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B2B payments: Tackling a broken landscape

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Last editedJan 20204 min read

B2B payments have fallen far behind their B2C counterparts.

The latter has shifted away from physical methods, with a significant amount of innovation taking place, such as contactless cards, e-commerce transactions, the rise of mobile payments and P2P payments.

B2B payments, however, are stuck in the past. Cumbersome processes rule the roost, with problems including a high level of failed payments, lots of wasted admin time, high risk around cash flow, awkward conversations with customers when chasing for payment, and potential data security issues.

While parts of the B2B process have been digitised, large gaps still remain. 52% of all B2B payments are still done via some form of bank transfer (UK Finance, UK payment statistics 2018).

And let’s not forget that nearly half of all global business transactions – $58 trillion in 2016 (Oxford Economics, Euromonitor International, Kaiser Associates, McKinsey Payment Data, Mastercard) - are still done on paper.

The delay in digital adoption is often attributed to the complex nature of B2B payments. Most transactions involve multiple stakeholders, are usually attributed to purchase orders and budgets, and are managed manually.

We spoke with a number of businesses and sought their takes on the B2B payments landscape.

The serious problem with giving payment terms

Tim Grinsdale is owner of an e-commerce company called TOAD Diaries, which produces paper-based diaries and planners. It also has a trade/B2B side to its business which is mainly a bookbinding service.

He believes that B2B payments have been broken for a long time. So much so, they have almost sunk his company twice. “The problem is around cash flow,” he says.

“Having terms with our clients means we'd often pay upfront for all the materials, do the bookmaking, send the final product then invoice, putting huge pressure on our cash flow in the process. Many of our clients did not pay on time, which only added to the problem.”

This all changed about a year ago. “I've implemented a 50% upfront policy and no more than 30 days terms. We've actually lost a couple of clients in the process, but the health of the company, especially from a cash flow perspective, is much better now. If we had not adapted, I don't think we'd still be in business,” says Grinsdale.

The company uses bank transfer as the payment method on 80% of its trade work. This means the money is immediately accessible (both cash and cheque can be problematic in this regard). Nonetheless, we need to look beyond just bank transfer in order to truly fix the broken B2B payments landscape.

While bank transfer is better than cash and cheques from a manual perspective, it's still a 'push' payment that isn't automated and requires the payer to remember to pay you (rather than you as the payee being in control of collecting funds, as is the case with ‘pull’ payments).

Overcoming the lack of a definitive B2B payments system

BoroughBox sells food and drink from hundreds of independent UK producers.

Andrew Lawson, Founder and CEO, sees both sides of the story. His company accepts consumer payments via its marketplace and enjoys the stable cash flow that brings. In fact, as a marketplace, it also takes payments on behalf of other businesses from consumers, then remits that money (minus its commission) at the same time each month.

The system works well, Lawson observes. However, the B2B payment side of the business is significantly different. “We provide logistics solutions (storage, pick, pack and dispatch) for a growing number of businesses and the payments we receive are sporadic, inconsistent and incredibly challenging to deal with,” he says.

“If we're having to use financial resource from another part of the business to supplement the cost of late paying B2B clients, then it has a knock-on effect to the way we pay our suppliers.”

The main problem with B2B payments is that there is no definitive, ubiquitous system which all businesses adhere to. Each business has different parameters and payment rules, with some offering credit, others needing full amounts up front, and so on.

Having this permanent state of chaos creates financial instability and businesses try to move money from one pot to another, to juggle who is paid, and when.

Picture it like this, if a consumer mortgage chain grinds to a halt because of one party not being in sync, then imagine the strain on a B2B payment chain from initial producer through the end customer, and every party in between.

Then take that scenario and multiply it across a business buying and selling everything from product to services. And multiply the number of businesses doing the same thing. Very challenging indeed.

“We have the technology to fix this, let's use it”

So, what is the best approach to fixing these problems? There are many solutions to ease the burden throughout the chain, but how do you make every business adhere to the same rules? Therein lies the problem.

“One solution I've often thought would work is employing some of the same technologies we use for splitting payments for consumers across a fixed time period,” says Lawson.

“It's becoming more commonplace now whereby a consumer can buy goods or a holiday, and rather than pay deposit then large payment, or all up front, instead they simply 'subscribe' to the payment terms of the seller and they’re billed in increments.”

Lawson argues that this methodology could be applied to the business landscape to help free up working capital, which is what every business needs to survive.

“It doesn't have to be monthly, it can be weekly, so an example might be us issuing invoices to our logistics clients with four-week payment terms, and taking a split 25% payment each week,” he says.

The bottom line is that every bit of working capital helps and if you've got monies coming in daily from various sources, it's much easier to plan the business.

“Most businesses currently focus on either end of the month to do everything, or only certain times for a bank run of payments, which gives the resulting bottleneck. We have the technology to fix this, let's use it,” Lawson concludes.

A shifting payments landscape

A great deal of the issues outlined in this article stem from the push-based payment methods that take control away from businesses, relying on customers to remember to pay them on time.

A switch to a pull-based method, such as Direct Debit, is one way out of the chaos. The key difference between is that pull payments originate from the payee (i.e the business owed money).

One such company that made the switch to pull payments is The Wow Company, a firm of cloud accountants and business advisers that aims to take the boring out of bookkeeping and make small business finance something to get excited about.

“As a business, we have recurring billing. A decade ago, that meant going into a Word template, changing the dates, changing the amounts and putting the invoice into an email – and that was a nightmare. You’d spend days doing it each month,” says Peter Czapp, Co-Founder and Director.

“Then Xero online accounting software came along and automated that whole billing process, but clients were still using standing orders to pay those fees. Every time a client changed their monthly amount, or had additional billing, that standing order had to be changed – creating a nightmare that had no benefit for us or our clients.”

He felt there had to be a better way to collect those monthly fees. The resulting search led him to GoCardless. By offering Direct Debit as it’s payment method of choice, The Wow Company is now able to automatically collect its invoices, with full visibility over what amount is paid and when.

“Our people can focus on higher-value tasks and client relationships, rather than chasing bills.” says Peter.

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