Often business-to-business (B2B) payments technology lags behind its consumer-to-business (C2B) equivalent. While sending a payment over a service such as PayPal or Venmo is near instantaneous, sending the same payment between companies, or from a company to a customer, can take days or even weeks. There are many good reasons for this delay, primarily to ensure that all parties are protected. But for merchants having to hold back payments to their suppliers—while their own customers delay payments because their accounting department only sends payments on the 15th of every month and it’s the 16th—can be hugely frustrating.
A majority of companies experience late payments, and despite average expected terms of 27 days, most payments take on average 34 days. More worryingly, the average merchant writes off 1.5% of its receivables—1.5% of everything they stand to make simply vanishes, and this can be enough to make or break businesses when so many operate on razor-thin margins.
Late payments and razor-thin margins that businesses work under are part of many factors contributing to sluggish growth in numerous developed economies, alongside supply chain problems, labor issues, the ongoing fallout of the COVID-19 pandemic and spiraling inflation. If businesses had that extra 1.5% to reinvest or simply to keep their heads above water—and if they could be paid on time rather than waiting months—then they could start to put themselves, and the economy at large, on a path to recovery.
Bringing C2B ideas into a B2B payments environment
An accounting or payments professional dealing with late and failed payments might order a new television on their phone during their lunch break with terms that suit them, thanks to financing options embedded in many major e-commerce sites. There are two entirely different worlds when it comes to payments, and a great deal of the innovation that B2B payments needs is happening in the C2B space and not crossing over.
The B2B payments space was worth a staggering $49 trillion in 2021 and is predicted to be worth $54 trillion in 2023. Although this 10% growth may seem to be good news, in context it reflects a “slow recovery in business activity following the impact of the COVID-19 pandemic.” Meanwhile, we have seen new payment innovations in the form of Buy Now, Pay Later (BNPL) and virtual cards. Real-time payments have been a standard in C2B and C2C payments for over a decade.
Let’s take a look at some of the key technologies that can drive this change and how they could operate in a B2B environment:
Tackling Cash Flow Challenges
Cash flow is any company’s lifeblood. Without it, everything shuts down.
Despite the importance of cash flow, the systems that bring cash into and out of businesses aren’t built to optimize cash flow. Aside from the significant delays in payments being actioned, acquirers can hold funds for multiple days before releasing them—sometimes longer if weekends and public holidays are a factor. Of course, there are many reasons why acquirers hold funds for a few days before releasing them, but it can still cause cash flow problems when a company has to wait three or more working days to pay a supplier, who in turn has to wait to three or more working days to pay their suppliers, and so on.
What’s needed is an ability to access incoming funds immediately, without the need to wait for settlements.
The global value of virtual card transactions alone is expected to soar from $1.9 trillion in 2021 to $6.8 trillion by 2026. This will be fueled by an urgent need for companies to optimize their back-office processes; currently too much time and money is spent on the complex processes described above.
Virtual cards change this. Say Company X needs to pay Company Y for their goods. They could either go through the standard payments process, which can take months, or create a virtual credit card with the amount that they need to pay, with which they can pay their invoice immediately. To create that virtual card, you either need to prepay or get approved for a line of credit.
These payments are also much more secure than their analogue counterparts. Even if the virtual card is compromised, it will only contain the funds needed for its intended purpose, and they can be reclaimed through chargeback procedures. Virtual credit cards also allow for much greater transparency and centralized control that can inform payments decisions and prevent losses.
The Ease of C2B in B2B Payments
There are many providers of virtual cards, but until recently there was no provider that could connect two traditionally separate payment functions and de-risk the payment process while unlocking new benefits. Virtual card providers allow companies to immediately access the incoming funds that are being paid to them. Instant access to incoming funds allows companies to immediately make supplier payments and fulfill transactions in real time.