By Aaron McPherson, Financial Services and Fintech Strategy Executive | Payment Industry Expert and Thought Leader

Aaron McPherson has been getting an uptick in contacts and stories about companies making a run at the B2B e-payments market, specifically IxarisNvoicepayBoostTipaltiKinnekFlywire, and Traxiant, which makes him wonder if there is a new wave of activity going on here, and if so, whether it will do any better than previous waves. There have been at least two prior waves of B2B e-payments companies, as he mentioned in his A 2017 Payments Wishlist, Part 4 where a revival of B2B e-payments was number 7 on the list.

The first wave was predominantly supplier-focused, and its value proposition centered on getting paid faster, thus improving cash flow. It ran into several problems, however:

Buyers typically divided their suppliers into two tiers. Tier 1 suppliers were already automated through the use of Value Added Networks (VANs) like GXS (now OpenText Business Network) that used Electronic Data Interchange (EDI) as the standard for exchanging invoice and remittance data. These accounted for the majority of payments dollar volume, so it was worth it to do the heavy lifting necessary to automate the process. Tier 2 suppliers were not cost effective to automate, and operated on a paper-based process. From the start, B2B e-payments networks were limited to these smaller suppliers.

  1. It was incredibly labor-intensive to recruit these suppliers into the B2B e-payment networks. Since the value proposition to the buyer depended on their ability to automate their tier 2 supplier invoicing and payments, networks had to be able to present close to 100% coverage of these smaller suppliers. Otherwise, the buyer would have to continue supporting the paper system alongside the electronic system, eliminating most of the savings. However, the amount of work required to sell the supplier on the concept, and then onboard them, was more than these small, undercapitalized startups were able to support.
  2. There were too many networks competing for the same pool of suppliers. As a result, they split the market and made it impossible for any one network to get to sufficient scale.
  3. The buyers tended to have the market power amongst these small suppliers, because one large buyer often was make-or-break for them, whereas to the buyer, the loss of one small supplier was not nearly so damaging. As a result, buyers did not have much incentive to participate in the networks, which reduced the value to the supplier.

The second wave learned from the first, and was more buyer-focused, recognizing that buyers often held the power to compel their suppliers to participate.  This time, the value proposition had more to do with saving money on invoice processing, and allowing buyers to capture a greater share of early payment discounts by automating accounts payable. We also saw larger companies, like SAP/Ariba, American Express/Harbor Payments, and JPMorgan Chase getting into the act, often by acquiring first wave companies. Corporate card issuers saw an opportunity to expand beyond travel and entertainment into supplier payments. Unfortunately, this second wave ran into its own problems:

  1. Again, enrollment was an expensive hurdle, even with large buyers incenting their suppliers to participate.
  2. As before, you had multiple networks chasing the same pool of suppliers, and suppliers were still reluctant to upgrade their accounts receivable systems to support more than one network.
  3. Pricing was a major problem. Since suppliers frequently offered an early payment discount of 2% if payment was made within 10 days, credit card issuers figured that they would be willing to pay interchange to get paid the next day. However, for small suppliers, the interchange rate was often substantially higher than 2%, and while issuers made noises about “large ticket” interchange rates that would be fixed or capped, they never really implemented them, perhaps because they feared that merchants would find ways of gaming the system by bundling small payments into larger ones. As a result, on a $100,000 invoice, a supplier could end up losing more than $3,000, which was hard for many of them to swallow when a check was “free” by the standard accounting practices, and ACH was pennies.
  4. Buyers undermined the early payment argument by abusing settlement terms, often claiming the 2% discount even for payments past 10 days, or sometimes even payments more than 30 days out. This made interchange-sharing arrangements less popular with buyers, who reasoned that they could save just as much money by continuing to use their market power to extract discounts from suppliers.
  5. Issuers’ own treasury departments saw them as a threat, and worked from within the financial institution (FI) to undermine them. If you were doing a large volume of check and ACH payments, you would not react well to another part of the FI going after that. To make matters worse, the card divisions at many banks were organizationally separate from the commercial banking divisions, sometimes right up to the CEO level, so it was difficult to manage the P&L conflicts, even if overall the FI would be making more money.

All these problems proved too much for even larger, well-capitalized companies to overcome, and most exited the market. A few stalwarts like Bottomline Technologies soldiered on, but concentrated more on automating accounts payable, and less on building a shared network.

Now we come to the present. What are the reasons for thinking that these new entrants might succeed where their predecessors did not? Here are some of the arguments that come to mind:

  1. Pricing reform: in the European Union, credit card interchange is now limited to 0.30%, and debit card interchange to 0.20%. In the U.S., debit card interchange for issuers with over $10 billion in assets is capped by law at about 25 cents. While obviously unpopular with issuers, these reforms make cards much more attractive as a payment option for B2B payments. (Update: these price caps currently only apply to B2C transactions, not B2B. To the extent that they are extended to B2B transactions, that would be significant.)
  2. Faster payments: while not fully rolled out everywhere, there is a clear trend toward making ACH (or ACH-like credit transfers) faster. Combined with the decline of checks (although they are holding on tenaciouslyin the B2B sector), this removes the number of choices available to buyers and suppliers alike, and makes it easier to sell them on electronic payments.
  3. Cloud-based APIs: integrating with shared B2B networks is now much easier, because these networks can publish open application programming interfaces (APIs) that popular accounting packages can cost-effectively support. In any case, software developers have had more time to incorporate electronic invoicing and payments into their products, so the market environment is more supportive for B2B e-payments. B2B networks don’t need to spend so much time and money to get suppliers onboarded.
  4. Globalization: a lot more commerce these days is cross-border, and legacy payment schemes have not kept pace. There is a lot of inefficiency in cross-border payments that makes it ripe for disruption.

Putting on my “grumpy old man” hat for a moment, here’s why they still might fail:

  1. They haven’t solved the problem of too many networks chasing the same suppliers. In fact, starting up a new company, rather than working through an established one, makes the problem worse.
  2. Cloud-based APIs make enrollment cheaper and easier, but it may still not be enough. Suppliers are remarkably resistant to any sort of investment in their accounts receivable systems, and frequently put off upgrades that might improve their capabilities. Compare with retail merchants in the U.S., who put off upgrading to EMV until the last minute, largely failed to take advantage of legal settlements allowing them to surcharge credit card transactions, and have mostly still not activated the contactless capability on their terminals, despite the presence of NFC-based mobile wallets for over two years now, and contactless cards before that. True, this is more of a U.S. problem; other countries, particularly in Europe and Asia, long ago migrated to EMV and contactless, and in general suppliers in these countries have been more up to date with technology upgrades. This may explain why many of these newer companies are based in Europe; it is a much friendlier environment over there. It is unclear whether what works in Europe will work in the U.S., however.
  3. Buyers still abuse payment terms. One of the newer entrants, Traxiant, argues on its sitethat you can get around this through the magic of software: simply don’t present a card option for payments past 10 days. The problem with this approach is it may just drive away buyers.
  4. Still haven’t solved the remittance data problem. One of the big obstacles has been the multitude of formats and messaging standards that are used to transmit data like invoice number, line item data, and reasons for short pays. The advantage of paper or e-mail is that it doesn’t require agreement on these things. The problem is that a machine can’t read it for you, which takes away a lot of the value of B2B e-payments.

In conclusion, there is cause for optimism that this time B2B e-payments will take hold, and I can check off one of my wish list items. However, there is also the risk that ignorance of the long and troubled history of B2B e-payments will lead to a lot of mistakes being made again. New entrants should take note that they are trying to solve an extremely difficult problem, and explore partnerships with larger firms earlier than they otherwise might. I consider it very unlikely that a venture-backed startup is going to single-handedly crack this market; a collaborative approach is much more likely to succeed.

Source: LinkedIn