B2B payments: The real digital revolution no one’s talking about

The surge in digital payments brought on by the pandemic is already well storied. Almost anyone who’s bought something in the last year can attest first-hand to the rise in e-commerce and contactless payments. But let’s be clear, this is not a sudden transformation. The critical digital infrastructure for consumer payments was laid over the last decade with the introduction of contactless cards, seamless online checkouts, and the emergence of highly popular digital banks. It’s only now that acceptance and adoption is being accelerated by necessity during the pandemic, and there’s no going back.

Meanwhile, B2B payments have been left in the dark ages. And now, behind the scenes, a quiet revolution is occurring as the back offices of corporates and financial institutions around the world go virtual in a frantic game of catch-up. Fintechs have a critical role to play here, helping accelerate innovation in business payments and at the pace that is needed.

Ditching paper at last

It’s baffling to think that a vast amount of B2B payments are still heavily reliant on paper cheques and invoices, with 49 per cent of UK businesses using cheques to pay a supplier in 2019. Meanwhile, most consumers’ chequebooks have been collecting dust in draws for years. Paper payments are manual, slow, and dependent on the mailing system. And the physicality of business payments doesn’t stop here. Opening corporate bank accounts still must be done in-person and supporting payment documentation signed for, then mailed or faxed.

Inertia and friction in the different systems between accounts payable and receivable have allowed these out-dated ways of doing things to persist longer than they should have. But the pandemic has driven this to a halt. How can you fax a document while working from home and the fax machine is in the office? Where do you mail a check when offices are deserted? Centralised offices were created to deal with increasing mounds of paperwork, but businesses and financial institutions have suddenly been thrust into a distributed remote working world.

Business payments have become yet another operational headache this pandemic has thrown at companies. Quick fixes, such as moving to DocuSign for payment validation have been readily adopted, but the journey to overhaul the crumbling legacy systems banks and other financial institutions rely on for payment processing has only just begun. 

Digital natives spurring innovation

It’s not just ensuring commercial transactions continue to flow through that is forcing businesses to innovate payment processes. The digital native fintechs and banks that pioneered digitalising consumer payments have now set their sights on businesses’ banking and payments, as it is more lucrative and can help them on the path to profitability.

As digital natives, they can move and innovate much faster, rolling out features that streamline business payments. They have the agility to cater products towards rapidly changing market needs. For instance, developing software that allows SMEs to automate their billing cycles – a key efficiency when cash is tight.

Meanwhile, larger, and more traditional players struggle to move fast. The cost of capital of investing in these initiatives is too high when they are saddled with the overhead of managing large and prone-to-fail IT systems. But here too the digital natives are driving innovation forwards, by competing with traditional players and applying pressure for them to digitalise their own payment processes. This is a longer-term battle for customer retention and acquisition which the pandemic has, again, accelerated.

Future of B2B payments

Switching to digital will take longer for B2B payments than it did for consumer payments. And so, although a revolution is now underway, it will take several years before it beds in across the global financial system. And the same digital natives that pioneered digital payments for consumers also have a vested interest in the collective advancing of this infrastructure, as their business offerings will sit on top of this foundation and cannot just rely on slick front-end applications.

Traditional financial institutions will start to bring in payment portals and other features that mimic the consumer experience, but for most, the task is too great to do in-house. This will create opportunities for another cohort of fintechs that can provide the critical digital infrastructure they lack, leading to a flourishing of Software and Banking as a Service (SaaS and BaaS) business models in payments.

Once commercial transactions go digital, this will give financial institutions and businesses alike far more control over their money. Payments will no longer just be money, but rich data that can be analysed and provide insights that give organisations far greater control and transparency over their finances.

While consumer payments will always be the first to innovate, the opportunity in B2B payments is greater. Consumer payments are typically low value, while business payments are both larger and more complex, so there is much more money in the business payments. Digitalising these payment flows will have a far greater impact and benefit on the health and functioning of the entire financial system.