Processors brace for a cash crunch

The economic outlook for the next year has been a moving target, but business payment companies fear that certain organizations are losing patience with the speed of transactions.

“The average time for a business to get paid by check is about [a month]. That may not be good enough for most businesses in terms of cash flow,” said Derik Sutton, vice president of product and experience at Autobooks, a small business payment and accounting company.

Sutton was one of four payment executives who recently discussed recession risk, B2B and other issues with PaymentsSource. Sutton was joined by Tede Forman, group president of consumer and commercial payments for Jack Henry & Associates; Fran Duggan, CEO of Payrailz; and Vijay Ramnathan, president of MineralTree.

Payment technology companies are pushing automation for supply chain payments, one of the slower transaction categories to embrace digital payments. While nobody roots for a recession, an economic downturn would pressure businesses to move funds faster, which could spark an uptick in technology adoption.

The odds of a recession in 2020 have eased, though a slowdown in growth is expected due to political factors such as Brexit, impacts from the U.S./China trade war and general cyclical issues. For supply chain payments, that uncertainty doesn’t change the broader pressure on businesses to act as if the economy is struggling, according to the execs we spoke with.

“A recession probably will happen at some point. And business owners are consumers and everyone will be more focused on the speed of payments,” Sutton said.

In a slow-growth environment, “payments will still happen,” Duggan said. But what will change is the need to monitor funds through the cycle of ordering, accounts payable and accounts receivable, he said.

Barclaycard, for example, has opened a B2B hub and extended a collaboration with SAP to improve visibility into supply chains.

“That’s where the opportunity will be for our industry,” Duggan said of acting in and advisory role for businesses, particularly in the small business category. “Not just in providing mechanics to move money but to tell businesses they may be short next month on cash and giving a path to improve that.”

Beyond general economic risks, businesses are confronted with the impact of consumer technology and e-commerce. After years of stagnation and reliance on check transactions, supply chains are finally embracing digital processing. Large banks such as JPMorgan Chase are combining automated B2B payments with other business processes such as enterprise resource planning.

That's pressuring other financial institutions and suppliers to provide the same level of service, and creating an opportunity for technology providers to build products along those lines.

“The awareness of and need for AP automation is growing rapidly in middle-market companies. Increasingly, companies are expecting the solutions they adopt to be end to end, as opposed to a point solution,” said Ramnathan, president of MineralTree.

The overall growth of e-commerce and mobile banking sectors has spurred consolidation among payment processors and a mix of public and government-led initiatives to improve payment processing to support digital payments.

Mobile transfer services such as Venmo and Zelle have not only boosted consumer usage of digital payments through habit, but have also exposed the lack of similar convenience for business transactions.

“There is a huge gap. The nice thing right now is credit unions and banks recognize the gap and the fact that they fell behind,” Duggan said.

Businesses also have more options to streamline operations, given fintech’s encroachment on merchant acquiring, which lowers the overall cost of doing business by digitizing payments and providing access to merchant credit based on future payment volume.

“Non-bank providers such as PayPal and Square are using money movement as the tip of the spear, and are offering more to compete with traditional financial institutions,” Sutton said

Jack Henry’s Forman said initiatives like FedNow and The Clearing House’s Real-Time Payments rail will spark more innovation both in and outside of business payment services, given the spike in adoption in RTP that accompanied the FedNow announcement, adding this would be an area of focus for his firm in the years ahead.

“Technology companies will become more of the main gatekeeper for banking services,” Forman said.

The strategy in this environment is to focus less on the “plumbing” of transaction processing, and to adapt to business needs that are more similar to consumer retail, in which “check in” and shopping are more important than the end transaction, Sutton said.

“The payment has to be full integrated into the banking experience, not just an add on,” Sutton said.

2020 will bring the earliest real-time payment use cases in B2B, demonstrating a continued interest and investment in B2B payments and software that will hopefully continue to grow, said Ramnathan.

Faster payments have evolved from being a concept to something real in 2019. While adoption in the consumer space has picked up, B2B use cases are still nascent, Ramnathan said, adding banks’ adoption and ubiquitous availability is critical in 2020.

“Businesses have certain use cases like payroll and urgent money transfers where faster payments can be helpful,” Ramnathan said. “Most of the vendor payments tend to be based on terms and scheduled accordingly. Business adoption will grow when interest rate grows. In the current interest rate environment, businesses do not have a burning need around speed of payments.”