B2B (business-to-business) payments have been steadily growing in both the number of transactions and the value of transactions. The global B2B payments market is expected to be valued at $38 trillion in 2020. The US B2B payments market alone is valued at $25 trillion and is growing at a CAGR of 5.8%.
As experts in payments consulting, Penser has assisted many a fintech and financial institution in their digital transformation & growth strategy initiatives. As a result, we’ve gained insight into the emerging and popular trends in the B2B payments space. Here are 5 key emerging B2B payments trends:
While a significant amount of B2B payments are still processed with checks, digital payments are swiftly closing the gap as more and more businesses go digital. In 2004, 81% of businesses used checks for payments; however, by 2016, that number was down to just 51%. Globally, digital payments are expected to reach $23.7 trillion in 2020.
With the advent of eCommerce marketplaces, digital B2B payments have gained a huge avenue. According to NACHA and the Credit Report association, 32% of B2B payments are now ACH (automated clearing house) payments, with industry expectations estimating it to increase to 45% in 2020. While digital and wire payments have seen an increase, check payments have been decreasing yearly. In fact, experts predict that check payments will decrease to 34%, with cards making up 12.5% and cash and wire making up 8.5% of all B2B payments in 2020.
From online card payments to mobile wallets, both customers and merchants have been choosing digital alternatives to pay for their goods and services. Digital payments have the benefit of being quick and easy to integrate into existing setups while offering lower processing costs and smoother cashflows. As a result, digital payments have swiftly revolutionized the B2C global payments market.
The B2B market though, with its lower-volume, higher-value transactions, has not grown at the same pace; this is likely because of the high cost and time involved in switching from an existing physical payment method to a digital one. But, as the global population goes increasingly digital, businesses are being forced to quickly make the switch to accept digital payments and manage payouts via similar channels. With technology advancements and new start-ups providing more cost-effective solutions, we are likely to see the barriers to entry come down, prompting a burst in the adoption of digital payments.
According to cards giant American Express, businesses that automate accounts receivable (AR) payments can manage incoming cash flows better, leading to fewer cash-flow and liquid cash problems. Historically, B2B payments have demanded a high level of manual control and intervention, leading to time-consuming work that often had several errors. Automated payments processing allows businesses to manage their payments more efficiently, resulting in quicker invoice payments, and allowing suppliers & merchants to receive their money faster.
This has spurred rapid adoption of automated payments by businesses, and fintech companies like Square, PayPal and QuickBooks, have even built automated payments and services solutions into their suite. With services ranging from recurring payments, customer/contractor reminders, etc. that businesses can use to speed up their payments and payouts process, automated payments are fast establishing itself as the new norm.
In fact, it’s not just the private sector; several governments across the world have backed electronic and automated invoicing for business-government work. In June 2018, in Spain, a new law mandated the electronic submission of public procurement contracts of $5,700 (€5,000) or more. In the US, the government has supported and encouraged the use of electronic & automated invoices since 2015. All government contractors have had to use electronic invoices since the beginning of the fiscal year 2019. With giant strides being made in both the private and public sector, automated payments are likely to only grow further in the near future.
Incorporation of AI and Machine Learning
Reducing human error and increasing efficiency are key focuses of any business today. With artificial intelligence and machine learning technology becoming more ubiquitous, several businesses are incorporating these technologies into their payments ecosystem. This allows fewer errors while allowing AI to analyse transactions and provide insights that can optimise the way payments are processed. The use of AI and machine learning is also helping with fraud detection and prevention of cybercrime, an important aspect of security when handling payments.
AI and ML adoption have also led to an increase in the use of virtual assistants, as they help increase procurement efficiency i.e. speed up processing times and reduce errors. Using AI and ML can result in fewer issues when it comes to invoicing and pricing, while also identifying alternative suppliers and providing crucial information to partners and collaborators quickly. Recurrent orders and transactions are studied to make the process smoother and error-free while issues with prior transactions are solved easily. AI and ML can also be smoothly integrated with AR (Accounts Receivable), AP (Accounts Payable), and STP (Straight Through Processing) to optimize B2B payments.
Cross-border B2B transactions generated about $125 billion in revenue in 2018 and continue to grow apace. To address this increasing opportunity, several new players have entered the space. The collaboration of digital payment players and cross-border payment providers has led to an increase in quick and cheap digital payments.
Freelancers, self-employed, and many more still receive B2B payments via wire transfers and correspondent banking networks. This can be cumbersome, time-consuming, and lead to several issues for payment clearance. The fluctuating foreign exchange rate, bank/wire transfer fees, etc. all make the traditional solutions less appealing, which creates the right environment for disruption.
Cross-border payments have gained momentum particularly as large amounts of work in developed markets have been outsourced to developing markets. Cross-border payments can be streamlined and sped up by leveraging modern tools like distributed ledger technology (DLT), which can complete transactions within minutes. Due to the immense potential of this market, established legacy players like SWIFT, Mastercard and Visa have invested in new fintech services that provide easy, flexible B2B payments solutions – SWIFT recently launched its gpi, Mastercard its B2B Hub, and Visa its B2B Connect program, each of which make use of innovative new technologies, such as the blockchain, to optimize the solutions they provide.
Blockchain and Cryptocurrency
The blockchain revolution has been sweeping both fintech and finance — and B2B payments are no exception. While blockchain and cryptocurrency payments are still being tested by most businesses, there are certain advantages to incorporating both into the B2B payments ecosystem.
Blockchain can assist businesses with KYC (Know Your Customer) and AML compliance requirements. Fraud reduction, lowered amounts of paperwork, increased efficiency in payment processing, transparent payments, the ability to hold a decentralised cash reserve, and quick (digital) identity verification are some of the major benefits to adopting blockchain and cryptocurrency in B2B payments.
We’re on the verge of larger adoption, with one report estimating that up to 25% of banks, manufacturers and retailers will leverage blockchain networks in some way, and by 2021, at least 25% of the world’s top organizations will use blockchain as a foundation for digital trust and data security. By 2023, blockchain networks are expected to facilitate over $60B in cross-border payments. Further innovation in this space is likely to increase as the market matures and blockchain-based solutions become more widespread.
B2B payments across the globe have seen a gradual but steady change from paper checks to digital invoices and payments. Given the large volumes of payment processing in the sector, it is only natural that the switch to digital, automated payments has taken longer than B2C payments. However, with the incorporation of new innovations and technology (such as AI, blockchain, cryptocurrency, etc.), making that switch is becoming increasingly easier. As the industry benchmarks adapt towards this faster more efficient solution, it is only a matter of time before B2B payments turn truly global and digital in nature.
With years of experience in the field, we have established ourselves as experts in the payments space, and keep a close track on emerging trends that could impact our clients’ business. We have helped payments companies implement changes in their capabilities by guiding their strategic planning process and offering industry insight into new and upcoming trends in the fintech sector. Contact us for digital transformation, due diligence, and strategic planning services.