When I tried to help a foreign company to launch in the US, I was trying to stay lean as I was given a very limited budget. However, I quickly found out that it was difficult. In addition to having accountant, I also needed someone to run account receivable (AR) and account payable (AP). For example, it was hard just to keep track of all the receipts, as they are dispersed between paper and digital. Worse when the numbers don’t add up correctly. Now, this was in 2018 already!
Having a technology background, I know there is a better way. I know there is a world where from my invoice, payments, to receipts are all digital, and nicely organized. I can easily view the latest AR and AP status in a dashboard. And it’s also integrated with my accounting and tax software. It’s also easy to install, like one-click, to integrate, and does not cost a fortune.
Now, this is not a wish list, but requirements from small business owners (users). Technology should be used to improve our lives, then I woke to reality as my suppliers were asking payments in cash and checks. As any change will need to start small, but fundamental, let’s start to look at the issue and some of the existing solution.
The problem / opportunity:
The business to business (B2B) payment market size is estimated to be around $25 trillion in transaction value in the US alone. Yet, paper check remains the most widely used form in B2B payments in the US even though it’s 4th in satisfaction behind ACH, electronic bank transfer and credit cards (ref. 1). It’s also interesting to note that, in the same report:
- The reason that check is so popular even though it has low satisfaction is because it’s widely accepted by suppliers.
- ACH receive the highest satisfaction because it’s easy, convenient, and cost effective
With the rest of the world moving away from paper payments, The US is playing catch up. Problem with checks:
- Transparency — don’t know when the funds will arrive
- Extra labor required to process and issue the check
- Prone to fraud
I think these problems are self-explanatory, so I won’t’ expand here. Before we look at solution in the market today, let’s first consider what a good solution should be. To apply first principle design thinking, I think a good payment system should have the following features:
- Easy or convenient
- Cost effective
- Accepted by most suppliers
- Better fraud & data security
and with the goal to achieve the following：
- Reduced errors
- Reduced costs
- Reduced fraud
- Reduced employee resource
- Better cash management
With the problem, and what constitutes a good solution in mind, let’s take a look at what I would consider a “standard” solution that needs to be offered by B2B payment providers to be competitive.
In this section, we will look into what are the typical services provided as part of the B2B payment solution. We will look into Mastercard’s solution as others will offer something similar.
Disclaimer: I don’t work for Mastercard. But Mastercard if you are watching, I am interested.
Currently, Mastercard B2B payment solution offer the following (it’s not exhaustive, but what I distilled and considered important Mastercard’s white papers, which understandably focus on marketing rather than functionality):
- RTP (real time payment)
- ePayble, AP automation
- Bill pay exchange
Real time payment done by vocalink (UK company acquired by Mastercard). Vocalink provides the underlying infrastructure to BACS (Banks’ automated clearing services). BACS provides inter-bank direct credit & debit.
- Consumer: Availability, speed, security
- Corporate: efficiency in invoicing & billing. Improved liquidity and working capital management
- Basically, improving costs, mitigate risk
RTP works as follow:
E-payable provides functions such as virtual accounts: randomly generated unique virtual account number & transactional-level authorization control allows you to define when, where, and how employee accounts are used. It’s convenient for the following:
- Simplify reconciliation and reporting
- Increased efficiency: integrate workflow control & transactional approval process
- Purchasing card for procurement
- Smart data on business spending
Bill pay exchange:
Bill pay exchange is a platform that can be used to set up billers, present bills, pay bills, and provides payment transparency.
The platform solves the following pain points when paying bills:
- Pain to set up,
- Lack of payment option,
- No real time payments,
- No bill presentment,
- Lack data collaboration to facilitate faster and more accurate reconciliation
Inside the bill pay exchange platform, there is also bill pay automation function. It addresses the following pain points:
- No visibility in invoicing & AP
- Corporate directive to lower costs
- Difficult to manage paper-based business
- Harder to manage cash according to business need
- Risk of payment-related fraud
And hence provides the following benefits:
- Reduction of paper invoice
- Quicker approval of invoices
- Visibility into unpaid invoices / liabilities
- Lower AP processing costs & increased employee productivity
- Reduction in late payment penalties and interests
The graph below represents a fully automated AR & AP solution as I have outlined in the beginning as the “wish list”. Bill pay exchange is certainly one big step towards it. I included it here because it’s good to have high level overview. And I bet Mastercard, true to its strategy of owning the underlying highway (as I have pointed out in my previous article), will be focused on the API (middle) layer.
As a payment geek, a small business owner, and a believer in using technology to improve our lives, I am really happy to see companies making waves in the B2B payments area. The efficiency and benefits it will bring be tremendous. One of the key for successful factor for such systemic change is adoption. I believe companies like Mastercard will continue to partner with PSPs to achieve wide adoption and create win win for both consumers (merchants) and Mastercard.