The state of digital payments in B2B ecommerce
It’s long been said today’s B2B buyers want and expect a B2C experience from manufacturers and wholesalers. Though B2B suppliers are increasingly embracing digital -- from ecatalogs to configure price quote (CPQ) and online checkout, supporting the diversity and complexity of B2B payments remains a challenge.
Unlike B2C, where streamlined checkouts accept instant payment from credit cards, PayPal and the like, paper checks and manual processes still drive the bulk of B2B payments. Corporate buyers expect to purchase against an account for large transactions. Purchase orders, invoices and bills of lading are part of the deal, often with negotiated pricing and credit terms.
With the average payment cycle taking 34 days to complete and 47% of invoices paid late, the transition to quicker and more reliable payments can’t come soon enough for suppliers, especially through ecommerce channels.
B2B payments at-a-glance
In 2018, 47% of B2B payments were made by paper check, compared to 34% via Automated Clearing House (ACH) and 13% via bank wires. Only 6% of payments were made by credit card.
Credit cards lag in B2B payments
Credit cards are a convenient way to pay for goods and services, especially online. However, in B2B commerce, not all transactions can be satisfied by a digital cart and checkout. For larger and more complex orders, credit cards simply don’t offer the credit limits or payment terms that buyers need.
The higher the value of a purchase order, the less likely it will be settled by plastic. Buyers expect to purchase against an account and negotiate credit terms (such as net 30, 60 or 90 days), giving them time to receive and inspect goods and manage cash flow and float. Should a buyer pay an invoice late, a supplier’s financing charges rarely match credit cards’ double-digit interest rates.
Not all suppliers accept credit cards. Despite the near-instant access to cash, even a 1.8% interchange fee greatly exceeds the cost of receiving a wire transfer or check on a six-figure invoice, with additional fees for refunds or adjustments. And fraud risk is a concern shared by both buyers and suppliers.
The reality of virtual cards
Good for one-time use and assigned a specific payment amount, virtual cards are a hedge against B2B credit card fraud. Issued by a bank or automated accounts payable system, virtual cards ensure an invoice can’t be overcharged or re-charged by a supplier, or the approved limit exceeded by a staffer. 13% of mid-market B2B companies use virtual cards, and 49% expect to increase their use.
While virtual cards make payments easier for buyers, only 1% of suppliers are set up to receive them seamlessly into their ERP. Virtual cards are typically sent via phone or email, requiring vendors to manually input data, and remittance data may be missing or improperly formatted. Reversing or crediting virtual transactions is also more difficult, as virtual cards terminate after a single use.
Paper checks still rule B2B payments
B2B payments are complicated by the fact both buyer and supplier must be set up to support a given method. Still the one method accepted universally, it’s no wonder nearly half of all B2B invoices are paid by paper check (though 47% of B2B buyers plan to decrease their use).
Small and medium businesses (SMBs) make up the largest segment of check payments. Many SMBs lack the credit limits or systems to make credit or e-payments and reconcile them with purchase orders and invoices. While SMBs may be hesitant to invest in new systems, checks carry their own overhead, including the cost per check, postage, insurance and administration time -- an estimated $4 to $20 per payment. For many SMBs, the investment in digital payment systems will pay for themselves by offsetting these costs.
EFT is on the rise, but challenges remain
59% of US mid-market firms use Electronic Funds Transfer (EFT) to pay invoices (34% via Automated Clearing House (ACH) and 14% via wire transfers), and 79% of suppliers are set up to receive EFT.
Wire transfers are less popular thanks to hefty fees charged to both parties (up to $50 for domestic and $65 for international wires) and cumbersome set up. Wires may be preferred for time-sensitive payments or for large transfers for which one or both parties don’t accept ACH or SWIFT transfers.
ACH is expected to be the payment rail that finally ousts checks as the top B2B payment method in the US, reaching 45% of payments by 2020 (with checks falling to 34%). More flexible for buyers than credit cards with fixed limits, ACH transfers are ideal for large orders.
Nearly 80% of credit and AR professionals cite it as their preferred way to receive payments (while 21% say their organizations aren’t properly set up to receive them). Faster than checks, ACH payments clear within a few days, with same-day ACH increasing adoption. Flat transfer fees are far lower than credit interchange, and end-to-end encryption makes ACH highly secure.
ACH requires a one-time set up between each customer and supplier, and acceptance is still not universal among buyers and sellers. What’s more, customers don’t always send consistent remittance data with their payments, making it more difficult for suppliers to reconcile invoices and purchase orders in their ERPs.
Fintechs are filling the gaps
To shift to more B2C-like payment experiences, fintechs such as Apruve are stepping in to support real-time digital payments, even when credit terms and checks or bank transfers are involved. Serving as a merchant’s Accounts Receivable (AR) department, suppliers can get paid within 24 hours while the intermediary handles collections. Online, B2B buyers can select Apruve as their payment option through a digital checkout (as one would PayPal).
According to Michael Noble, CEO of Apruve, purchase orders are 5.6 times larger with 3.2 times more line items when buyers can order against an account versus pay immediately through credit card. Buyers also by 2.2 times more frequently.
AR-as-a-service can also save merchants significantly on overhead. "Most businesses don't realize what their internal costs are," says Noble. "Merchants can expect 30-50% cost savings versus running their own credit program." Outsourcing AR not only offsets costs of the department, but also frees salespeople from the time-consuming task of tracking down payments to focus on higher value activities.
The importance of supporting multiple payment types
Flexibility is a competitive advantage
Buyers’ payment decisions depend on the methods their suppliers accept. Not offering a buyer’s preferred method can be enough to make them choose or switch to a competitor.
Friction costs revenue
As with B2C, removing friction from the checkout or transaction “flow” will increase conversion and revenue. Buyers want convenience, and supporting as close to real-time transactions online is key.
Suppliers must lead the way
41% of B2B buyers say they would increase their use of credit cards and 48% use e-payables if more suppliers would accept. Changing long-standing business processes carries costs, and for some businesses, the transition to digital payments won’t be worth it until they can be used with a majority of suppliers.