The 3 main differences between B2C and B2B payments

Obviously, B2B payments are between legal entities, whereas B2C payments are between natural persons. This results into 3 fundamental differences between B2B and B2C payments. This article aims at detailing the specificities of B2B payments compared to what payment professionals generally know about B2C payments (please note that B2C payments cover a wide variety of instruments, however in this article, it is mainly referred to cash, card payments and wire transfers).

Difference 1: identification and authorisation

Identifying a natural person in the context of a payment is relatively trivial, in most cases: for example, who is the holder of a debit card? Does the name on the card correspond to the person? Does he/she know the PIN code of the card?

In contrast, identifying a legal entity is often indirect, as a natural person is usually taking action on behalf of the legal entity. Moreover, legal entities have less formal identifying information (compared to a passport or an ID card): typically, a company’s certificate of incorporation, articles of association, an extract of the national companies’ house or trade registry. When such documentation includes a unique number for the legal entity in the jurisdiction it belongs to, all the better: for example, a national VAT number can help to uniquely identify a legal entity.

Making a payment on behalf of a legal entity usually requires the approval of an authorised representative, hence the importance of the identification of the legal entity and one of its authorised representative, at the time of the transaction. Depending on its size, a legal entity may have multiple authorised representatives, which can either be natural persons, or legal entities again (mind the circular reference!). Also bear in mind that legal entities may be structured with several branches and offices, which may or may not be stand-alone legal entities, but may have different authorised representatives.

Difference 2: size and nature of the transaction

There is a reason why cash and card payments are so prevalent among B2C transactions: their extreme ease of use. Why are they not the norm in B2B payments?

Cash payments work well for low-value / face-to-face payments, such as payments at a local market or at the bakery. However, cash payments are by nature anonymous: quite unfit for B2B use cases which usually require to enforce authorisation rules. And what happens if an employee runs away with the cash envelope? Besides, the absence of intrinsic electronic record in a cash transaction does not help maintain a proper accounting, which is mandatory for most legal entities.

Card payments leverage a card scheme to ensure the different parties in a given payment transaction adhere to the same rules. Most card schemes offer solutions to cover the needs of B2B payments, however within certain limits. By design, a card payment requires one party to use a card number and its associated credentials, and the other party (typically the merchant side) to use a card terminal. This works well for face-to-face payment use cases, as well as online cases where payment is initiated by the card holder (i.e. “push” payment flows), however many B2B use cases fall outside of these scenarios.

Moreover, card payments embed a given level of security, which is not infinite. This is designed to keep a highly user friendly experience while mitigating the risks for low value transactions: typically, contactless up to 50EUR, and above that, typing a 4-digit “secret” code, up to the card’s transaction cap, typically several thousand euros. Besides, the economic model of card payments often include an acquisition cost expressed as a percentage of the transaction value.

As a consequence, B2B use cases involving high-value transactions or specific natures (such as merchant-initiated payments, i.e. “pull” payment flows) need specific instruments.

Difference 3: the complexity of the services around the transaction

Last but not least, most B2B payments have deep links with other transaction-related services: order management and invoicing, delivery and supply chain logistics, customs and VAT clearing, trade finance and credit insurance… These services belong to verticals that have yet to integrate well with the core payment rails used for payments between companies, in particular between large corporates. This is in part due to the legacy of enterprise finance and treasury systems, as well as to the complexity of each service vertical.

For example, companies often rely on EDI (Electronic Data Interchange), a standardized electronic format for exchanging business documents such as invoices, purchase orders, and shipping notices. Corporates use EDI to automate and streamline their supply chain processes. However, EDI runs on infrastructure, systems and programs that often lack in openness and interoperability, making it hard to follow up with the speed of innovation typically found in payments.

On the other hand, each service vertical around the transaction involves highly specialised know-how and workflows. Similarly to the situation with EDI, they often lack native inter-operability capabilities. Making all of them work together is like building a Tower of Babel — a challenge undertaken by several B2B fintech innovators around the world, on a mission to make B2B payments as seamless as B2C payments.

Are you looking for more information about B2B payments? Alpine Style provides online courses to payment and financial services professionals. Contact us to learn more!