B2B Payments: What Magic Will It Take to Make Paper Disappear?

A 2015 Payments Leader article discussed the pros of using credit cards for business-to-business (B2B) transactions – less paper, less manual intervention, rebates for users, ability of suppliers to be paid sooner and global acceptance of major credit cards.

Since 2014, commercial credit cards have gained about three percentage points share in B2B volume – rising to 12.5 percent in 2018 while ACH transactions moved up 10 percentage points between 2014 and 2017 to 32 percent, according to a joint study from the Credit Research Foundation and NACHA.

Although paper check payments are declining, they still account for nearly half of B2B transaction volume overall. Small- and medium-sized businesses (SMBs) are the heaviest users despite inefficiencies associated with handling paper, including tendencies to misplace checks. The independent store owner, for example, often writes a check collected by a delivery person to take to the supplier where it makes its way to the back office – encountering multiple points of manual handling and potential misplacement along its route.

Product Innovation Drives Renewed Interest in Commercial Cards

Issuers – not just the historically dominant Tier 1 players – are exhibiting renewed interest in commercial cards. Financial institutions are increasingly investing in commercial cards to help deepen their commercial relationships, especially with SMB customers – projected to record the highest growth rate in usage by the Aite Group.

Rebates have been the unavoidable market driver to sign up SMB owners. However, rebates are unsustainable at their current level as users demand better monetary deals and more frequent payouts. Rebates are analogous to retail sales promotions – addictive as incentives but setting up a scenario of continuously thinning margins and dwindling effectiveness as a differentiator.

Truly differentiating benefits of commercial cards are twofold: gains in efficiency and data empowerment. A 2015 Deloitte study found that using payment cards reduces processing time and speeds up the reconciliation process for buyers. The study also found that users were able to streamline the purchase process and reduce their administrative costs.

Efficiency gains also are made possible by application program interfaces (APIs) that integrate commercial cards into enterprise resource planning (ERP) and accounting systems.

Data Can Break Down Supplier Resistance

Some suppliers have resisted interchange and acceptance costs associated with commercial cards. However, efficiency gains and harnessing data associated with commercial card use can offset those costs and provide insight into the customer base. One example is insurance providers to commercial businesses. Card data can be examined by different variables such as geography to determine what factors are associated with on time and full payments. Finding out the characteristics that differentiate payers helps insurance companies develop more precise risk profiles and adjust premiums accordingly.

If suppliers know they will be paid on time, they are more willing to accept commercial card payments. Along this line, dynamic interchange rates are being launched to expand the pool of supplier acceptance. Rates are based on when payments are made – the sooner the payment, the lower the interchange rate. Suppliers are accustomed to offering early payment discounts. In essence, dynamic interchange rates provide an early payment discount.

Paper Won’t Magically Disappear Yet

Paper checks are expected to gradually lose share but will still account for a significant share of B2B payments for some time, especially among SMBs:

• Although businesses see value in same-day ACH, many companies don’t have the proper systems or resources to use ACH effectively.
• For large transactions, card acceptance is impractical due to credit limits. According to NACHA, the average ACH debit transaction was more than $30,000 and the average ACH credit transaction more than $9,000 in 2015. At the same time, the average B2B general purpose credit card transaction was only $209.