Five B2B Payment Stories to Look for in 2018
While the mainstream business and tech media will likely continue to be swooned by mobile payments and blockchain/cryptocurrencies in the coming year, B2B payments likely won’t achieve the same active mindshare. That’s because B2B payments are not a sexy topic. Pay-in technologies like mobile and credit cards represent revenue and are far more relatable to the masses. Bitcoin has the audacity to challenge the modern financial currencies. But B2B payments are the transactional workhorses that make up the backbone of commerce – $18.5 trillion in the U.S. alone. Given that, those in the B2B payment space may feel like the neglected stepchild on the payment stories front.
B2B payments enable the worldwide ecosystem to endure, and they permeate every aspect of our lives. They’re just as critical, if not more, than these other stories. But their invisibility to anyone outside of business means we tend to take them for granted. So, in deference to their importance, here are five B2B payments stories that we need to pay attention to in 2018.
The second “B” in “B2B” is evolving
The supplier relationship is critical for all businesses. No one makes every part of what they sell. Even Apple – for all their ingenuity and proprietary technology – still sources discrete components for their products from others (including some of their competitors). The contributions of those outside the business are very much essential to bring a complete product to market.
It’s important to understand the impact B2B payments have to businesses as a whole. The term “supplier” traditionally invokes the image of a parts manufacturer or a factory or a large shipment from a freighter, but the truth is, suppliers are much more than goods moving about. It goes beyond the end-product. They are infused in the workings of every company.
For example, when a company is organizing a big event, they have to pay for signage, caterers, audio/visual, advertising, and PR. Unpaid, unhappy suppliers and vendors in those situations can derail projects and success. When you don’t have strong supplier relationships, you put the company’s execution at risk. B2B payments are the only true affirmation that the business relationship has meaning. Being paid is what makes people want to continue doing business with you. Getting payments wrong is an indicator that you’re either unreliable or worse – untrustworthy.
The definition of a supplier is changing as well. Consider the gig and sharing economies: marketplaces of freelancers and sellers looking to deliver or address some market need. This not only has an effect on the makeup of the workforce, but also on what we consider the supply chain. As the traditional economy becomes more on-demand and digitally oriented, a growing segment of B2B commerce will move to higher speed supplier transactions from a wider range of resources. This is happening in nearly every industry, from entertainment, media, and advertising, to professional and personal services, to tech, retail, ecommerce and marketplaces. Much of this B2B activity is driven from a more mobile and increasing millennial and Gen-Z demographic. They’re transaction expectations are more immediate, and they are used to working outside of the standard “net 30” conventions.
With relationships that are more fluid, the transactions themselves will be driven by more digital means than customary invoices and purchase orders. The benefit is that businesses sourcing these types of suppliers get to scale their outsourcing easily or are able to find unique, ready-made materials in the broad, diverse marketplace. The challenge is that a lot of finance organizations won’t know how to handle this if they don’t have a purchase order in place.
B2B payments will play a bigger role here. Scalable backends will need to consider paying in less rigid payment runs and schedules. Payments may need to be executed sooner and at much higher volumes than they had ever previously imagined. They’ll need to support more cross-border payment methods as suppliers become increasingly global. Essentially, “digital B’s” as a segment will expand into normal business operations, because it’s already happening.
Midsize maturity and scalability will bring the next unicorns
How do smaller and midsize companies become the next billion-dollar unicorns? They act with best practices in mind and scale their operations at will to fuel growth. In 2018, the emerging success stories will not only come from cool technologies and ideas we suddenly can’t live without. They’ll be brought by companies that understand how to be mature commercial operations. These unicorns-to-be have compliance and risk mitigation in mind. With free-flowing venture capital getting harder and harder to come by, businesses will need to learn to do more with less. They have to make sure they’re built lean to run an efficient capital operation and with minimal friction in processes.
One of the great challenges is that growth becomes more challenging and costlier as the business continues to grow. Scaling with any meaningful multiplier becomes exponentially more difficult when trying to go from $100 million in revenue to $1 billion versus going from $1 million to $10 million.
B2B payments are central here as well. Payments, particularly across international lines, can be complex. They’re also not always best left to human intervention. In most organizations, payables processes, such as supplier management, banking, tax compliance, and reconciliation processes, are overhead. They require spending from business coffers on spending.
The well-conditioned, mature-minded, midsize companies that can decipher the formula to make B2B payments less a cost and resource burden and more of an advantage – for example, attracting suppliers and reducing risk – have a better chance to grow into their next phase. The operating model needs to be inherently designed to reduce friction, effortlessly scale with growth, and look to technology to solve repeatable, low-value processes.
The future of growth will depend on global relationships
Even though our politicians may have problems figuring out how to work together, that’s simply not true in the commercial realm – and that is the most exciting aspect of the B2B world. There are vast, untapped communities of talent – including those in emerging countries – that haven’t had the opportunity to expose their genius to the market.
In designing a modern business model, being globally-minded from the start raises the chance for success, simply because the market opportunities can be so great. Hollywood studios have started to think in these terms. They know the international market can be just as lucrative as the domestic, so they’ve built offshoots to some of their big-ticket projects to play in China and beyond. That same global focus can be a part of B2B relations. If you can make the effort of working with your global supply chain as simple or as similar to your domestic one, the world literally opens up.
In many cases, establishing global relationships with suppliers has been difficult because of the ability to transact. Those in emerging markets often have limited banking infrastructure making wire transfers and checks problematic or exorbitant. In addition, forex concerns, fraud potential, and tax reporting add even greater complexity to what should be a straightforward payment operation.
Speaking of paper checks, here’s the bad news: they will still exist in 2018 for B2B payments (even if some of them are never found or cashed). Even with all the available and traceable electronic payment methods, the faster landings, and reduced paperwork, many organizations still don’t have the infrastructure or clean operational processes to stop using checks or the higher appreciation of the total cost burden paper checks introduce. Maybe in 2019? We can only dream.
And while bitcoin remains a big buzzword in payments, the fact that China and South Korea have banned cryptocurrencies means it’s not wise to make them your business’s sole global B2B payment strategy. Bitcoin isn’t a silver bullet. It’s just another kind of bullet, much like wire transfers, Global ACH, or even ewallets (though arguably less prevalent). Ultimately cryptocurrencies lack of regulation and oversight and their questionable use cases scare businesses away from seriously considering them and until that happens, it’s unlikely to change. At this point, making a B2B payment with Bitcoin would be akin to paying suppliers in Google or Amazon stock (assuming you have them to deal with). Surely some would accept it, but probably not the overwhelming bulk of vendors. It’s the long tail of spend that is always the hardest to manage.
Given the thousands of variables that need to be considered for paying global suppliers effectively, the entire approach to managing global B2B relationships will need to support greater diversification. It’s understanding that it’s not one-size fits all. Even in the same country, multiple remittance methods can be prevalent depending on who the payee is and how much they’re being paid. That means businesses need to be relatively payment agnostic, ensuring global reach and allowing the supply partner to choose a remittance method that works best for them. Of course, this all needs to make sense economically and efficiently for the supplier. Just as businesses don’t want to spend money to spend money, international vendors rather not lose considerable money and time in order to get paid.
The intertwining of fintech with regtech
Heavier reliance on a global supply chain puts regulatory issues front and center. Treasury and finance will need both transparency and assurance that B2B payments are legitimate. Beyond just tighter role management and auditing of B2B payment controls (who can see what, who can approve, who can execute payments), businesses will need to look at the external factors as well.
Traditionally, businesses have looked to banks to provide basic financial services (accounts, checks, wire transfers, currency management), but banks are not motivated to provide extensive regulatory compliance (unless they directly affect the bank or the customer is a Tier-1 client).
Regtech and Fintech will need to work hand-in-hand to strengthen each other. Regulations such as FATCA, OFAC, and many others are too risky not to be taken seriously, and are intertwined with B2B payments, but the resource repercussions of handling this manually are untenable. Technology that handles both B2B Fintech and Regtech requirements can remove gaps or cracks in the armor with less manual intervention and software will be more thorough than humans. Regtech systems that tie into fintech systems can help control the money in a compliant, auditable, configurable, and scalable way.
The further transformation of the payables space
It’s not a secret: the payables space is changing and going through a subtle, but clear shift. LinkedIn recently reported that those in the accounting and finance space have started to change their professional profiles to be more “strategic.” They’ve moved away from tactical skills like “accounts payable,” and more towards planning and analysis. Aspects of AP automation – software-driven, touchless approaches – are permeating organizations big and small, as humans are realizing there are tasks that they don’t need to do anymore.
Collecting and managing supplier payment and tax information, keying in and matching invoices, routing approvals, logging into bank portals to send payments, reconciling payment data – these are rudimentary functions that technologies already can solve for in 80 to 90-percent of cases. Businesses can hire entry-level people to do the task, but there is also significant overhead associated with that process from recruitment, training, and managing. Eventually, they will need to replace those people because it’s such an unrewarding job.
Some will fight payables transformation. A similar population fought spreadsheets and microwave ovens when they were introduced. But rather than deny the future, the approach that actually offers a path towards career longevity is for those in the payables space to elevate themselves to perform financial activities that bring real value to the business: Hard Finance. It’s more FP&A. It’s solving complex budgeting, spending, forecasting, and cash flow management, and financing issues.
Onto another payables issue, the long net payment terms of 30, 60, even 120 days are likely going to swing the pendulum back into the suppliers’ favor soon. Competition for vendors who deliver unique, desirable goods and services will only increase. This will force businesses to extend supply chain financing options to a much broader set of their suppliers. Rather than one-off negotiations with a handful of specific vendors, business will start to recognize the need for full-scale early payment programs.
One last note: this is the age of social media going viral. Almost certainly there will be a B2B payment issue that captivates the digital discussion in 2018. Maybe it’s an unhappy supplier that shames the buyer, or worse, a terrible bookkeeping error that results in someone being paid 10-times what they were owed. A payables team somewhere will get embarrassed, and it will be public. Hopefully, it won’t happen to anyone reading this.