Established enterprise software providers are entering the underpenetrated business-to-business (B2B) payments landscape.
Traditional banking and payment companies have faced significant disruption from emerging business-to-consumer (B2C) payment players in recent years. Now another wave of payment players is on the rise. Established enterprise software providers are entering the underpenetrated business-to-business (B2B) payments landscape. This move allows them to provide their vast customer base with automated payment integration, generate incremental revenues from new service offerings and expand their addressable market. This trend mirrors the one we have already seen in B2C payments.
Core payment processing has become highly commoditised, squeezing the margins of merchant acquirers. That has created an incentive for payment providers to differentiate their business models. By supplying merchants with additional value-added services and solutions, these providers can expand into higher-margin offerings and offset the downward price pressure on payment processing. These additional solutions and services are primarily focused on specific commercial needs of key customers and generally lead to some degree of ‘verticalisation’ of payment companies. Merchants, in turn, have been more willing to pay for add-on capabilities. These have largely been focused on the consumer experience at the check-out, such as alternative payment methods, loyalty programmes, gift cards, working capital management and omnichannel solutions.
Global B2B payment flows are more than four times the size of consumer payment flows.
B2B payments are a significantly larger market than B2C. According to Mastercard, global B2B payment flows are more than four times the size of consumer payment flows. However, electronic B2B payments significantly lag behind B2C payments across industries. It is estimated that only one-third of B2B transactions are processed electronically, compared to two-thirds of global B2C spending. High levels of manual processes, a lack of visibility of supplier payment information and limited transactional data for reconciliation have all acted as a drag on electronic B2B payments adoption.
Where payment service providers are active in the B2B market, they tend to focus on servicing mid-sized and large enterprises. As a result, traditional payment processes within SMEs are more labour-intensive and inefficient leading to significantly higher unit costs for accounts payable processing. With manual intervention needed to receive and approve invoices, make payments and reconcile accounts, there is a compelling opportunity for enterprise software providers to drive return on investment (RoI) by tightly coupling software and payment workflows. Increased adoption of software-based accounting systems and general ledger, alongside enhancements in real-time payment infrastructure, is also accelerating the digitisation of B2B payments.
With manual intervention needed to receive and approve invoices, make payments and reconcile accounts, there is a compelling opportunity for enterprise software providers to drive return on investment (RoI) by tightly coupling software and payment workflows.
Only one-third of B2B transactions are processed electronically, compared to two-thirds of global B2C spending.
Payment companies: Payment companies generally serve as the aggregator of software and service solutions, positioning themselves in the middle of all transactions. The expansion of their coverage is being driven by strategic acquisitions. Recent examples include Global Payments’ acquisition of MineralTree, CurrencyCloud’s acquisition by Visa and Fleetcor’s acquisition of a series of companies, including Nvoicepay, Levarti and Associated Foreign Exchange.
Enterprise software businesses: The new breed of ERP solution providers already offer some level of core accounts payable automation (processing, receiving, invoice matching, reconciliation, etc.). They also provide specialised solutions for cross-border payments, working capital and treasury activities. The leading players have pursued strategic acquisitions to further expand their geographic coverage and add new capabilities. These include BillTrust’s acquisition of Order-to-Cash, Esker’s acquisition of Market Dojo, Bill.com’s acquisitions of Divvy and Invoice2go and Coupa’s acquisition of BELLIN GmbH.
Enterprise software businesses are uniquely positioned to develop payment services and allow their vast captive customer base to manage payments directly through software enabling automation, tracking and reconciliation.
Accounting software businesses are at the forefront of this foray into payments and financial services.
Enterprise software businesses are also uniquely positioned to develop payment services and allow their vast captive customer base to manage payments directly through software enabling automation, tracking and reconciliation. This increases their addressable market and customer stickiness (e.g. ClearCourse’s integrated automation and payment capabilities). Better reporting can also further enhance the user experience, creating value for both the enterprise software company and the end customer. This has led payment companies such as Global Payments to look to acquire vertically integrated software businesses. Accounting software businesses and companies serving SMEs are increasingly at the forefront of this foray into payments and financial services.
Banks and financial institutions: Payment and enterprise software businesses often work with banks to distribute their solutions to the market, because banks usually own the customer relationships. This allows payment or enterprise software companies to minimise their sales and marketing costs. Some examples of partnerships include:
- Amex and Goldman Sachs Transactional Banking announcing a collaboration to provide large corporate clients with a cloud-based payments solution that supports multiple payment options and offers data and analytics on one integrated platform. Furthermore, Goldman Sachs has a specific solution for B2B payments, liquidity management and working capital primarily targeted at SMEs based on a cloud platform.
- Oracle’s subsidiary NetSuite launching Suite Banking, its mid-market fintech offering to provide easier access to a range of financial services, in October 2021, backed by an alliance with global banking behemoth HSBC.
- Kyriba and Soc Gen launching a joint treasury management solution in September 2021 delivering more sophisticated functionality through collaboration.
In contrast to the retail (B2C) and peer-to-peer (P2P) payment markets, which have gone through significant and rapid consolidation to create larger institutions, the B2B market has stayed fragmented and under-penetrated. Key adoption barriers have been incompatible technology, internal client-specific workflows, different accounting standards and local regulations.
The downside risk of customer churn could be offset by a drive for financial efficiency amid an inflationary environment.
In contrast to the retail (B2C) and peer-to-peer (P2P) payment markets, which have gone through significant and rapid consolidation to create larger institutions, the B2B market has stayed fragmented and under-penetrated. Key adoption barriers have been incompatible technology, internal client-specific workflows, different accounting standards and local regulations.
B2B players within a specific niche with strong technical capabilities, key partnerships (especially with banks) and a targeted acquisitive growth focus are best positioned to thrive in the medium term. With the increasing use of AI and data analytics, new vertically integrated business solutions (e.g. Visma Finance) could be credible challengers in the longer term.
While a recession could negatively impact SMEs, the downside risk of customer churn could be offset by a drive for financial efficiency amid an inflationary environment. We, therefore, expect to see robust market demand as businesses look to digitise their payment systems. Building scale and operational efficiency through M&A across the B2B SME payments landscape will underpin strong deal activity, both amongst strategic buyers and private equity investors.