B2B Payments — Overview
Commercial / B2B Payments Today
Imagine a market so large that it is measured in Trillions instead of Billions and has no obvious 800-pound Gorilla market leader. Contrast this with the Cloud Services market, which is worth $100 billion, and you are likely to think first of AWS / Amazon Web Services and rightfully so, they dominate the market. Microsoft (Azure) is second in this large market with a market share of 18% to AWS’s 33% and new large players like Alibaba are making in-roads. Oddly, IBM and Oracle that actually started the cloud services market are in the 3%-5% range of market share.
B2B payments is a highly fragmented Trillion Dollar Market.
It is a highly fragmented market by sector, geography and providers. The methods of initiating transactions and moving monies is different across all of the various sizes and types of companies. Corporate, mid-market and SMBs do not act the same within this segment. The reason this is important is that Cash Flow is the lifeblood of any business regardless of the variables and every CFO and CEO looks to Treasury for how to optimize Cash Flow.
A fair question to ask:
Is B2B payments a market or multiple markets?
The B2B payments market can either be:
- Movement of money from one corporate entity to another
OR
- Procure to Pay and Invoice to Cash in addition to:
o Domestic or Cross Border
o Liquidity Management
o Asset Optimization
For the purposes of this report on Commercial Payments we are going to look at the broad base of moving monies across the commercial landscape. That will make the market view more complex but also more complete and how to solve for Corporate Treasury issues today and further into the future.
We will focus on data and insights from two reports to get clarity about the Commercial Payments market:
1. Goldman Sachs Equity Research September 2018
2. Credit Suisse — “Payments, Processors & Fintech, If Software is Eating the World…Payments is Taking a Bite.” January 2020
Additionally, for clarity we are going to use the term B2B Payments as compared to the more specific Accounts Payable, Procure to Pay or the more bank centric Commercial Payments.
Looking at a couple of key segments from Credit Suisse issued in January 2020:
Of the $125 Trillion TAM (note this represents TPV):
$110 Trillion or 90% of this number is Accounts Payable
That is to say it the two sides of Procure to Pay or Invoice to Cash
A PO is issued for goods or services
An invoice is issued against the PO
After delivery based on the company’s credit rating a payment is issued against the matched PO and Invoice.
This process is rife with errors, delays and paperwork today
Of this $110 Trillion in TAM/TPV, Credit Suisse Analysis considers approximately 20% of this to be “eligible” for a card transaction replacing the current methods.
B2B Cards or P-Cards are a growing segment of B2B Payments
$10 Trillion of the TAM is estimated to be Cross Border which requires a different methodology due to the compliance regulations from different countries.
Cash and Checks are still factors in the B2B Payments market as the data from Suisse Bank notes that $38 Trillion per year is paid by these methods. The bulk of the $125 Trillion today is done by ACH. As many reports note ACH fraud has increased dramatically during the past 5 + years.
According to the AFP, 78% of businesses experienced attempted or actual B2B payments fraud last year. This number has risen steadily since 2013, and one of the primary causes is the continued use of paper-based and manual processes to capture, approve and pay invoices. Source: Association of Finance Professionals — 2019
The following chart from the Credit Suisse report lays bare that the B2B Payments market dwarfs the Consumer Payments market. It also has to be noted that consumer market is primarily a cards-based market with a much smaller percentage of payments being done by ACH.
Anyone operating in the Consumer Payments market will also tell you that the profit margins in Consumer Payments is much higher than B2B Payments.
So why would any bank want to be in both Consumer and B2B?
Two reasons:
1. Volume — Like Amazon’s move to AWS a payment company that ignores the massive volume in B2B Payments will likely miss the scale opportunity associated with the volume.
2. Changes — Consumer behaviors are changing. Consumer payments will not likely look in 2025 like they look today in 2020.
Apple, Google, Amazon and others are moving to charge into the most profitable sectors of consumer payments
Jeff Bezos famously said “Your margin is my opportunity”
It is unlikely that Consumer Payments remains the high margin opportunity it is today.
Revenue growth in wholesale payments from 2019 to 2028 is likely to remain at a similar pace to that seen over the past decade, with a forecasted CAGR of 5.6%. source: BCG
Goldman Sachs views the B2B Payments Revenue potential in this market as follows:
Today’s B2B Payments landscape is a mix of outdated systems, legacy players and newly minted Fintech providers. It should be noted that most Fintechs in the commercial payments space offer only a portion of a total solution. This at a time that corporates are looking to rationalize their array of payment vendors.
It is also important to understand that it is a four-corner model in Commercial Payments.
1. The Buyer starts the process with a Purchase Order (P.O.)
2. The Buyer’s Bank
3. The Seller issues an invoice against the Purchase Order
4. The Seller’s Bank
This diagram from SAP / Ariba outlines the issues at a high level and shows the four-corner model covering both the buyer and seller.
The buyer and seller try to issue PO’s and Invoices digitally, but they remain mostly paper based and manually processed. Previous attempts to standardize the data transfer between parties have mostly failed or were too unwieldy. Electronic Data Interchange or EDI has the most traction and was driven to widespread usage by Walmart. (see below)
EDI
“Electronic data interchange (EDI) is the concept of businesses electronically communicating information that was traditionally communicated on paper, such as purchase orders and invoices. Technical standards for EDI exist to facilitate parties transacting such instruments without having to make special arrangements.” Source: Wikipedia 2020
EDI has been in use within corporate supply chains since the 1970’s and had a big push from Walmart as they forced their vendors onto their EDI system. EDI was not a panacea for data exchange as the versions and standards expanded with their being no real one true document format or type.
Finance departments in corporations deal with this issue constantly and mostly have work arounds without truly solving the data exchange issue.
But honestly the most common solution is Excel. As someone in a Treasury department told me the other day when he was trying to develop a solution for their cash position to share with senior management:
“Can you get it to look more like Excel.”
