B2B Virtual Payment: A Rapidly Evolving Family of Technologies

Payments in an Accelerated Innovation Period

After decades of slow-to-no change in B2B payments processes and systems, a period during which maintenance of the status quo was the strongest driving force, payments processing is now in a period of accelerated innovation.

Chief Financial Officers (CFOs) at major companies throughout the world are approaching digitization and the attendant tools developed by payments technology firms with greater interest and attention. AP and AR automation technologies have been on the market for years, but finance leaders have only recently decided to examine how these innovations can drive connectivity between AP and AR departments, and between buyers and suppliers. Though digitized payment services have long been thought an inevitable end to the monumental changes wrought by globalization and the invention of the internet, the COVID-19 epidemic has accelerated the implementation, development, and sophistication of these services, for obvious reasons of necessity.

In a recent conversation between PYMNTS CEO Karen Webster and WEX Corporate Payments President, Jay Dearborn, on PYMNTS TV, the discussion turned toward the payments landscape in the context of COVID’s continued grip on our nation. Webster and Dearborn spoke about the recent payments buzz, new IPOs that have come about as a result of COVID, and the role of Amazon Business in the world of payments.

How Investment in Payments Changed the Playing Field

While the world has been in the throes of a pandemic, payments service providers have been introducing new features and functionality to improve the business user experience over the course of the last year. This innovation is happening across both the buyer and seller payment flows.

Many companies that have invested in developing payment services technology are reaping the benefits. For example, AP automation technology firm AvidXchange has taken off during this payments hyperspeed technology boost with plans to take its accounts payable (AP) automation technology public with a valuation of about $7 billion – up from $2 billion in April of 2020. The digital shift has more than tripled their valuation.

“We see it in our own numbers that over the past year, B2B payments spend has really risen dramatically through all of our channels. It could be our direct-to-corporate channel, it could be our financial institution channel that white labels our software, it could be our embedded payments channel where fintechs use our API to create their own payments,” Dearborn told Webster. “And what’s really driving all of this is the need to digitize the back office. A need to get rid of checks. A need to take what are typically human-driven processes either in the AP department or the AR department and put it on technology and manage by exception.” AvidXchange, and companies like it, recognized the opportunities implicit in these rapid changes, and rose to the occasion.

Postal Service Delivery Delays Adds a Wrinkle

While we are experiencing static in our business processes due to COVID, an added concern for businesses is the overburdened and underfunded plight of the beleaguered United States Postal Service, where mail is being transported even more slowly than ever before in the modern era. Our postal delivery system is moving backwards. A recent article in the Washington Post reports that consumers are inundating members of congress with complaints about late medication, paychecks, and bills as a result of Postal Service inefficiencies. This provides even further impetus to move anything payments-related to the digital sphere. While the sluggish nature of check delivery through the mail has always been an issue for businesses, now with these new Postal Service delays a check that might have taken one to three days to arrive may not arrive now for five to seven days, or they may get lost in the shuffle and not arrive at all. Webster noticed a peculiar trend within this new state of affairs. Discussing paper check with Dearborn, she says, “It just seems that they’re so hard to get rid of, Jay.”

Killing the Check

Dearborn started his career at American Express in 2001. Even back then, he told Webster, they were talking about “killing the check.”  Despite this early iteration of a straightforward, common-sense expectation — for what is the use of handwritten, mailed payments, when digitized payments are so much more efficient? — WEX ran some research last year which showed that, nonetheless, more than 50% of B2B payments in the US are still being made by cutting a paper check. “But what you’re seeing during COVID is a necessity to get rid of check payments.” When much of our workforce is remote because of the pandemic, the processes around paying via check become all the more onerous. The pre-COVID call to “kill the check” has grown louder in the aftermath of worldwide lockdowns.

Bridging the AP/AR Divide

Businesses around the globe are using the opportunities that have been unintentionally generated by COVID lockdowns to rethink all of their payments processes. The analysis is not limited to digitizing; it also involves rethinking every step of the way through a payment and a reinvigorated focus on streamlining how AP and AR processes flow. Once that work is done, then comes the time to apply the technology and automation that will support these newly developed processes. As Dearborn shares, “I talk frequently about bridging the AP/AR divide and at the very end of the day there are about three things that will do that. You’ve got people, you’ve got technology and you’ve got the processes that pull all of that together. And you actually have to reinvent all three.” He explains that this kind of technology is always developed in response to the newly defined role of the human beings who are in turn responding to a set of new circumstances. The legacy processes, whatever the modes of operation used to be, then get ripped down, reinvented, and fit for purpose. “What you’re seeing now is that the friction to go through that transformation is continually decreasing as more and more businesses embark on that journey.”

There’s also a different dynamic between trading partners: buyers and suppliers are interacting in a new way. They’ve been forced to think about their relationship differently because of the stresses the pandemic has placed on payables and receivables. By their nature, buyers and suppliers trade goods or services. As Dearborn explains it, normally “payments, invoicing, reconciliation, cash application, all of that comes second. But during COVID, during the pandemic, in many ways these now all come first. It’s a matter of survival to get the cash flow to work for both the buyer and the seller.” As a result, there is increased scrutiny on cash flow. There is a laser focus on when the cash is coming in, how a company applies it, and a heightened anxiety about whether any cash is leaking out of the system. The pandemic has increased scrutiny on payments processes.

New Tools to Bridge Payments Gaps

With a lack of cohesive processes and linked technology between AP and AR, it’s commonly understood that new tools would be useful to reconcile those gaps. Suppliers have always wanted to be paid sooner and buyers always want to pay later but in an environment where cash flow is survival, particularly with some suppliers unable to tap into lines of credit, there is an opportunity for new tools and new ways of thinking.  Tools for AP automation, tools for AR automation, and tools to connect the two together exist – it’s who’s demanding those tools that’s changing. “It’s a virtuous cycle that allows those tools to innovate more quickly and for us to build that bridge more quickly.” Building a bridge between AP and AR also allows for more efficient, real-time access to information. With stale data, companies can be stymied from making effective decisions. Bridging AP and AR allows companies access to timely, cohesive data that covers the entire process from end to end.

Dearborn describes the bridge between AP and AR as being made up of three elements:

• The payment, whether that be an ACH, a wire, a virtual card, or a (still alive and kicking) check
• The data associated with that payment which allows both the buyer and the seller to tie everything out and settle the exchange of goods or services
• The technology that has to run all the time, has to connect into different aggregators, needs to disseminate the information on the other side to different end points, and needs to do everything reliably across many different environments.

The Role of Amazon Business in this New Payments Environment

If there were any doubts about the impact of the pandemic on digitizing B2B commerce, Amazon Business’ latest figures have put them to rest. The company reported that it has now reached $25 billion in global annualized sales.

Amazon Business is a wholly-owned subsidiary of Amazon and it provides companies a one-stop shopping experience for everything they need to supply their business. Amazon attributes most of their recent growth to clients in government offices seeking greater efficiency and to enterprises looking to manage tail spend. Tail spend, often referred to as rogue spend or maverick spend, is typically made up of small purchases by organizations that are not within a contract and are made without the awareness of the procurement team. Lots of transactions fall into this category and can account for as much as 20% of total corporate spend.

This latest figures report from Amazon represents a sales milestone for Amazon Business which reflects an industry-wide evolution, according to Dearborn. Amazon Business is shifting volume away from corporate cards which had formerly been used for that tail spend. Amazon Business is integrated into many of the procurement systems these corporate customers have in place, making buying from them a seamless process because they can directly purchase for a business from vendors behind the scenes without the need for arduous processes and red tape. “If you look at Amazon Business and their customer profile they have around five million different customers driving $25 billion worth of spend on the platform. What’s interesting about it, when you do the math on this and get behind it, is they’re serving both large government and large corporates while also addressing the small business segment.”

Dearborn raises the question of how much of that small business segment is spending on corporate plastic, whether that be actual plastic or virtual cards. “I know in our own profiles as we look at the many billions of dollars of corporate spend that we have on Mastercard and Visa, we see Amazon and many other new retailers in that spend file. The legacy retailers are included as well.” The small business segment is spending on Amazon via Mastercard and Visa as well.

Industry cooperation will be crucial to give marketplaces like Amazon the ability to continue offering an optimized front-end experience, while at the same time enabling fintech partners to drive further digitization of B2B transactions on the back end. With fintechs working closely with one another and with retailers like Amazon Business, more effective progress can be made with payments technology.

Webster noted that retailers like Amazon have a lot of influence on how payments are made and can produce a lot of incentives to shift preference.

Bridging the AP/AR Divide

There are many different players participating in the AP/AR divide in the Commercial Payments segment. “At WEX, we’re focused on the AP department and how we serve them. You’ve got someone like a Billtrust or a VersaPay or a HighRadius who’s focused on the AR department and then you probably have someone that runs these marketplaces like an Amazon and they are squarely in the middle trying to figure out how to optimize and influence the buying decision and how that buying transaction happens.”

CFOs across industries are dialed in to spend management right now, and they’ve honed a lot of their processes over the course of the pandemic. If there is another tool in the tool kit to not only rationalize spend, consolidate it, get better pricing but to also influence how those purchases are made on behalf of the employees making them, CFOs will be all ears.

Cross-Border Payments Impact on the Landscape

Federal Reserve Chairman Jerome Powell recently said that the coronavirus pandemic has underscored the need to improve systems for transferring money across international borders.

“The Covid-19 pandemic has shined a light on the less efficient areas of our current payment system and accelerated the desire for improvement and digitalization,” Powell said.

The Bank for International Settlements (BIS) recently weighed in on the issue of cross-border payments and suggested one potential fix would be to focus on Central Bank digital currencies (CBDCs). Agustin Carstens, General Manager of BIS suggested that “A retail CBDC could address longstanding and emerging issues in payments. It could increase competition, lower fees and encourage innovation.” He goes on to say that central banks around the world are collaborating to put this idea into practice.

Webster shared that PYMNTS recently produced a report with Visa on US and UK businesses, “Innovating Cross-Border Payments Report,” which suggests that on average about 26% of spend is cross-border and those payments take 55% longer to receive. The report also revealed that nearly one-third of US and UK firms are planning to automate their cross-border receivables over the next three years – which means fintech solutions will continue to be in high demand.

Dearborn had witnessed similar results from studies WEX has conducted. Twenty-five percent of the corporate wallet for mid-market and large-market is in cross-border spend (which includes both direct and indirect spend) according to WEX’s research. This is a large share of the US corporate wallet. “We’ve known for a very long time that cross-border spend is broken and it’s broken in two different ways.” Dearborn explains that one way the system of cross-border payments is not working is that it’s expensive to operate. Secondly, it’s quite slow: those payments clear and settle at a snail’s pace. Both of these issues provide ripe opportunities for innovators in the B2B space.

Innovators in the cross-border space who are focused on a niche area of payments can focus on their specific customer and what pain points that specific customer is experiencing. From that knowledge, they can create the innovation within an acute use-case. Each vertical has its own unique characteristics and requires a slightly different version of a solution. “And the buyer and the seller also have unique value, and solving for that value and delivering that value will always have payments as part of it.” This is where being highly specialized will be powerful and conducive to innovation and technological development.

AP Automation is all the Buzz

AvidXchange and accounts receivable (AR) technology partner Billtrust, (which released its first earnings report this week since going public via SPAC in January) are both part of the AP automation buzz. As Dearborn sees it, lighting-quick technological evolution coming out of companies such as theirs is a testament to how quickly the corporate payments landscape has had to evolve over the last year. “Right now, anyone who’s in B2B payments on the AP side of the equation is really focused on chasing spend. How do we get as much of that spend onto our platforms and be able to drive the automation of that spend. At WEX we’re hyper-focused on AP automation, and are doing that directly for corporates. Many of our financial institutions white label our software and work directly with corporates themselves and we’re also focused on embedding our offering into different financial technology firms who are experts at building these bespoke front-ends but then need help on the back end to create that payment. At WEX we have all the technology, we have all of the processing power, we own our own captive bank. We do all of the compliance and so you get that one-stop-shop at WEX that allows that fintech to go do what they do best which is grow and focus on the end customer.” As Webster puts it, “B2B payments as a service.”

We need to alter our thinking on what it means to Digitize Payments

As CFOs learn about these nascent, innovative payments technologies, the ecosystem must continue to foster a shift in what it means to digitize. The goal of adopting AR and AP automation tools isn’t to take jobs away. The goal is to automate mundane tasks, connect systems and business partners through data, and empower finance leaders to focus on more strategic initiatives.

“You’ve got people, you’ve got technology, and you’ve got the processes that pull all of it together – and you have to reinvent all three,” stated Dearborn. And the more we innovate, and the larger the crowd grows that chooses to participate, the easier it will become to implement the technology that will make us all stronger and better at what we do best.

Click here to learn more about how WEX payment solutions can be tailored to your business, so you can operate easier and faster while creating lasting growth and success.

Click here to listen to the entire PYMNTS interview. 

Resources:
Washington Post
Wall Street Journal
The Bank for International Settlements