Fostering Trust Through Payment-led Platform Verticalization
Last post, we introduced the $1T B2B Payments opportunity by highlighting 5 key areas of focus: verticalized workflows, cross-border payments, open banking, real-time payments, and alternative payment methods.
In this post, we’re diving deep into the power of verticalization in B2B payment workflows. We highlight two industries that are ripe for disruption and discuss their specific, unmet payment needs.
tl;dr: The evolving landscape of B2B transactions highlights the challenges in establishing trust and personalized relationships as trends to digitize transactions increase. While the B2C market has successfully built online trust, the B2B market faces complexities due to higher purchasing volumes. As such, traditional one-size-fits-all B2B fintech products have not fully addressed industry-specific needs and pain points, leading to poor user experiences.
We believe that there is a significant opportunity for payments-led businesses to offer verticalized B2B solutions tailored to specific industries, leveraging deep industry expertise to empathize with customers and enhance payment experiences. Traditionally overlooked industries, such as healthcare and construction, contain distinct payment challenges that require specialized solutions to streamline payment processes and incentivize efficient payments.
In the context of B2B transactions, personal relationships have traditionally played a pivotal role in fostering loyalty and establishing lasting business partnerships. However, as B2B processes increasingly undergo digitization, there has been a growing concern about how to extend this trust to new digital channels. The shift towards globalized transactions has made it increasingly impractical to maintain personalized relationships with all buyers, and vice versa.
In contrast to B2C, where online trust has been successfully established, the translation of trust in the B2B realm is more complex. With higher purchasing volumes involved, the stakes are considerably higher. It becomes unrealistic for businesses to independently build the level of trust required to facilitate these transactions within their existing processes.
Historically, the B2B fintech products that address this were predominantly designed to follow a one-size-fits-all approach, mainly due to the high costs associated with product development, acquisition, and servicing. As a result, companies like Bill.com offer identical products to both large corporations and small startups, regardless of the specific nature of their business. This has resulted in less-than-desirable user experiences and poor customer satisfaction with platforms that only address a subset of existing pain points in B2B payments.
We at Illuminate believe that there’s a significant opportunity for payments-led businesses to build platforms that cater to the unique needs of specific industries — particularly those that have been overlooked by incumbent technology providers. Startups that provide deep industry expertise have an innate ability to empathize with their customers and ultimately become the next fintech unicorn.
1. How we got here
In B2B transactions, payment terms are typically more complex than simply paying cash upfront. Most transactions involve some sort of credit extension that requires payment 30, 60, or 90 days after invoicing. Since these unrealized payments are flowing both in and out of an organization, accurate accounting often requires increased effort and involves the participation of dedicated staff and specialized software.
Baseline B2B payment platforms provide software that digitizes financial workflows to aid accounts payable (A/P) and accounts receivable (A/R) organizations. This set of features, which can include the ability to pay by multiple rails (ACH, wire, virtual card, etc.), 3-way matching, and ERP integration, is “table-stakes” for any solution looking to enter the market; however, customers are starting to demand more sophisticated features that cater to their distinctive industry’s needs (see next section for examples).
Incumbent solutions that are more horizontally tailored do not have the knowledge or expertise to serve this cohort of customers, thereby offering less than adequate customer support — a common complaint seen on the review site Capterra. Startups that build solutions and expertise that align with the nuances and complexities of specific industries can offer vertical payment solutions that can address payment issues quickly and effectively.
2. Payments vs. Software-led Platforms
A common principle in the world of B2B payment solutions is the setting by which startups enter the market, either via software-led or payments-led solutions.
Software-led payment solutions typically refer to payment platforms or systems that are designed with a primary focus on digitizing workflows, with payments being an afterthought. Often horizontally tailored, these solutions are built to cater to a broad range of businesses and industries, offering general payment functionalities and features. Examples of software-led payment solutions include existing A/P and A/R solutions like Tipalti and NetSuite. While payment facilitation is a feature, their core offering adds value to the process and operations surrounding the payment.
Conversely, payments-led solutions take specialization to the next level. These offerings are specifically crafted to offer payment solutions as the primary means of monetization, with features such as differentiated payment rails and financing products that are tailored to the distinct needs of each sector. Because payment-led solutions address specific industry nuances, such as invoice factoring in construction to free up working capital, we believe that the next generation of verticalized B2B solutions will inevitably be payments-led, providing faster and smoother payment experiences.
3. Industry-specific Challenges
Below are just two of many examples that illustrate the different complexities of payment processing in various markets:
Healthcare: Innovation away from virtual cards
The healthcare industry has been slow to adopt digital payment solutions, particularly in medical supply procurement. Despite suppliers expressing a preference for automated clearing house (ACH), roughly 85%(!) of payments continue to be made through traditional paper-based checks and physical cash. This reliance on legacy payment methods inevitably leads to errors and delays in payments, causing predictable tensions between business partners.
As an illustration, consider the case of Huntington Health during the COVID-19 pandemic, where the urgent need for N95 masks uncovered significant payment challenges — particularly in the facilitation of money transfers. Due to an antiquated A/P platform that couldn’t handle issues in supply chain delays or cross-border payments, Huntington officials found themselves with physical cash in hand at Long Beach docks, located over 30 miles away, to purchase the necessary equipment from foreign suppliers. Instances like this underscore the need for sophisticated payment systems that streamline the full payment process.
Additionally, the payment systems that have found (limited) success selling into healthcare systems have solved one issue by creating another. To grow quickly, many of these platforms built business models that rely on transaction revenue derived via payment fees, most notably via the use of virtual credit cards that are heavily pushed as the primary form of payment. With an average order size of $230,000 per order and an interchange fee of 2.5–2.6%, suppliers can expect to pay an estimated $5,290 per payment!
To overcome these challenges, the next evolution of B2B healthcare payment workflow solutions will provide value by incentivizing the use of cheaper payment options for all parties involved. Startups like Gather and Fracter, which are already making it easier for healthcare systems to purchase medical equipment from suppliers, can push new, cheaper payment rails that further enhance efficiency, security, and transparency in B2B healthcare payments.
Construction: Solving for late payments
Construction companies are grappling with a growing problem: late payments. In fact, the total of late payments for wages and invoices in the construction industry surged by 53% last year, to roughly $208B. This surge led to 37% of firms having to halt or delay their projects, marking a significant 28% increase from the previous year.
The struggle to receive timely payments has long plagued construction companies, and the resulting cash flow issues can quickly escalate into more significant problems if left unaddressed. Late payments constitute a staggering 12% of total construction costs, forcing one in three contractors to seek financing options and incur additional carrying costs. It’s not uncommon for many to wait for more than 90 days to receive payment, increasing the risk of negative cash flow.
The problem might not be with lack of technology, but a behavioral change that’s required throughout the entire industry, as every participant in the value chain has an incentive to pay their invoices as late as possible mainly due to high upfront costs and razor-thin margins. These barriers make it difficult for contractors to pay what they owe to their subcontractors and suppliers before they’ve been paid themselves.
While late payments aren’t unique to construction projects, their ubiquity is. One potential solution to address delinquencies might be for platforms to leverage alternative financing products, such as invoice factoring, purchase order (PO) financing, and asset-based lending. These products offer stakeholders the ability to get paid upfront for money they’re owed in the future. Startups like Nickel and Billd, which embed these services into their verticalized SaaS products, can help the industry naturally increase the speed by which projects are completed, as well as overall cash flow.
4. Closing Out
As evidenced in Huntington Health’s troubles in paying overseas suppliers and issues with payment promptness in construction, existing payment problems are industry-specific; solutions that first help businesses properly digitize and facilitate payments will subsequently expand their offerings into other features and value-added services. Consequently, we’re constantly on the lookout for startups that have rare skill sets at the intersection of payment expertise and industry proficiency.
If you are a like-minded investor, early-stage company building, or thinking about opportunities in the payments space, we at Illuminate would love to chat with you. Feel free to reach out to me at jb@illuminatefinancial.com
