B2B Payments: A Once In A Generation Transformation Opportunity

Digital transformation has now risen to the top of the CEO agenda, according to research by McKinsey. Rethinking business models to compete with digital offerings has become a strategic imperative as well as rethinking operating models. As we scour the back office for opportunities to create operational efficiencies, improving the payments process is often low hanging fruit, offering a high ROI “quick win” that can in turn fund other digital initiatives.

Any process where there’s a lot of paper and manual work is a good candidate for digital transformation, and payments certainly qualifies. In the U.S. today, $26 trillion in vendor payments flows between companies, and about 50 percent of transactions are carried out via check. We still see a few companies using checks exclusively, but most companies today use a mix of payment types that is predominantly check but also includes some card and ACH payments.

That’s more or less the state of electronic payments in business today—only a fraction of payments are made electronically, and the only part of the process that’s electronic is the movement of funds. There’s a whole lot of manual work on the front end to prepare to transmit payments and then on the back end to reconcile and sort out the inevitable payment errors.

The great irony is that in many ways, adding card and ACH to the mix has turned out to be less efficient than simply sticking with checks, because now A/P is running three separate workflows—four if the company does wire payments.

On top of that, to pay electronically AP team members have to take on the work of vendor enablement—figuring out which vendors will accept a card or ACH payment, collecting their banking and remittance information, and keeping all of that data up to date. And, they expose themselves to risk by storing vendors’ sensitive account information. Most accounts payable departments don’t have the resources to do that for all their vendors. They end up enabling just the top 10 or 20 percent, which is why checks are still so prevalent in business.

But change is on the horizon. The fintech wave that has created so many great consumer payments products over the past decade is finally coming to business payments. It’s taken a while to get here, because the actual payment is just a tiny piece of the puzzle. To provide a truly automated solution you have to solve for all the complexity around the payment. That is exactly what fintechs are doing today. The difference between next generation payment automation and what today passes for electronic payments through most banks is night and day.

Fintech solutions handle all the complexity around B2B payments, automating the entire frontend workflow so that the person in AP is dealing with one interface and one process—selecting invoices and clicking “pay.” Payment is automatically routed to the most advantageous lowest cost method.

Vendor enablement is handled at scale leveraging cloud-based networks, taking the whole workload off of AP’s plate, where it really never should have landed in the first place. With ongoing, real-time enablement efforts, most companies are able to get to 80 percent or more electronic payments with any remaining checks automated as part of the process.

The ROI equation is pretty simple: Electronic payments cost 10x less than paper checks so there is a dramatic opportunity to lower cost. But that doesn’t capture the entire story. Modern payments automation provides superior visibility and control over payments and that creates a number of efficiencies throughout the building.

Resolving payment errors and reconciling payments are ingrained in the daily routine in AP departments, but they’re huge drains on productivity that are greatly reduced when you have an automated process with real time visibility into payment data.

CFOs and treasurers can make better cash management decisions. They have visibility into whether they are capturing available discounts and incurring late fees, and they can adjust the timing of payments with a lot more precision than check float, which is really a blunt instrument for cash management.

Audit is much more efficient; no more trips to the storage space rummaging through files to find documents. Fraud is easier to spot. Procurement can improve relationships with vendors, and in a lot of industries paying electronically and on time can create a competitive advantage. We see this in construction where subcontractors provide better bids to companies they trust to pay on time.

The business world is abuzz with talk about data, analysis and intelligence and how those lead to better decisions. Payments are strategic because they are about the deployment of cash, and they’re connected to the data flow for all buyer supplier relationships.  As companies automate in this area, I think we’ll see a move toward a much higher order of business intelligence around all the tasks that touch on payments, and that will enable businesses to be more efficient in a variety of ways.

When CEOs think about digital transformation, payments may not be the first thing that comes to mind, but it’s really a great place to start the effort. Since it only impacts AP, it’s so much easier than swapping out your ERP, CRM or P2P system. It’s really not even a valid comparison. It takes about a month to get up and running, with about 10 hours of IT time.

With such little effort required to get all these benefits, you’d think the market would be growing like crazy. Well, it’s coming. Less than 5 percent of the market is using next generation payments automation, so this is an opportunity for most companies. The market is going to dramatically accelerate over the next few years. Automating payments is a relatively easy win for finance and accounting, with immediate benefits for any industry. It’s a once in a generation opportunity for finance and accounting teams.

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