B2B (business-to-business) payments have historically been slow, opaque and at times costly. In today’s world of instantaneous digital communication and digital transfers, these flaws are more apparent than ever.
B2B business models differ from B2C (business-to-consumer) models in several ways, including pricing structures, payment terms and purchasing dynamics.
In the age of instantaneous communication and digital transfers, all eyes are on B2B payments systems to adapt. To do so, they’re increasingly taking cues from the fast-growing, advanced realm of B2C sales.
Let’s explore why and how B2B firms are adopting features from their consumer-facing counterparts, driven by the need for convenience, speed and efficiency.
The state of today’s payment processing industry
The overall payments industry is robust and expanding, according to McKinsey’s most recent annual report. Their findings show that revenues grew by 11% in 2022, double-digit growth for the second straight year, reaching record highs above $2.2 trillion.
Commercial activity accounted for 53% of the activity, with consumer activity at 47%. This varies among markets, where North America’s consumer culture and largely card-driven activity accounted for 63% of revenues. Meanwhile, the Asia-Pacific region was nearly the opposite, with 62% commercial activity, and was easily the largest geographical contributor at $1 trillion, nearly half of the year’s record total of global payments revenues.
McKinsey also found that flows were up 13% from the prior year to about $150 trillion in 2022 — boosting cross-border revenues by 17% to $240 billion.
Higher interest global rates played a role, generating about half of 2022’s revenue growth. This was a change from recent years, when fees accounted for more of the growth. Processing fees significantly impact overall revenue, leading many businesses to prefer digital payment methods that help them avoid high fees.
Are frictionless digital payments on the way?
Executives are starting to see the fruits of the labor by fintech firms to make B2B transactions more seamless.
After all, in their private lives, these corporate leaders and other consumers are accustomed to growing payments options — whether buying something across town or sourced from around the globe. These frictionless B2B transactions are executed faster, more transparently and at lower costs than those between businesses.
So why has there traditionally been so much friction for companies making B2B payments?
It’s complicated, but experts say it’s getting better as these transactions are evolving to more closely resemble B2C purchases. Thanks to technology, improvements in accounts payable and accounts receivable processes are leading to quicker payment cycles and better financial management.
Here are four areas where B2B payments are evolving to match the seamless efficiency of B2C transactions:
1. Digital payments and wallets
Digital wallets are becoming more commonplace in the everyday lives of B2C companies and consumers. They’re used to hold credit cards, bank accounts, cash and cryptocurrencies and to make online payments and access additional financial services beyond just making purchases.
Companies can schedule payments, avoid writing checks and more quickly and securely settle accounts, making this alternative more attractive than cash or traditional transfers. In B2B, it generally takes longer to win customers and their sales. Removing friction and increasing the speed of commerce makes sense to create a loyal, repeat buyer.
2. Instant payments
Instant or real-time payments (RTP) are transactions between accounts that are settled in seconds. They are also available 24/7 as opposed to some electronic transfers that only operate during banking hours or take days to clear.
The demand for quicker settlements is growing for B2B firms as well as consumers. Instant payments can remove the guesswork from liquidity forecasting by reducing lag time. These faster processing times are particularly helpful for smaller and mid-sized businesses with tighter budgets and cash flow management.
As highlighted in Convera’s Fintech2025+ cross-border payments report, the RTP market is set to boom. These transactions are expected to reach 511.7 billion by 2027, marking a 21.3% annual growth rate.
Another benefit of real-time payments is that data is submitted in accordance with ISO 20022, the global standard for payments messages. That brings real-time transparency for reconciliation and bookkeeping within reach.
For invoice payments, Lisa Scott, CEO of Banked, told Converge in an interview, “A lot of small businesses will work on monthly reconciliation, month-end payments. Having the ability to do real-time payments and real-time reconciliation on those payments is, I think, really valuable.”
3. Advanced fraud protection
Digital wallets and other consumer payments mechanisms also offer advanced security protocols to minimize fraud and identity theft, including two-factor and knowledge-based authentication, encryption and tokenization.
Invoice fraud is a rising concern for companies, making secure B2B payment systems essential to prevent financial crime. The COVID-19 pandemic has increased the risk of financial crime, with scammers targeting businesses through invoice fraud and business email compromise (BEC) schemes.
Bank of America notes B2B wallets will become more attractive by featuring these safety features.
“Integration with core bank accounts and the rising value of data will increase the appeal of tokenization for business-to-business transactions, extending the benefits of simplicity and security,” they write.
“Tokenization of supplier data can reduce both fraud and the administration burden of vendor master data. This will increase the flexibility of supplier payment systems, allowing suppliers to directly manage their data, making changes to bank account details without needing to notify customers.”
Bank of America’s research also suggests future use cases may include intelligent routing and the reconciliation of alias-based payments.
4. BNPL (Buy Now Pay Later) and other accounts payable methods
The rise and success of Buy Now Pay Later companies in B2C has not gone unnoticed by those operating in the B2B world.
This is not an inherently new concept, as companies already offer trade credit and invoice financing using the underlying idea of BNPL. The B2B version of BNPL is also a trade credit, where companies including Allianz Trade develop what they call “instant credit decisioning to allow buyers a consumer-like buying experience.”
The B2B space requires extra steps such as know-your-customer (KYC) compliance and risk scoring, making BNPL adoption slightly more difficult. Plus, there’s the potential risk of a buyer defaulting and other regulatory issues regarding the payment method.
Wire transfers play a crucial role in handling large transactions, highlighting the complexities of B2B payment processing, which demands secure and efficient solutions to mitigate financial crime risks.
In addition to BNPL, B2B firms are expected to continue expanding the range of payment methods, including ACH transfers, credit cards and cryptocurrencies.
Future growth for B2B payments
These trends seem poised to continue. McKinsey’s report predicts that “future revenue growth will likely be stimulated by instant-payments innovations and the rise in digital wallets in certain geographies. The increase in electronic payments transaction volumes has consistently outpaced payments revenue growth (17% versus 6%) over the past five years.”
In other words, more consumers will become more comfortable using digital payments and wallets. Shifts in payments preferences could lead to more usage in the commercial space, helping push the market to exceed $3 trillion in payments revenue by 2027.
Additionally, cash is in danger of losing its crown in the near future as more developing nations move to instant payments through digital wallets. Cash spending has lost nearly 20 percentage points of share in global payments since 2020.
These evolutions could continue to boost growth in the B2B marketplace as more B2C-type payment systems are implemented, making transactions with other companies seamless, safe and user-friendly.
Want more insights on the topics shaping the future of cross-border payments? Tune in to Converge, with new episodes every Wednesday.
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