Data: B2B payments go digital

January 3, 2019 10:10 AM

While the consumer payments market quickly eschewed checks for mobile and card-based payments, the B2B sector clings to physical checks as a standard payment form. It is true that business check usage is down from peak levels years ago, however, checks hold an important position between ACH debits and credits, which have an average value in the thousands; and card-based payments, which have an average value in the low hundreds of dollars.

Businesses see value in faster payment technologies such as Same Day ACH and conversion from checks to card-based payments. By adopting faster payments, businesses have more flexibility to make last-minute payments and emergency payrolls, or gain a larger window for early-payment discounts. Similarly, payment cards represent an opportunity to streamline purchases, improve payment reconciliations and give greater visibility to overall cash flow.

Overall, B2B payments represent a massive opportunity for banks, payment vendors and financial services organizations, as clients of all sizes are eager to improve the purchase and bill pay process while benefiting from new payment technologies that have come to market.

While paper checks have been quickly disappearing from everyday consumer life, they have maintained a strong position in the business world.

The big drivers that have caused consumers to move away from checks have not fully materialized in the business world. Take for example the basic consumer checking account, which now rarely comes with paper checks. Most business accounts come with a plethora of features, including checks, due to their higher fees.

The larger transaction sizes in the business world, often in the thousands of dollars, makes card acceptance impractical either due to interchange costs or credit limits.

According to the Association for Financial Professionals (AFP) 2106 Electronics Payment Survey, businesses continue to write paper checks for 51 percent of their B2B payments. It appears that the steady decline in check usage has levelled off — and even increased one percentage point from the 2013 survey. However, check usage is significantly down from historical highs of 81 percent in 2004 and 74 percent in 2007. As new faster payment rails are implemented and take hold, B2B check usage should once again begin to decline.

The rise of faster payments has been a global phenomenon that has addressed the needs of many businesses, as well as consumers.

While faster payments have come in the form of many different flavors and speeds, they are not all created equally. The downsides of faster payments is that without enhanced risk detection, fraud has been encouraged to grow. The other challenge is that the sender must be able to make sure that the recipient can receive the payment within the expected timeframe, whether it’s same day or real-time, in order to be able to credit the sender’s account in a timely fashion.

When Same Day ACH was first introduced in 2016 with credit transactions, there was considerable business interest in its adoption. When the AFP conducted its 2016 Electronics Payments Survey it asked businesses their most likely uses of Same Day ACH payments, and found that 57 percent of business planned to use it for last-minute bill payments. While emergency payroll was the second leading use case at 38 percent, almost a quarter (24 percent) of businesses planned to make AP payments on the very last day that qualified for an early payment discount.

While issuers of payment cards are often seen in pursuit of converting larger business payments to card-based payments, the reality is that not all B2B payments are a “cardable” opportunity.

Based on the U.S. Federal Reserve 2016 Payments Study, which examined payments made in 2015, the average B2B general purpose (GP) credit card transaction was only $206 in value. This figure pales in comparison to the average B2B ACH debit transaction, which was $31,118 in value; and the average ACH credit transaction at $9,349.

Given that few business credit cards have enough credit line to handle more than a few ACH-sized transactions per month, it does not make them a reasonable alternative to using the ACH network.

Businesses used ACH credit transfers mostly to make payroll and payments to other businesses. While the Federal Reserve notes that 2.1 billion consumer checks in 2015 were converted to ACH debit, only a small number of business checks were converted to ACH debit transfers.