Even with electronic payment, where the receiver has to agree to be paid this way, the payer is still, in most cases, determing the timing of the payment. The receiver figures out how to cope with the inbound payment, and how to collect, associate, and integrate the data.
Hub dictates are most typically annoying friction to their counterparties – and do not become a standard way of doing payments for the counterparty.
This myth is based on a belief that banks are somehow making lots of money on check processing, and are reluctant to give up this “gold mine”. We think this is a pretty fundamental misunderstanding of what’s going on in commercial banking. The gold mine for banks is not check processing, but the business deposit account. Banks are aggressive in competition to get these accounts, and highly motivated to retain them.
Banks do, of course, make money from from check processing for small and large businesses. They also have sizeable investments in check products such as controlled disbursements, lockbox processing and related data management.
So why do we say this is a myth? Because checks – and check float are disappearing anyhow. Banks don’t care that much about keeping check business – they are perfectly happy for their customers to use ACH – what they care about is keeping the deposit account. And an electronic payment can support a business deposit account as well as a check.
By the way, two things banks really are terrified about:
- Losing small business deposit accounts to non-bank ISO’s. This is OK, at first, if cards are just a small percentage of receipt. It’s getting scarier now that ISO’s are offering RDC and eChecks to B2B companies.
- Losing the “stickiness” of the depository relationship – this explains why banks have dragged their feet on UPIC. (UPIC is an initiative of The Clearing House to enable businesses to give their suppliers a dummy bank account number (for example on invoices) – this would reduce fears of exposing the company to fraudulent debits and, if implemented, would accelerate adoption of ACH. The problem is that a company could keep their UPIC and switch banks.)
The importance of cash flow management is central to the problem of B2B payments. Payers want to control the timing of disbursements; suppliers want to accelerate collection of payments.
Changing from checks to ACH may or may not involve a renegotiation of terms: if terms are renegotiated, either party may be the net beneficiary.
Cards are more complex. The time value of funds received needs to be offset against the cost of the merchant discount. If card payment is taken at the TOS (“time of sale”), the supplier benefits from receiving close to immediate cash. In buyer-initiated card payment models, the buyer controls the timing of the payment. This may be negotiated when the supplier agrees to accept card payments.
What’s important to remember here is that the decision to accept cards (or make card payments) does not determine the critical cash flow question: that depends on how the card payment option is implemented – and who initiates it.
This is a huge problem – and it really is amazing that no-one has solved it (in any real scale fashion) yet. Imagine, if you will, that you are the payables manager of an enterprise. You have 85,000 active suppliers. You want to pay them electronically – let’s say you’ve decided on ACH. How do you pay them? You need a) their agreement to be paid electronically b)their bank routing number and account number and c) their instructions for remittance data delivery (see “Real Reason #3). There is no place (no “phone book”) where you can look this up. You need to go out, individually, to each supplier, and ask for this information. You then need to store and update that information. (Think about the potential for PCI-type data security regulation in the future.)
On the other hand, to make a check payment, all you need to know is your supplier’s address – and that is already in your vendor database. Remittance data is not a problem – you just stuff it in the same envelope!
Many companies, trying to tackle this problem within their A/P departments, never get beyond their biggest suppliers. This really is a “long tail” problem!
There are four tough pieces to the remittance data problem:
- Getting the data from the buyer: a listing of the invoices paid, the amount paid for each invoice, including an explanation of short pays, and justification for discounts and promotional deductions
- Associating this data with an inbound payment
- Getting this data into digital, system-readable form
- Matching the remittance data against the suppliers receivables data and posting the payment against open balances for the customers in A/R
The payments solution rarely solves any of the remittance data problems. Or, perhaps more accurately, most payments solutions claim to solve the problem, but in fact simply add to the problem by fragmenting the business processes of the receiving company.