Fintechs Take Aim at B2B Payments

Financial-technology service providers are out to disrupt business-to-business payments. But rather than displacing banks, fintechs are looking to make them their partners.

From virtual cards to digital invoices with embedded payment links, financial-services technology providers are aggressively targeting business-to-business payments.

Fintechs are pushing into the B2B space—which has long been dominated by banks because of their account relationship with businesses—to satisfy firms’ growing desire to automate what has traditionally been a manual, paper-based payment process.

Indeed, 42% of B2B payments are still made by paper checks in the United States, and 97% of companies use checks to pay at least some of their suppliers, according to the Association for Financial Professionals.

Now, in addition to digitizing payments, businesses want to link digital-payment technology—and the information around a transaction—not just to their accounts-receivable and payable systems, but also to their enterprise resource planning systems, which collect and organize key business information.

While the transition to digital B2B payment solutions has been gradually under way for years—B2B sellers and buyers are notoriously slow when it comes to embracing new technology—the Covid-19 pandemic heightened the need for businesses to adopt faster, more efficient ways to pay sellers and receive payments from their own customers.

‘A Nightmare’

One major drawback to manual payment processes is the time spent managing invoices. On average, fully 11 working hours are spent managing a single invoice, and as many as 15 people can be involved in the process, according to payments provider BlueSnap Inc.

“Manual reconciliation [of invoices and payments] can be a nightmare,” says BlueSnap chief executive Ralph Dangelmaier. “The only way for companies to improve forecasting accuracy, track invoices, and reconcile payments efficiently is to digitize and automate as much of the process as possible. Yet, many companies don’t have an automation strategy and most banks don’t have the technology to deal with digital invoicing.”

Reliance on manual accounts-receivable processes remains high, with 99% of businesses acknowledging manual invoicing and payment, according to a BlueSnap survey. Among the manual processes cited, 40% of respondents say they still mail invoices and 32% still fax them. In addition, 13% say they accept cash payments and 11% take checks.

The inadequacies of such manual processes were magnified during the pandemic as many employees, working from home, were not equipped to manage such fragmented and manual tasks outside the office. Indeed, some payment experts estimate the pandemic accelerated the adoption of digital B2B payment solutions by five to 10 years.

“A lot of the problems businesses face when it comes to B2B payments occur in the back office, where a lot of the systems are old, opaque data silos,” says Rajiv Ramachandran, vice president of Coupa Pay for Coupa Software Inc., a provider of spend management applications. “Businesses are looking for ways to integrate data about what was bought, how the purchase was paid for, and how and when it shipped through a single platform.”

‘Better Mousetraps’

Now, several fintechs that disrupted consumer payments with innovative technologies have set their sights on B2B payments. These include Adyen NV, Stripe Inc., and BlueSnap. To the these fintechs, B2B represents a vast pool of new business that some payments experts estimate is twice as large as the consumer-payments market.

“B2B payments are a space that has been broken for some time, which is why there has been a lot of innovation in it the past couple of years,” says Steve Murphy, director, commercial and enterprise payments advisory service for Mercator Advisory Group. “Fintechs see an opportunity to make B2B payments faster and easier.”

Capitalizing on the growth opportunity in B2B does not necessarily mean displacing the banks that provide treasury-management services to businesses. Rather, it means partnering with them, observers say.

Indeed, while fintechs have an edge when it comes to tying digital invoicing and payments applications together with ERP systems, they don’t have the relationships with businesses that comes from serving their banking needs. As a result, many fintechs are seeking to work with banks, and the even the card networks, to gain an entrée into the world of B2B payments.

Stripe, for example, has forged a relationship with Visa Inc. to enable buyers using the Visa Payables Automation platform to pay suppliers that are unable to accept digital payments through a virtual Visa card. And Coupa has struck a deal with American Express Co. to issue a virtual credit card for B2B transactions. It has also set up partnerships with Bank of America and Chase to let them leverage its platform.

“Banks are valuable distribution partners for fintechs because they control the customer relationship, but they are not great at developing new technology,” says Jake Moore, executive vice president, corporate development and strategy at payment-solutions provider Repay Holdings Corp. “Typically, there are a lot of better mousetraps out there than what banks can offer, so they look to partner with technology companies.”

In April, Repay joined the CDK Global Partner Program, which provides auto, construction-equipment, marine, and RV dealerships with access to third-party applications aimed at increasing productivity and streamlining operations. The arrangement enables dealerships in the CDK network to use Repay’s platform to automate accounts-payable payments based on specific invoice data within the CDK system. The CDK network has 17,000 dealerships throughout North America.

‘Cash-Flow Benefit’

One payment application gaining a lot of traction now is virtual credit cards, which are digital versions of plastic credit cards. Virtual cards are typically generated for a specific use, such as paying a purchase order or supplier invoice. They can be created instantly through a pre-approved process and have a credit limit authorized to be spent only with the designated supplier for the amount of the invoice or purchase order.

That information, along with remittance detail, is securely emailed to the buyer, which then activates the card to pay for the purchase. Once the payment is processed, the transaction is automatically reconciled for buyer and seller with the corresponding invoice or purchase order.

By comparison, traditional corporate cards aren’t pre-approved and must be manually coded and reconciled by the accounting department. Corporate controls typically require approval for each transaction.

The annual value of virtual cards used by businesses is projected to total more than $1 trillion by 2022, up from an estimated $568 million in 2019, according to Juniper Research. Eventually, spending on virtual B2B credit cards is projected to surpass spending on traditional purchasing cards and checks.

Last October, Coupa expanded its virtual American Express B2B card program to the United States. Previously, Coupa offered virtual cards in the United Kingdom and Australia.

Once a business’s eligible AmEx account is tied to Coupa Pay, virtual cards can be automatically sent to authorized suppliers for payment. Each card is generated with a unique AmEx account number specific to purchase.

In addition to providing buyers greater visibility into the data around the payment, virtual cards help buyers better manage their working capital, as they typically have 30 days to pay the balance on the card, just as they would have when paying an invoice. At the same time, sellers benefit by receiving payment faster than the typical 30-day payment window for invoices.

While virtual cards can expedite payment and improve tracking, they are typically linked to digital invoicing systems. Stripe, for example, has built a suite of applications around digital billing and invoicing and card issuance.

Stripe Billing allows sellers to instantly collect one-time or recurring payments via card, automated clearing house, and other payment methods, and sync billing and payments data with existing workflows. The application can support any billing model, Stripe says. The hosted invoice page detects which payments require strong consumer authentication and requests 3D Secure authentication as part of the payment process.

Stripe Invoicing enables B2B sellers to send a Stripe-hosted invoice in minutes and includes an API and advanced features to automate payment collection and reconciliation.

“The main cash-flow benefit from digital payments is their speed of reconciliation,” James Dyett, Stripe’s head of global product sales and payments optimizations, says by email. “Products like Stripe Billing and Invoicing make it much easier and quicker for B2B payments to be facilitated. A majority of Stripe invoices are paid within three days, for example.”

Stripe Issuing allows businesses to instantly create virtual or physical cards for payments. Businesses creating cards with Stripe Issuing can set spending limits and specify the types of businesses where the cards be used, while virtual cards can be designated for one-time or multiple use.

‘Lots of Runway’

In addition to its virtual card strategy, Stripe is leveraging Visa’s Payables Automation software to help automate accounting and payments by extracting information from invoices, verifying it against purchase orders, and automatically approving and making payments. The aim is to lower costs while increasing spending controls.

The primary reason Visa partnered with Stripe was to facilitate a network connection to sellers not set up to accept a virtual credit card so they could still accept digital payments.

“Since the connection of buyers and sellers is ultimately a network problem, it made sense for Visa to turn to Stripe’s existing infrastructure for multi-sided marketplaces, [which is] Stripe Connect,” Dyett says. “All a seller on Stripe Connect has to do to receive funds is sign up and provide a bank account number. This allows suppliers to seamlessly onboard with card networks and reduce their reliance on trade credit terms.”

Stripe Connect is a set of application programming interfaces that allow businesses to facilitate payments on their software platform, build a marketplace, and pay sellers or service providers globally, while shifting payments compliance to Stripe.

As the economy begins to reopen and manufacturers return to pre-pandemic production levels, the opportunities for fintechs to expand their foothold in B2B payments are expected to grow substantially. Given the low penetration of digital payment and invoicing solutions, payment experts expect there will be plenty of room for existing and new players as competition heats up.

“About 30% of the B2B market has been penetrated with digital payment solutions on the accounts-receivable side and full penetration may never be achieved on the accounts-payable side,” says Moore. “There’s still lots of runway left.”