As part of its increasing focus on B2B payments, Edgar, Dunn & Company (EDC), a strategy consultancy specialising in payments, describes the evolution of B2B payments and the increasing digitalisation of B2B processes and payments.
B2B payments have significantly lagged in the adoption of new technology, compared to Business-to-Consumer (B2C) payments. Approximately one-third of total B2B global expenditure is processed electronically, compared to two-thirds of B2C global expenditure. This lag can be partially explained by constraints imposed by ERP and financial systems used by enterprises but also by historical reasons and legacy processes. However, over the past years, there has been undeniable consumerisation of B2B payments, which has placed an increased focus on customer experience and alleviated all potential pain points. This has led to B2B payment trends increasingly mirroring B2C payment trends.
Traditional B2B payments were often characterised as outdated and inefficient. For instance, Automatic Clearing House (ACH), card payments and paper cheques were, until recently, the main payment methods used by businesses in the United States (US). Similar systems and certain variations, depending on geographies, were also used across the globe. Over the past ten years, new products have been introduced as technological innovation facilitates the transition of B2B payments towards a digital payments landscape:
- New B2B payment methods have emerged that offer an entirely digital experience. Transactions no longer include a physical component. Instead, businesses increasingly use digital or virtual bank and card accounts that enable payments through digital portals, mobile apps, social networks and APIs.
- Real-time or near-real-time payments systems, such as Same Day ACH (credit and debit) in the US, Faster Payment Service (FPS) in the UK, the Immediate Payment System (IMPS) and Unified Payment Interface (UPI) in India, and MAS Electronic Payment System (MEPS) in Singapore, have changed the domestic payments infrastructure. To ensure interoperability across the Single Euro Payments Area (SEPA) and avoid potential market fragmentation, new initiatives have been launched such as Instant SEPA Credit Transfers in Euros (SCT Inst), RT1 for processing payments at a pan-European level and TARGET Instant Payments Service (TIPS) for the settlement of instant payments, and potentially beyond. While real-time payment systems (RTPs) have typically been more used by consumers due to the cap imposed on transaction value, small businesses have also used them. As instant payment develops, it has also become increasingly relevant for B2B use cases, such as merchant settlements, payroll or money transfers.
- Initiatives from payment schemes with Visa Direct and Mastercard Send also highlight the need to enable real-time transactions that can address specific use cases such as B2B marketplaces, gig economy and payments to SMEs.
- E-invoicing is a fundamental change that has only recently emerged. This change resulted from the need for invoicing workflows, such as the approval process and invoice generation processes to be automated, cloud-based, or be embedded in the newest generation of enterprise resource planning systems (ERPs). The automation of the invoicing process results in faster Accounts Payable (AP) and Accounts Receivable (AR) cycle times, lower costs, reduced errors, increased visibility of financial data and faster approvals.
Bearing all of this in mind, it is clear that B2B payments have undergone a significant shift towards digital processes and payments. Until recently, this change may have been relatively slow, and Covid-19 has considerably accelerated this trend.
The analysis of Covid-19 on B2B payments will be analysed in EDC’s next newsletter.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).