The Finance Tech Stack: The Opportunity in B2B Payments (Part IV)
By: Medha Agarwal and Urvashi Barooah
At Redpoint, we have been excited about the CFO tech stack for many years now and have written about our point of view on gaps in the market, the current landscape and buyer personas. One area of the stack that we believe is ripe for more innovation is B2B payments, i.e., the process through which businesses make payments and get paid. It is a large market — projected at ~$125T globally — and is largely manual today but has inherently viral properties (whenever a company pays a bill, it automatically connects their system with their suppliers’, hence creating opportunities for viral growth.) At the most basic level, there are two components to a B2B payments offering. Firstly, there is the payment itself: facilitating ACH, check, credit, and virtual card payments between companies and their suppliers, usually charged for on a per transaction basis. Secondly, there is a SaaS component, which includes workflows to help finance teams process payment approvals, reconcile the books and detect anomalies/fraud. Today, the biggest players in B2B payments are companies like Bill.com, AvidXchange, Coupa, Tipalti, and others.
Across the spectrum of buyers from small to large companies, we found the mid-tier segment to be the most attractive: Almost all the buyers we spoke to in this segment expressed frustration with their current solution and a willingness to try something better. If fintechs can find the right feature set, which we will dive into below, mid-market B2B payments represent a large, underpenetrated market opportunity.
A typical transaction goes like this: a supplier or business generates a list of payments owed for goods or services rendered. Transactions can take a wide variety of forms — a marketplace assessing how much to pay contractors on its platform to an invoice from a software vendor to an insurance company managing policy payouts. The B2B payments provider, say Bill.com, routes the invoice to the appropriate person(s) within the company for approval. Once a payment is approved, Bill.com transfers the appropriate funds from the customer’s bank account to the supplier. The completed payment is then recorded in the company’s general ledger. An integration between the GL (e.g., Quickbooks) and Bill.com ensures that accounting entries are appropriately reconciled and there are no errors during the close process.
Across the US, B2B payment volume is estimated to be as high as $25T. However, the majority of these payments are made using paper checks, resulting in inefficient, costly, and fraud-prone Accounts Payable (AP) processes. The lack of automation means that the average invoice takes about 34 days to process! Contrast that with consumer to business payments: despite being a fraction of the size of B2B payments ($4T compared to $25T for B2B), consumer payments are far more advanced when it comes to automation: less than 30% of consumer payments are made by cash or check compared to 50% for B2B payments. As consumers get accustomed to instantaneous, digitized payments in their personal lives, they expect the same from business payments.
Small and medium businesses bear the brunt of these challenges, as they have lagged behind large enterprises in adopting automation. In our conversations with buyers of AP software, we found that the mid-market segment is the most frustrated with existing solutions: nearly all the buyers we spoke to expressed an openness to switching vendors. These mid-market companies generally feel they outgrow Bill.com — the largest incumbent in the segment that still only serves less than 2% of total SMBs in the US — once they hit a certain volume of transactions. However, these businesses find alternatives like AvidXchange and Tipalti to be too heavyweight for their needs.
We interviewed several buyers of AP software from mid-tier companies to understand their specific needs. These conversations surfaced six attributes that we believe B2B payments startups targeting the mid-tier segment should focus on:
1) Seamless integrations with ERP systems: Native integration with a customer’s ERP is a must have in order to sync data across the AP software and ERP, eliminating the need for manual data entry, the potential for errors, and expediting accounting reconciliation. Netsuite is the most widely used ERP and therefore critical to tackling this market.
2) Ability to handle scale and complexity: We heard many times that when the volume, maturity, and complexity of a finance organization reaches a certain point, they have to move away from Bill.com, which is generally good for companies with <$50M in revenue. As companies reach several hundred to thousands of transactions per month, they find issues in speed, payment errors, and limitations in FX management. The ability to grow with organizations — to manage a high volume of payments quickly and accurately as well as increasing complexity such as currencies and float — is key.
3) Customizable approval workflows: Finance teams in this segment are looking for more granular policy customizations to manage vendor and payment approvals. They would like to be able to better dictate workflows such as dual or dollar threshold approvals (e.g., require the VP of Marketing and CFO to authorize marketing invoices >$5,000) to systematize and automate what are very manual processes today. Some buyers have gone so far as to create internal Slackbots such that approvals can happen right in Slack (or other apps where employees spend most of their time) without having to log into their payments platform — these kinds of integrations are a nice value add.
4) High levels of automation: AP is highly manual and therefore time-consuming today. Prepopulating information is important because even though the work for each vendor or payment may be small, the time adds up at scale. As one customer described, his team spends 46 hours a month populating fields and checking for errors. Software that is able to leverage technology to automate this work — populating fields based on previous transactions, suggesting workflows, digitizing via OCR will see strong demand. Similarly, having a large supplier network to pre-populate banking information for vendors is helpful because it reduces the manual work required to onboard new payees as well as errors that delay payments or even lead to the wrong vendor being paid.
5) Payment flexibility: There is strong interest in features that allow for greater flexibility in when and how to pay. Check, ACH, and card payments are table stakes. While checks account for nearly half of B2B payments today, ACH is growing fast and will likely overtake checks in a few years. Beyond supporting these payment methods, we heard many customers express a desire for embedded factoring and working capital using GL data for underwriting. Buyers also expressed an interest in workflows to accommodate discounts for early payments or payment extensions, and an ability to communicate with vendors within the platform.
6) Channel partnerships: Most buyers evaluating new software for this category either default to providers they are already familiar with (e.g. incumbents like Bill.com or other solutions they have used in previous jobs) or consult with their bank or accountant on which software to purchase. Therefore, channel partnerships with banks, accounting/CFO firms and accounting software providers should be a key component of GTM in addition to direct sales.
Our conversations with buyers have made it clear to us that there is demand for a new product in B2B payments. Providing a scalable platform for growing companies will also be table stakes. Interestingly, many of these other features highlighted above boil down to a similar theme — reducing the large amount of manual work that is required to make payments and reconcile the books. We believe that the company able to do this most elegantly through workflows that enable a faster process (vs. 100% automation) will win. Once a company has built a robust payment platform, the opportunities for product extensions into expense management, treasury management, and working capital are enormous — yet another reason why we are so excited about the category. If you are building a company to tackle B2B payments or the CFO tech stack more generally, we’d love to hear from you!
