B2B Payments Deep Dive Shows Paper Checks Have An Expiration Date
In the end, we’ll be puzzling the answers to the big questions that loomed in 2020:
What just happened? What will we change? What will it take? What will the future look like?
Those questions could be posed to any number of events – the pandemic, of course, which has brought those same queries to all aspects of life, from the economy to the election…
And B2B payments, too.
The fundamental things apply, as the old song goes, and the pandemic has changed everything, helping to move the needle in how corporates pay one another and communicate, and how buyers interact with suppliers.
In a months-long series of interviews and fireside chats conducted and hosted by PYMNTS, payments executives, investors, bankers and economists weighed in on where we’ve been — and where we must go.
The $20 trillion in corporate payments done through paper checks represents a staggeringly large greenfield opportunity – and there is any number of ways to modernize B2B interactions (and corporate treasury activities in lockstep).
The Big Themes – And The Challenges
The end is as good a place as any to start getting a sense of the big themes taking shape, and how we can get there. In the final conversation of the series, Kevin Phalen, head of global business solutions at Visa, told Karen Webster that collaboration and interoperability will be the new hallmarks of B2B transactions, even though there are multiple rails that can render the infrastructure – with an eye, of course, toward replacing the paper check (and even the fax!).
But to get a sense of the overarching theme governing those who seek to change the way it has always been done: As noted in the keynote that kicked off the confab, taking a page from the late Harvard Professor Clay Christensen, business innovation must consider the “jobs to be done” theory of business innovation. In a nutshell: Companies (and even consumers) “hire” goods or services to get where they want to go, to make progress, to satisfy goals.
“Buyers and suppliers don’t really care about the network, but they want to have the payment. They want the data [and] they want the information,” said Phalen in the final discussion with Webster. Data flows can help break down silos between companies — and even within the firms themselves.
There may not be one set of rails that connects everyone (and everything) — but as Phalen maintained, we’re headed into a longer-term evolution where through standardization of messaging (such as through ISO 20022) and networks such as Visa B2B Connect, platforms can bring together messaging, payment capabilities and settlement to address credit and trade financing activities.
“That’s where the market’s going. That’s where we’re investing,” he told Webster, noting that “smaller firms, in the past, maybe had one or two partners outside the home market. Now it’s many more, and we’ve got to be able to facilitate trade for them.”
But beyond simply making the rails available – akin to a “build it and they will come” mentality – B2B solutions providers face the challenge of creating a strong value proposition that goes beyond displacing checks, as Bruce Lowthers, president of banking and merchant solutions at FIS, told Karen Webster.
“We need to find a way to create something cool that solves a problem and helps our clients so they can get better and more efficient at running their businesses,” Lowthers told Webster. “The reason things haven’t accelerated faster than they have in the past is that no one has come together with that really compelling value proposition to make the move.” Creating the value proposition leaves the door open, according to one discussion between banking and FinTech execs, for partnerships to transform treasury banking, corporate payments and back-office processes simultaneously.
That value proposition may take a while to be fully embraced, noted Deluxe President and CEO Barry McCarthy said. After all, $20 trillion in paper payments is a lot to get rid of overnight. Paper checks are waning, but temporarily. Lower business volumes translate, naturally, into lower check volumes. A temporary lull.
“This is not a catastrophic cliff,” he said of check-ordering trends, noting to Webster that what’s been seen amid the pandemic is “what we have seen in every previous recession.” Checks will hang on and co-exist with digital payments for a good long while.
The Pressure Points
But the pressure points are amassing. In a separate panel discussion with Mike Massaro, CEO of Flywire, four executives from various verticals — from freight management to banking — gave a ground-level view of how digital payments are taking root. PNC’s Chris Ward, head of products and innovation, treasury management, said the pandemic, similar to 9/11, is “another monumental event that will drive the shift to electronic payments.” CFOs and treasurers will increasingly see that they need to eliminate dependencies on paper forms of payments and transactions.
That has led banks and others to accelerate their investments in digital channels to help their corporate customers embrace digital onboarding activities, making it easier to initiate transactions using application programming interfaces (APIs).
Innovation, of course, is also coming from other parts of the payments ecosystem – namely, through the venture capital and private equity fund flows that underpin new product and service development. Indeed, as one panel of investors noted, there is heavy interest, even amid the pandemic, in investing in financial services platforms across all manner of verticals, and in helping them grow and go to market. And though valuations may be stretched, fundamentals are indeed sound.
As Bain Capital Ventures Partner Matt Harris told Webster, “If you ask investors, I would say the recognition of the next big value creation opportunity in B2B payments [has] happened. I think in terms of market recognition, 2020 was the breakout year — [and] in terms of commercial adoption, 2021 will be more like it.” Digital transformation remains a top priority, especially in an effort to merge accounts payable and accounts receivable functions.
“Literally, envelopes with checks in them were piling up in an empty office,” he said. “That sort of thing really does get the attention of the treasurer or CFO.”
Moving Toward A Better Customer Experience
The paths toward innovation, and toward bringing suppliers and buyers together, are taking a cue from the great digital shift seen in consumer payments. In one discussion among five executives with payments and supply chain expertise, integration was a key area of discussion. Sarfraz Nawaz, head of digital transformation at J&J Supply Chain, said the new digital reality has forced companies (including his own) to focus on being responsive and agile on order to make supply chains resilient. At the same time, they have to check the myriad boxes tied to mandatory compliance and governance of supply chain management.
“Tech should be an enabler,” Sarfraz said, while platforms can promote the shared goals between departments as far-flung as finance, treasury, sales and marketing – and ties payments intuitively into the process. Within firms, as noted in another panel discussion, lines of communication can be improved between AR/AP departments to make day-to-day cash flow management on the part of CFOs easier, strategic and even in real time.
In the drive toward digitizing and consumerizing B2B payments, said Flint Lane, CEO at Billtrust, buyer-supplier dynamics are changing — for the better. Those dynamics need to get better, as days sales outstanding (DSOs) are rising. Ignore the supplier at your peril, Lane cautioned buyers, in an environment where the mail is 35 percent slower – and where offering digital payment options is critical.
“I have found that on the AP side, more and more of the software vendors are finding it necessary to deliver a great supplier experience or they’re going to see churn in their own payment numbers. Suppliers want to be flexible, but there are limits,” he told Webster.
What Comes Next
Looking ahead, it all may feel like drinking from a fire hose, as corporates and FIs grapple with digitizing and modernizing payment flows and back-end processes. But longer-term roadmaps show that there is room for several payment rails to compete, coexist and even complement one another, as noted in a discussion between Alan Koenigsberg, global head of new payment flows at Visa New Business Solutions, and five executives from payments and messaging networks, services providers and the crypto realm.
Real-time payments and ACH will co-exist for a long time, said observers. Digital currencies loom, too, as stated by Jeremy Allaire, CEO at Circle. “The real innovation cycle is where you layer on the programmability of money as a data type on the internet,” he noted. “There need to be governance models. There need to be regulatory models around it.” Separately, Dr. Paul Sheard, senior fellow at Harvard’s Kennedy School, told Karen Webster that there will be more innovation taking place at the central bank surrounding digital currencies, in tandem with private-sector players.
“The Fed and other central banks can get obsessed in the financial markets about monetary policy, but … the nuts and bolts of central banking is around payments and settlements. Everything ultimately is settled in central bank money – at least that’s the way the system works,” he said.
2020 can’t end fast enough, for all sorts of reasons — but we’ll point to this year of upheaval as ushering in a new era for B2B payments.