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.

Unlike consumers, who may have a dozen or so companies and individuals to pay each month, businesses often deal with hundreds or even thousands of active suppliers that need to be paid.

According to the FIS 2016 B2B Payments and Bank Connectivity Study, which surveyed more than 170 corporations, over half (54 percent) paid 1,000 suppliers or more on a regular basis. Additionally, 28 percent needed to make payments to more than 5,000 active suppliers regularly.

Given the vast number of suppliers that need to be paid regularly, it is not uncommon for a business to develop a strategic relationship with their key suppliers that allows tighter integration between inventory, shipping and payment systems to smooth the transfer of information and funds between the two.

In the FIS study, about 30 percent of companies reported that they have strategic relationships with more than half of their suppliers. This makes B2B payments less complex and more error-free which ultimately can improve a relationship between supplier and buyer.

A 2015 Deloitte B2B Payments Study of 150 Australia and New Zealand mid-sized businesses with an average of 610 employees found many major benefits of having a card-based payment solution from the buyer’s perspective.

Most notably was the fact that using payment cards reduced processing time, which can have significant impact on a company’s ability to manage its reconciliations. The faster a transaction is processed, the more quickly a company can go about reconciling payments.

The Deloitte study also found that 74 percent of respondents stated that using a payment card for B2B purchases reduced the number of approvals required, thereby streamlining the purchase process. It also found that 68 percent of companies reduced administration costs by using payment cards.