Next in Tech | Ep. 186: B2B Payments Technology and Markets

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Eric Hanselman: Welcome to Next in Tech, an S& P Global Market Intelligence podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, Chief Analyst for Data and Insights at S& P Global Market Intelligence. And today we're going to be delving back into the payments business, but this time looking at some of the business-to-business aspects.

And to discuss that with me is Mckayla Wooldridge. Michaela, welcome back to the podcast.

Mckayla Wooldridge: Hey, Eric. Thanks for having me back.

Eric Hanselman: It's great to have you here. And we're heading in a slightly different direction than what you were talking about the last time you're on. I mean, you've been working in the payments side of the business quite a bit, but you've started to focus more on the business side shifting, well, at least shifting newly away from a lot of the consumer side.

Mckayla Wooldridge: That's right. This is a really exciting market right now. So, I'm excited to share some key trends we're seeing in the B2B payments market and some of our data as well.

Eric Hanselman: So, what's Different in terms of the two. And I think most people are probably familiar with the consumer side payments industry. A lot of the payments technologies, a lot of things we've talked about previously.

The business-to-business side though, is it sounds like there's some fundamentally different aspects in terms of the way in which it operates and some of the facets of that market.

Mckayla Wooldridge: There is, yes. As consumers, we're used to paying how we want and when we want, whether that's a credit card or a debit card or even a digital wallet.

But in the B2B payments market, it's really not as straightforward. We found that half of businesses surveyed say they pay their suppliers by bank transfer. And about half pay by credit card. But what's really interesting is that nearly half still use paper checks. Then about 16 percent still use cash.

And that's from our 2024 business trend survey.

Eric Hanselman: That, that, that is, I mean, well, it's interesting. We talk about various industries and what their progress has been in digital transformation and its various forms and the basics of digitization. And we were talking about, when we talk about a lot of what's happening in logistics, facts is still a big factor there.

And even in healthcare, we seem to have, what are these retro technologies, but they still wind up being that least common denominator that you know, that you can always pay somebody in cash, but holy cow, all of the challenges that starts to present just operationally for a business, though, those are pretty massive.

Mckayla Wooldridge: It is. It can be kind of concerning because, you know, it's not really just about inconvenience with paying by check, it can really be costly for a business. It can take several days for that check to clear. Processing costs can be anywhere from 4 to 20 for a single check. And then also, checks just are more vulnerable to fraud compared with other payment methods as well.

Eric Hanselman: We've seen in a lot of the consumer side fraud, but certainly that's happening on the business side for fraud problems with checks as well. But I think the point that you made about digitization is that interesting piece, because it's there's the cost aspect of it, certainly. But there also is that issue of how are you tracking the operations of the business?

How are you integrating that in terms of getting the business to a more solid technology footing? And that that's that seems like one of the even more basic progressions that businesses are making.

Mckayla Wooldridge: Yeah, it's so interesting because there's really a whole range of back-office operations that go on for a business to both make and receive payments.

So unlike consumer payments, businesses typically pay for goods and services after they've been delivered, and this is generally for referred to as paying on terms when the payment process between a buyer and a supplier can be pretty complex. So, the process typically begins when. A customer creates a purchase order, then the supplier fulfills that order, and its accounts receivable department creates an invoice to send to the customer.

And then the customer's accounts payable department processes and pays that invoice. But this entire process can be anywhere from 30 to 90 days on average.

Eric Hanselman: So, well, you mentioned check clearing times. I wonder for some businesses whether or not that additional delay that they still have is necessary.

Access to funds before that check clears might in fact might be something that they're still literally banking on in some level, but I guess that creates a whole set of questions about what's their motivation? Do they want to actually make these transactions happen faster? Are they, you know, what are the motivations to be able to go into digitized payments?

And what are some of the benefits that a business can potentially reap, you know, if they're shifting to a better and at least more technically mature technology?

Mckayla Wooldridge: Yeah, it's a really good point because it's really all about managing cash flow and working capital for businesses. So, I'll give an example, real time payments.

That is something that Skeptics argue businesses may not want to use because those funds are leaving their accounts instantly. We found that according to our survey, about 20 percent of businesses are actually using real time payments already to pay their suppliers, but this is really interesting because the other way to look at it is businesses can actually hold onto those funds until the last minute they need to be paid.

And so that is also kind of a way for them to manage their working capital. There is kind of a desire for those digital payment methods as well, not only in terms of speed for the transaction, but in terms of security as well. Um, and then also, like I mentioned, just the ability to kind of manage cashflow as well as is a factor.

Eric Hanselman: Well, there's, there is some, some benefit to being able to say, hey, the checks in the mail, but to your point, it means that if you have suppliers that you want to make sure that one, you've got some confidence of when that transfer happens, but two, you want to actually have that control. You want to have that precision of saying, all right, this is due on the 30th.

I want to make sure that, yes, I want to keep my supplier happy because I want to make that payment, but I also want to, presumably I can do things like scheduling payments, you know, midnight on the 30th or whatever the, the last transaction time is that I could potentially move those funds. So, a little more control for business.

It sounds like what's the upside.

Mckayla Wooldridge: Absolutely. Having that. that control that also helps with things like reconciliation and then getting that visibility into expenses as well. So that's where getting employees corporate cards and being able to set spending controls and limits on those cards are really important.

Eric Hanselman: Well, when you contrast that, I guess we've talked a little bit about how this contrasts with consumer. I mean, consumer, you're basically consumers are paying up front businesses are paying in arrears, but that the actual technologies are the technologies that are involved in each of these significantly different.

I mean, again, you're talking about credit cards driving a certain part of this. How did the technologies differ?

Mckayla Wooldridge: Yeah, it's a great question. So, I think it's helpful to kind of think about it as really two different sides of the market. So, on one side, there are B2B payments providers that are catering to business buyers and they're providing technology such as accounts payable automation to streamline the payments process.

Thanks. When businesses pay their suppliers. So, AP automation typically uses technologies such as artificial intelligence and machine learning, and also optical character recognition to digitally extract information from invoices. And then it's able to match invoices to purchase orders and then also automate some of that payment approval workflow to help kind of streamline some of the payments process and reduce the manual labor associated with making a payment.

So that's the, uh, the business buyer side, and then there's also the providers that are focused on serving the suppliers and kind of streamlining the receiving end of payments. And that's where accounts receivable automation comes into play. And this technology is essentially automating the invoice generation process.

It's automating collections reminders, and it's also recording and tracking payments as well. And the goal of this is to get businesses paid faster and reduce their day sales sales outstanding.

Eric Hanselman: Ah, so both sides of that equation, but it's interesting that one of the things you're identifying is that in both these ends, there are bridge technologies.

So, you're talking about invoice scanning, being able to have AI applied to some of this to identify and match some of these workflows to ensure that you're smoothing workflows. It sounds like one of the big points is actually. Being able to approach this with an understanding that this is not an immediate overnight transformation to full digitization, it actually is starting to put technologies in place that can both deal with the manual capabilities that exist today as that March integrator digitization actually takes place.

Um, it seems like that, that being able to bolt up to the manual processes is a key part of this on the business side.

Mckayla Wooldridge: Absolutely. And right now, businesses have data in disparate systems and replacing a lot of these legacy systems. It's a big challenge right now. It's not something that's going to happen overnight.

But, you know, that's where I think partnerships with B2B payments providers can really help streamline some of this manual back-office payment processes.

Eric Hanselman: Yeah, I know in logistics, part of the digitization process was really working to come to some level of agreement on interoperability. Are you seeing the same kind of things in B2B payments?

And I guess, are there efforts to get to a point at which there's some acceptance of common formats, common processes, things of that nature?

Mckayla Wooldridge: Yeah, that's a good question because there's definitely standardization is a huge challenge. It's a huge, you know, goal with getting data into the correct format that is very much part of the process.

But what I think is really interesting is, while this market is pretty fragmented right now. So, I mentioned there's providers focused on the AR tech, the AP tech, we're actually beginning to see providers offering more integrated off solutions across the B2B payments value chain. So, for example, on the business buyer side, we're seeing providers offer Procurement support, uh, AP automation and expense management capabilities.

Ramp, for example, they started off offering corporate cards and then they expanded into expense management, AP automation and procurement. So really that addresses a lot of the challenges that businesses have with data living in disparate systems that can all usually tie back to their. ERP systems, and then that addresses a lot of challenges that they have with just managing expenses in general and then also making payments to suppliers.

So, it's, they're able to tap into a lot of capabilities through a single provider. Now,

Eric Hanselman: it sounds like this is another situation in which there are a lot of potential buying centers, but you've got payables, you've got receivables, depending upon the size of your organization. Those may be different teams.

Is this a situation where, in fact, you've got potentially different systems in both of those areas? And as a result, uh, that you've got to approach them from different angles for both of them?

Mckayla Wooldridge: Yeah. So, they, it is very much like I mentioned, a fragmented market. Still, there are different teams, different systems at play, but we're beginning to see providers kind of offer a lot of these capabilities under a single pane of glass.

So, in some cases, there are providers even catering to both sides of the market. So, pay stand bill. com, for example, they all serve business buyers and also suppliers. So, with. Accounts payable, accounts receivable capabilities, and that just helps businesses get access to capabilities through a single.

Eric Hanselman: Well, and you've said the platform word now, it seems like there's so many things that we're looking at, you know, so many areas in which we're seeing this, this gravitation towards platform-based offerings.

The difficulty, though, is that in a lot of cases, it's one big system. It sounds like in B2B payments, this is a slightly more gradual shift, but that the end goal is one that most of the players would like to be the one platform that covers all the needs and various ends. It seems like that's going to require a lot of integration and especially for something that's as fundamental to most organizations as receivables and payables to the function of the organization.

Uh, that could be a tough transition. Is, are you seeing interest in platforms? Is this a shift that looks like it's going to really pick up steam?

Mckayla Wooldridge: Yeah, we've actually found that. A lot of businesses prefer to use a single provider for their single software provider for even financial services. That's a trend that we're seeing.

There's also still a preference for having multiple providers. Uh, there's benefits to that as well. It can be a little bit more flexible support, maybe different use cases. So, there are benefits to both, but I think just in general, we're seeing a shift towards providers that can offer just More capabilities for businesses in a singular platform.

I don't think we'll ever get to the point where there'll be that one platform that covers all B2B payments capabilities for buyers and suppliers. But I think that we can get a good portion of the way there.

Eric Hanselman: Uh, it seems like we've got a lot of, of software providers that want to be able to get to the Salesforce model of being the everything for everybody in that particular area of their market.

That's not an easy thing to be able to master. As, as you're pointing out there, there are still these best of breed, more specialized approaches that depending upon how an organization's. Organized may be better fits. Of course, having one single system certainly would simplify things, but it seems like an area in which there, there may be particular challenges and being able to have one system that does everything exactly the way that, that a particular business happens to operate.

Mckayla Wooldridge: Absolutely.

Eric Hanselman: Yeah, because it does seem especially for something for long established practices, like the internal financials of an organization, there are going to be ways in which the business has been organized around this and managed it. I mean, even you were mentioning some of the shifts moving from cash and checks, maybe to cards.

That, I think probably paying on for credit cards and some of this was probably a big enough change, but it sounds like some of the players in the market came from an environment in which they were helping to get cards as part of that payment environment and then had the data that the cards generated and then are now helping businesses manage that data are corporate cards.

Has that been a transformational? process or is that something that's still in the midst of happening?

Mckayla Wooldridge: Still in the process of kind of digitizing payments like we talked about earlier. So corporate cards are interesting. One trend we're seeing is virtual cards. So virtual cards are essentially digital versions of physical cards and they're only valid for one time or limited use.

One of the Biggest benefits of virtual cards is their enhanced security. So, because the card expires when a payment is completed or a specific time is reached, virtual cards are considered more secure than physical cards. So, I think that's a really interesting payment method that we're seeing. And like you mentioned, having those card payments, it helps businesses better kind of capture and track.

expenses as well. So that's where a lot of corporate card providers are now offering expense management capabilities for businesses as well because they're just so closely tied together.

Eric Hanselman: That's fascinating because the, the peruse we've had, we've had the consumer corporate card of, and there was a lot of experimentation that went on in the consumer markets about single use credit card numbers so that your potential loss of that number wasn't a particular issue.

But here it sounds like what's happened is that this is now more secure than using a check. You don't have the problem of there's all those legacy stories of I've got the corporate card and I'm going to go off and, you know, have unrestrained purchasing power because I've got a card. You've now got the management piece of it.

You've got the security of it. And now that one time use card number starts to become a standardized way of doing the transaction. It's more secure than, you know, any of the normal stuff, which is wire transfers, direct ACH transfers, you know, bank to bank, you know, bank account transfers. It seems like it overcomes a lot of those challenges that in that what had been a physical card business in terms of how they got used.

Mckayla Wooldridge: Yeah, it definitely addresses a lot of the challenges that businesses are having with their payments. Um, so I anticipate adoption to increase for virtual cards. I think that there are a little bit more. More benefits to it in the B2B payments market than there are in the consumer market. That being said, I think that it's not, maybe not a great payment method for all types of payments.

It is kind of limited to those one-time transactions. Although there are some that can support recurring transactions as well, but typically they're geared towards more just very specific transactions. Purchases and it definitely gives organizations more control over employee spend. They can set controls and spending limits and kind of have that control like we talked about.

But I think that's just one of the many payment methods that are very beneficial to businesses in this space.

Eric Hanselman: And it's, I'm guessing that much like other card-based transactions, it comes with fees.

Mckayla Wooldridge: Yes. So that is something that businesses will have to take into consideration. There are fees for it. And the fees with B2B payments are interesting because it's really kind of based on the level of data that the payment method generates.

So, there's like level one, level two, level three data processing. And so that is. Another really interesting area of B2B payments is just how valuable that detailed data is with a payment method as well.

Eric Hanselman: Oh, so is, do payment methods get priced differently based on the kind of data they generate?

Mckayla Wooldridge: Yes, essentially, like I mentioned, it's referred to as the different levels of processing.

And so, for example, level one would have very basic information about the purchase. Level two would have a little bit more detailed information about the, the purchase and then level three would have even more detail. So, they are priced differently. The processing fees that businesses pay for these and the more.

Detail that's going to affect the cost of the transaction.

Eric Hanselman: So again, this is one of those things that a, the backend institutions that are managing this need to be able to generate some kind of revenue beyond just simply the holding the cash parts of this, but it's interesting to see that shake out in terms of.

Their access to the information that gets derived from the transaction and being able to have that as being a valuable part of that interchange as well. And my guess is that on the business side, that's probably even more valuable than consumer just because of the size of the transactions is that.

That a safe assumption.

Mckayla Wooldridge: I think you're absolutely right. Having that detailed data is really beneficial and businesses are really incentivized to provide it with level three processing since it's a lower processing cost and level one or level two. So, it not only helps businesses save on processing fees, but it can also be a lot of money.

process more quickly, which can help improve cashflow and having that more detailed data like we talked about can help businesses even better track and manage their payments as well.

Eric Hanselman: Oh, cause that's something where if the transaction itself carries that higher level of information about the transaction, certainly the business again, if you've gotten digitization can now give you more perspectives about what that transaction was.

So, in fact, there's value on. both sides of that coin, both to the payments processor, as well as to the business itself. Absolutely. So, what do you see as some of the challenges that exist in the market and potential opportunities that lie out there ahead?

Mckayla Wooldridge: Yeah, I think we, we got at some of them earlier.

One challenge being Data lives in disparate systems, replacing these legacy systems that businesses rely on. It's not something that's going to happen overnight. Smaller businesses may have a bigger challenge with it than enterprises. Also, we found that a third of businesses say they have difficulty keeping up with their cashflow management strategy or don't have one at all.

Eric Hanselman: Ooh, well, well, and again, maybe not all that surprising when you think about what, what the general state of many businesses is, but yeah, um, Nonetheless,

Mckayla Wooldridge: absolutely.

Eric Hanselman: And I wonder, is this something where you see the same kinds of focus on some of the benefits and contrasting this with consumer payments? A lot of the focus on consumer winds up being on flexibility.

It seems like business hasn't quite gotten to that state yet.

Mckayla Wooldridge: Flexibility in terms of the payment method or?

Eric Hanselman: Yeah, payment method and maybe starting to do things like offering terms. A lot of what's been happening in payments, it seems you mentioned on the consumer side, you've got retailers that are building in capabilities to be able to have more flexible payments primarily because they're looking to make that transaction simpler for the consumer.

I was curious whether or not you see similar kinds of things happen on the, uh, the business side.

Mckayla Wooldridge: Yeah, that's an interesting question. I, you would let, when I joined you last time, we were talking about buy not pay later, and that is something we're seeing in B2B payments as well. So, paying on net terms, that.

Is something that has been very standard in B2B payments for a while. You might've heard the term to 10 net 30, and that's really where businesses, they can essentially receive a 2 percent discount if they pay their bill within the first 10 days. Otherwise, they have 30 days until the payment is due. So that it almost sounds like buy not pay later.

It's that flexibility at checkout that we talked about on the consumer side, but we're seeing providers now that are coming in and actually offering Extended terms. So, beyond the 30 days, they may offer 90 days or several months. And so that's essentially acting almost as buy, not pay later for businesses.

So, I'm thinking of like Billy Mondeo tranche. Those are all providers that have kind of coined the term buy, not pay later for. B2B payments. Oh,

Eric Hanselman: interesting. Oh, it sounds like maybe historically there's been that flexibility in the business-to-business side and that maybe now there's an opportunity to formalize.

Oh, wow. Interesting things. So, what do you see as next steps?

Mckayla Wooldridge: Yeah, it's really. Exciting time for B2B payments. I think that there's a lot of momentum. Like we talked about the industry's becoming more digitized and it's also using technology to streamline some of those accounts receivable accounts payable processes, like I talked about.

And like I mentioned, the market is still pretty fragmented, but we're seeing that's beginning to change. So, there's providers that are. Offering essentially a lot of these capabilities, like we talked about. And this is really interesting because having oversight too. On both sides of the market, if you're serving a supplier and a buyer, this opens up new opportunities for things like working capital and expense management.

I'm just having that. Insight into buyer’s needs, and then maybe being able to kind of provide financing as well when businesses need it. So, it just opens up so many opportunities. And I think that's really exciting. I also think that as the market kind of becomes more integrated, we can expect some consolidation.

We've already seen a ton of M and an activity in this space. Pay stand acquired team pay in April this year, flywire acquired invoice. That's just to name a few. We have a report that's publishing that has a lot more. Acquisitions and even potential targets that we highlight. But I expect there to be a lot more M& A activity in the space as well, just given how big the market opportunity is right now.

Eric Hanselman: Well, especially for those that can serve both sides of that supplier and purchaser end of the business, hopefully a lot more that can be done. Interesting stuff. Well, I will point our listeners to the show notes, which will have pointers to some of your research and a lot of material that's been in there.

But these are really interesting perspectives, Makayla. Thank you very much.

Mckayla Wooldridge: Yeah. Thanks so much for having me, Eric.

Eric Hanselman: It was great to have you back. And, uh, well, a lot more research to come. We'll have to see how this market shakes out.

Mckayla Wooldridge: Yep. I'm excited.

Eric Hanselman: But we are at time. That is, it for this episode of next in tech.

Thanks to our audience for staying with us. And thanks to the production team, including Sophie Carr, Feranmi Adeoshun, and Kyra Smith on the marketing and events teams and our agency partner, the 199. I hope you'll join us for our next episode because we're going to be talking about data centers and Energy transition, uh, we're going to be extending a conversation we've had about this and actually looking into some new areas about some of the research we've had and a conference is coming up to really look at some of the details in even deeper perspectives we've gone into so far.

I hope you'll join us then because there's always something next in tech.