Ask the Analyst: How businesses pay bills

In-depth interviews play an important role in S&P Global Market Intelligence 451 Research's coverage of enterprise IT, and are part of our Voice of the Customer research deliverables. For Ask the Analyst reports, we focus this approach inward, conducting interviews with our own subject-matter experts to address critical questions on an important technology topic and sharing this insight with our clients. These are transcriptions of conversational interviews, edited only slightly for flow and ease of reading. In this report, 451 Research Analyst McKayla Wooldridge is interviewed about the business-to-business payments landscape.

It is an exciting time for B2B payments. There is a lot of momentum, and the industry is becoming more digitized in the payment methods used and the technology being used to streamline those accounts-receivable and accounts-payable processes. The market is still pretty fragmented, but we are seeing providers that were focused on a specific part of B2B payments now with more integrated offerings across the B2B value chain. For example, providers that were focused on serving business buyers and suppliers with accounts-payable and -receivable offerings, they are now serving both sides of the market instead of just one. Having this oversight can open up new opportunities for providing things like working capital expense management. As the market becomes more integrated, we can expect some consolidation. We have already seen a lot of M&A activity in the space.

The interview

Associate Research Analyst Amy Hedrick spoke with McKayla Wooldridge, a research analyst on the 451 Research Fintech team within S&P Global Market Intelligence. McKayla's coverage focuses on trends and technologies impacting the fintech ecosystem, and implications for stakeholders and the customer experience. Her research spans the "buy now, pay later" market, B2B payments, banking as a service, and bank and fintech partnership dynamics.

Amy Hedrick: We are all used to paying bills as consumers. We have choices how we make those payments — we can write checks or send cash or money orders, or use a credit card or the phone or PayPal, whatever. Are these the same payment mechanisms that businesses are using to pay their bills?

McKayla Wooldridge: Yes and no. As consumers, we are used to paying how we want and when we want. We can pay with a credit card or a debit card or a digital wallet nowadays. And in B2B payments, it's really not that advanced right now, although I think it is moving in that direction.

As part of our Voice of the Enterprise research, we surveyed businesses, and about half say they pay their suppliers by bank transfers and another half by credit card. What is really surprising is half still use paper checks and about 16% still use cash, which is crazy to me. And that's all from our 2024 business trend survey.

What is a little bit troublesome here is that it's not just a matter of inconvenience, like it would be for a consumer to pay with cash or check, but paying by a more inefficient method like checks can be really costly for businesses. It can take several days for a check to clear, and processing costs can range from about $4 to $20 for a single check, which can add up. Checks are also the most vulnerable payment method to fraud — so, pretty concerning. Digital payments are definitely making their way into B2B payments, but it's not as advanced as the consumer market right now.

What kinds of things do you think are keeping that from happening?

Businesses are definitely recognizing the benefits of going digital. And I think it's infrastructure challenges as well. They need to be able to support the payment method. Suppliers, for example, a lot of them still, surprisingly, don't accept credit cards. That is changing. There are more that are accepting them, but it is really almost like a network problem where you have to get other players onboard before you can make it happen.

And then you have infrastructure challenges. You also have to change your operations in the way that you handle those payment methods, so it's not something that can happen overnight.

For businesses that are moving in this direction, what tools and technologies do you see them using behind the scenes these days to make and receive these payments?

There is a whole range of back-office operations and technology that is involved when businesses make and receive payments. Unlike consumer payments, businesses typically pay for goods and services after they have been delivered. And this is referred to generally as "paying on terms."

The process that goes on between a buyer and a supplier can be quite complex. The process begins when a business customer creates a purchase order, and then that supplier fulfills that order and its accounts-receivable department creates an invoice and sends out to the customer. The customers' accounts-payable department, for example, then processes and pays the invoice. This is just a back-and-forth process that can take anywhere from 30 to 90 days on average.

And that is where technologies such as accounts-receivable (AR) automation and accounts-payable automation come into play. Accounts-payable automation typically uses technologies such as artificial intelligence and machine learning, as well as optical character recognition to actually digitally extract information from invoices. Then it can match that invoice to purchase orders, and it can also automate the approval workflow to help streamline some of the payment processes that would typically be a very manual process for businesses.

On the other end of the spectrum, AR automation typically automates the invoice generation process and collections reminders on behalf of suppliers, and then it can actually record and track that payment. So businesses are beginning to embrace this technology to streamline their whole payments processes.

We hear terms like "fintech" and "embedded finance." Bill pay is part of that, right?

Yes, fintech and embedded finance are pretty pervasive across the whole payments ecosystem. And financial technology and embedded finance are both reshaping how businesses pay their suppliers and business partners and how they get paid.

With embedded finance, companies work with banks and fintechs to embed financial products and services into their own product offerings. An example of this would be [a company] offering its own debit card, which is actually issued by [a] bank. So they don't have to be a financial services company — they can now launch their own financial product.

One application of this that we're seeing in B2B payments is suppliers offering their business buyers flexible payment options and payment terms at checkout, and they can offer that under their own brand.

It sounds like there are other companies now that are part of this whole financial bill pay ecosystem, not just the buyers and sellers, and not just the banks anymore.

Banks are still a really important part of the process, but there's a whole range of companies that are now involved. Under an embedded finance arrangement, for example, banks can provide the underlying funding and capital, and financial technology companies can provide the infrastructure layer for companies to launch financial products and services.

Then you have providers that are focused on streamlining the accounts-receivable, accounts-payable process, providing corporate cards and expense management offerings. And there are providers that specialize in offering working capital and financing to businesses as well. So it has really become a diverse ecosystem of providers that are coming together to help businesses automate their back-office operations and get access to funding and better manage their expenses.

What new technology challenges does this bring to businesses as they're trying to pay their bills in new ways?

Legacy technology, relying on spreadsheets, for example, and then having disparate systems to make and track payments is a big hurdle. Having information live in various different places can really be a challenge for reconciliation, too. So implementing new technology requires a whole new reconfiguration of operations. It can be costly. There's a learning curve.

It is really not something that can happen overnight. And that is where partnerships with all these ecosystem players really come into play. We asked businesses what their biggest challenges were when paying their suppliers and business partners, and one in five said that waiting on outstanding receivables to make payments was their biggest challenge. Another 19% said they experienced too much manual review. These challenges, to me, emphasize the need for modern technology that can automate some of that manual workload when making payments.

There's also a working capital story here. If businesses are waiting to pay their suppliers because that money is tied up in receivables, then this creates some friction across the payments chain, so suppliers aren't getting paid and then businesses are waiting to get paid from their customers. This is where flexible payment terms and working capital loans, for example, can be really beneficial.

Businesses can choose to hold on to their funds longer, which they are naturally inclined to do, so that they can use those funds for other business needs. But it can be a really lucrative option to pay early and get that discount. So now we have providers acting as buy now, pay later providers for B2B payments, and they are essentially giving businesses even more flexibility over their payment terms than a "2/10 net 30" arrangement would. There are also working capital providers that are focused more on optimizing and automating the discounting process between buyers and their suppliers.

Another part of that is the emerging payment methods that are coming into play here, like real-time payments, which are payments that are transferred, cleared and settled almost instantly. They are becoming more common in B2B payments now.

Skeptics might argue that it's unfavorable for buyers because that money's leaving their account instantly. But real-time payments let businesses hold on to their funds until the last possible minute that they need to be paid. This is another working capital play that businesses can take advantage of.

I wonder if this also cuts down on the error rate. Nobody's forgetting to send a check with an automated system.

Digital payment definitely improves the visibility and tracking of payments. And it reduces the human-related error that would occur.

As consumers, we're always thinking about security when we're paying our bills, whether it's fear about the transaction itself or some data breach with financial details or whatever. How are the organizational concerns changing security-wise as the payment systems are shifting more toward digital?

Unfortunately, where there are payments, there is always fraud, and it is an ever-present threat. But as the industry moves away from things like paper checks to digital payment options, payments are becoming more secure.

Businesses are beginning to adopt virtual cards for making payments, for example. Virtual cards are essentially digital versions of physical cards that are only valid for one-time or limited use. One of their biggest benefits is their enhanced security because the card expires when a payment is completed or if a specific time is reached. And the digital number is tokenized. Virtual cards are considered more secure than physical cards that use the same number for repeated purchases.

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