Unleashing the $1 Trillion Goldmine: Exploring the Lucrative B2B Payments Landscape
Following Illuminate Financial’s announcement of our new $235M Fund III, we’re excited to dive deeper into B2B Payments, a theme that complements our existing investment areas, particularly in financial & digital asset infrastructures.
tl;dr: In the realm of payment companies, names like PayPal and Venmo often dominate the conversation, capturing the public’s attention with consumer-focused offerings. Yet, while these B2C giants have gained widespread recognition, their B2B counterparts, operating on an entirely different scale, often remain hidden in plain sight.
We at Illuminate Financial are lifting the veil on this B2B payments landscape — a space that holds a staggering $1 trillion opportunity — to identify hidden gaps and market opportunities. From industry leaders like Stripe and Bill.com, to innovative disruptors such as AppZen and Tink, a powerful and transformative revolution is unfolding. Follow along in this 6-part series as we explore which areas within the B2B Payments world are ripe for disruption.
How we got here
Business-to-business (B2B) payment solutions have historically been the “ugly stepchild” of the payments family. Unlike B2C (business-to-consumer) payments, which have benefitted from players offering solutions to a relatively straightforward market, B2B payments encounter a myriad of factors that have significant implications. These factors, such as transaction volume, frequency, and payment cycles, extend to multiple parties across diverse industries and countries. For instance, within the realm of supply chain transactions, payments often need to be split amongst numerous suppliers or subcontractors, each presenting their unique set of payment terms and conditions. Effectively managing these multi-party transactions and ensuring seamless coordination and reconciliation is a daunting task that requires systems capable of handling complex payment flows. Furthermore, the diverse range of customers and business sectors introduces a host of industry-specific payment needs and standards, underscoring the importance of adaptable and customizable payment solutions tailored to meet the specific requirements of each sector.
The slow adoption of new B2B payment solutions can also be attributed to resistance to change within established business processes. Many organizations have been using legacy systems and traditional payment methods for years, which can be deeply ingrained in their operations. As a result, B2B payment solutions have often been plagued by inefficiencies, manual processes, and a lack of standardization; however, the landscape is rapidly evolving. The increasing adoption of digital platforms is quickly modernizing B2B payments by offering streamlined processes, enhanced security, and real-time tracking capabilities. These advancements can empower businesses to optimize their payment workflows, reduce costs, and improve cash flow management; however, the question remains: will businesses willingly adopt new technologies, or are innovative payment solutions solely for the benefit of consumers?
Opportunities
Although embracing modern payment technologies within organizations is challenging, we have identified 5 generational market shifts that reduce the barriers to adoption, each acting as a catalyst to bring businesses into the 21st century:
- Payment Workflows
- Cross-border Payments
- Open Banking
- Real-time Payments
- Alternative Payment Methods
1 . Payment Workflows
There are two components of a B2B payment: (1) Payment itself and (2) SaaS products that assist finance teams in processing. Many companies, such as Bill.com and AvidXchange have made fortunes providing (2) to process (1); however, trends toward verticalization are emerging, as customers have realized that these incumbents do not address nuances specific to their industries. For example, the healthcare industry requires solutions that address their unique workflows, specifically: the integration of healthcare-specific coding systems to ensure compliance with regulations (e.g., HIPAA and ACA), the coordination with payers (insurance providers) and customers (patients), and the automation of reporting and compliance documents. Tailoring payment workflow solutions to address these industry-specific pain points can greatly enhance the value proposition for businesses, creating an opportunity for startups to build a competitive advantage over incumbents.
Additionally, as evidenced by poor customer support reviews on Capterra, incumbents like Bill.com also struggle to deliver satisfactory experiences. Lengthy response times, lack of knowledgeable support staff, and limited communication channels (not to mention the high price tag of such platforms) can hinder businesses from effectively managing their payment workflows. Recognizing this gap, innovative providers have an opportunity to differentiate themselves by offering exceptional customer support, and ensuring prompt and helpful assistance to their clients. Innovative startups, such as AppZen, have recognized this trend and are capitalizing by offering unique, differentiated solutions to finance teams.
2. Cross-border Payments
Cross-border payments, of which 80% are B2B, play a significant role in the payments market due to the increasing globalization of businesses. Conducting transactions across borders generates high transaction volumes and substantial revenue potential; however, there are nuanced challenges, particularly in settlement speed & transparency. Reducing the cost and time it takes to settle in cross-border payments is a crucial aspect in unlocking further potential in the B2B payments space. By streamlining and optimizing the process of converting currencies, businesses can benefit from secure, faster, and more cost-effective cross-border payments, ultimately enhancing their ability to engage in global transactions with greater ease and efficiency.
Non-bank challengers, such as Wise, have recently entered this fragmented space. Such parties aim to leverage new technologies that provide transparency and remove friction in the historically opaque cross-border payments space.
3. Open Banking
Open banking is a financial practice that allows businesses to securely share their financial data with authorized third-party providers for enhanced financial services and innovation. As a result, third parties can build applications and services that enable faster and more convenient payments, greater visibility into finances, and net new services.
From 2021 to 2026, the number of open banking users globally is expected to increase nearly eightfold, providing plenty of opportunities for startups to emerge, specifically those focused on building new products around lending, investments, fraud, and B2B payment workflows. Mature startups like Tink and Truelayer are changing the financial industry drastically by creating new opportunities for financial institutions and businesses to connect digitally.
4. Real-time Payments
In the United States, the recent release of FedNow, a new instant payment system developed by the Federal Reserve that will allow businesses and individuals to send and receive payments instantly, 24/7/365, has reignited the discussion in the real-time payment (RTP) market. Although real-time payments have been available in the United States for some time, they have not yet gained significant traction in the B2B payment landscape; however, the release of FedNow, which is expected to go live in July, has sparked optimism and anticipation for a potential surge in real-time payment transactions. As the space matures, there will be opportunities for startups to address problems in targeted use cases, such as transaction analytics, disbursement innovation, and liquidity management.
Real-time payments, which are expected to grow CAGR 33.5% over the next 5 years are quickly gaining momentum in the B2B space, driven by the need for instant transactions and improved cash flow management. Real-time payment systems enable businesses to send and receive funds instantaneously, accelerating payment cycles and enhancing liquidity management.
As previously mentioned, 50% of businesses still make payments via paper checks, which creates headaches in processing. Real-time payment rails alleviate this headache, as the data that is included with each transaction will be instant, meaning that a business owner no longer must worry about matching payments to invoices to purchase orders (PO), nor will there be issues with cash flow management, as funds will hit accounts instantly. This fosters an incredible sense of trust between the vendor and business owner who wants to focus on value-added growth activity, not to mention the reduction of cost (roughly $25 per transaction) to process B2B payments.
5. Alternative Payment Methods
Alternative payment methods (APMs) such as invoice financing, buy now pay later (BNPL), and trade/supply chain financing offer alternative financing options to businesses, unlocking working capital and improving cash flow options. These solutions cater to the specific needs of B2B transactions and provide financial flexibility to businesses of all sizes. Investors are also starting to take note: according to Pitchbook data, the amount of capital allocated to alternative payment method providers increased by 32% in 2022, suggesting a strong desire to offer tailored solutions that fit the customized needs of payers.
APM solutions can yield significant benefits for businesses, not only in terms of bolstering cash flow but also enhancing cash flow flexibility. This allows for expedited and efficient cash flow increases on short notice, enabling companies to capitalize on time-sensitive opportunities, such as availing discounts (i.e., “2/10 net 30”). Moreover, APM solutions offer enhanced accessibility compared to many other loan and financing options. For example, unlike traditional business loans, B2B BNPL entails fewer credit checks and a streamlined onboarding process, facilitating a faster and more seamless experience. Companies like Finaxar and Billie are building these APM solutions to empower businesses to embrace a simplified and short-term financing commitment, mitigating the risks associated with long-term debt obligations.
The $1T Market Opportunity
While the B2B payments volume dwarfs B2C volume ($125T vs. $52T), it has seen slower developments, paving the way for startups to address inefficiencies in the existing value chain. Payment workflows, cross-border payments, open banking, real-time payments, and alternative payment methods all contribute to the growth and innovation in this market. As businesses continue to navigate the complexities of B2B transactions, the demand for specialized solutions tailored to unique customer requirements will continue to drive advancements in the industry. Stay tuned for Part 2 — a deep dive into the next generation of payment workflow solutions.
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
