Payment methods are on a collision course with global business. But not for much longer.
By Andrew GilboyJan 20202 min read
The failure of B2B payments to be truly borderless is at odds with the very exercise it is primarily designed for - buying and selling things.
What does the ideal payment model look like for a US B2B company with global ambitions? You probably want to invoice in the currency you’re doing business in, so it’s as easy as possible for your customers to buy from you. And land the payment back in dollars, so you’re in control of the foreign exchange risk. With all the hazards and costs of banking in a foreign land magically passed on to someone else.
By the end of 2020, I predict businesses in the B2B space will be closer to this ideal. Freed from the burden of needing a separate bank account and legal entity in every country, and with money moving seamlessly across an international payments system, a business will look very different. Automation will see accounts payable and receivable teams halve in size; risk and compliance can be scaled back too. Headcount and resources will be diverted to core growth activities, such as product development and sales.
Today, no payment method can truly claim to be this borderless nirvana. Paper cheques - still used for more than half of B2B payments in the US - are the most obvious felon. The major credit card networks are perhaps the closest we have to being borderless; but they are not available everywhere, and they can be separate from the card issuers operating at a country level. Moreover, they largely cater to a B2C model; in the US only 5% of B2B payments are via credit cards. The banking network may seem like a frictionless ecosystem, but under the hood the flow of money is being constantly interrupted by incompatible national systems, diverging regulations, and antiquated tools. Bank debit is the primary example of this dislocation. In the US we have ACH, in the UK it’s BACS, and the Eurozone has SEPA. Australia, South Africa, Sweden, Japan, Malaysia and Turkey each have their own bank debit schemes, to name just a few more.
Ironically, this failure of B2B payments to be truly borderless is at odds with the very exercise it is primarily designed for - buying and selling things. In 2018, the US traded $5.6 trillion of goods and services with the rest of the world. As each dollar criss-crosses the US border, it loses value. The banks and intermediaries - on both sides - name their price for processing payments. Foreign exchange fees come next. And then there’s the cost of complying with the rules of wherever you’re doing business. The complexity prompts you to invest in resources to oversee and optimise it all. Yet it can be so opaque, and the rules so rigid, that you have no choice but to fall in line. No wonder that 58% of US businesses think the complexity of international payments is holding them back from growing.
Payment methods are on a collision course with the global nature of business today. International commerce is the unstoppable force - $22 trillion is transacted across borders every year. But payment methods are not unmovable objects.
So my actual prediction? B2B payments will be the next frontier for innovation. Technology companies, rather than big banks, will be the ones to fix things. The successful will limit their ambitions to one payment method, and do it better than anyone else. That’ll be a pull-based method, where a business takes payments from their customers, because that makes everyone’s lives easier. Passing on the cost and stress of complying to national banking rules will be a key benefit of using the platform. Enabling US businesses to grow abroad.
This article was originally published PYMENTS '2021 Time Capsule' eBook.