B2B payments for the middle market

Addressing unmet needs to tap into a new pathway for growth

There is a tectonic shift underway in the business-to-business (B2B) middle market payments landscape, with increasing numbers of service providers offering specialized products and services to address buyer/seller pain points. Traditional financial institutions may be particularly vulnerable to disruptive competition that they haven’t experienced in their core banking and lending services. Barriers to entry have largely been eroded by a combination of technology and disruptive business models that are making it easier for smaller players to do what only the larger banks were able to previously. Financial Institutions can and should tap into this new pathway for growth.

US B2B middle market opportunity

The large and thriving US middle market historically has been underserved in its (B2B) payments needs. As a result, many sellers and buyers are experiencing significant frustration with the B2B payments process. And while financial institutions are increasingly targeting middle-market growth opportunities, they could do more to address the segment's payments pain points.

The middle market, comprised of businesses with revenue from $50 million-$1 billion, is a key sector of the US economy. With total revenues of over $6.6 trillion, the middle market leads the country’s economy and is growing at a fast pace.

Middle market companies are prime targets for banking and lending services. Firms at the lower end of the spectrum (<$100 million) are particularly attractive, as the segment’s average quarterly revenues for companies grew by 6.6 percent year-over-year (YoY) in the second quarter of 2015 (2Q15) compared to GDP growth of 2.7 percent.

B2B payments landscape: Pain points, unmet needs

Accounts payable lifecycle analysis reveals eight key pain points and unmet needs faced by middle market buyers and suppliers.

High processing costs: Thirty-five percent of businesses report high processing costs as a major challenge with traditional payment methods. It costs a typical Accounts Payable (AP) organization nearly $8 to process a single supplier payment. Also, 62 percent of costs stem from labor.

Payment delays: Thirty percent of middle market businesses quote payment processing time as a major issue. Payment delays can result from a delay in payment from suppliers/buyers or slow processing methods. It takes an average of ~30 days to complete a payment, and around 47 percent of the suppliers are paid late for their products or services.

Manual AP processing: Buyers lack adequate automation capabilities for AP processing due to limited back-office integration with electronic payments and electronic invoices, lack of IT resources, and difficulty in convincing customers/ suppliers to use ePayments.

Fraud risk: Risk of fraud is high, as there are limited authorization controls for each transaction and some existing payment methods don’t always provide the right level of security for online payments. In a 2014 survey, about 22 percent of middle market businesses reported that they faced payments fraud.

Limited transaction visibility: A limited end-to-end view of the transaction associated with multiple payment methods results in extra costs, delays, chargebacks, and payment cycle disruption.

Supplier payment methods: A mismatch in the payment methods preferred by buyers and suppliers also poses challenges; buyer payment decisions are heavily dependent on the payment methods their suppliers use.

Remittance data processing: Reconciling multiple invoices and receiving and processing remittance data can be cumbersome due to missing data elements in the files, use of different file formats, and lack of back-office support for automated remittances. These pain points in the $3.3 trillionand growingmiddle market B2B payments processing space haven't received the same degree of attention from financial institutions as consumer payments or corporate payments aimed at large companies.

B2B payments for the middle market

Enhancing the Financial Institutions (FI) value proposition

Easing middle market B2B payments pain points will be table stakes for FIs. Payments processing increasingly will become commoditized, especially with the US Federal Reserve driving towards ubiquitous and faster payments. To enhance their value proposition and compete effectively over the long term, FIs also should help middle market companies manage ongoing business and growth challenges. For example, cash flow predictability is often impaired by inflexible payment terms offered by different suppliers, and heavily impacts buyer and supplier working capital availability. Close to 55 percent of middle market players find it highly or moderately challenging to maintain sufficient working capital. By developing innovative payments products that address larger-picture issues such as working capital, FIs can differentiate themselves from FinTechs and other market entrants, especially as the payments process itself becomes commoditized through ubiquitous, faster payments schemes. In preparation, FIs should consider developing a strategic framework based on three pillars for an enhanced value proposition:

  1. Strengthen core capabilities. Cater to customer payments processing pain points and table stakes expectations across traditional payment modes by reducing costs, increasing speed, and improving efficiencies.
  2. Create proprietary bundled solutions. Understand the larger business issues that the middle market faces and develop products/offerings that go beyond providing a seamless payments experience to help companies leverage the synergies between payments and business solutions. Through these offerings, FIs can create differentiation and continue to play in this market as core payments processes become increasingly commoditized.
  3. Harness “greenfield” innovation. Develop new B2B payments products and services for the middle market that harness the power of disruptive technologies (e.g., cloud, mobile, digital currencies, real-time payments, etc.) and leverage partnerships and investments in innovative FinTechs to fill capabilities gaps.

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