The timeliness of B2B payments raises the stakes for all parties involved, as a missed or delayed payment can cause a ripple effect across a business and its network. But how can community banks speed up these payments? And what are the challenges they’ll need to solve?
By Karen Epper Hoffman
Many a consumer has claimed that “the check is in the mail” in response to a long-delayed payment. When it comes to business-to-business, or B2B, payments, that excuse hardly holds water. Yet a 2019 survey by the Association for Financial Professionals found that checks are still used in 42% of all B2B payments. That’s a record low—but they’re still slowing things down.
“[As small businesses] are the primary client base of community banks, there is still significant check volumes that are weighing down the payments cycle,” says Erika Baumann, a senior research analyst for Aite Group’s Wholesale Banking & Payments practice, based in Boston. “As technology is becoming more accessible, there are tools moving downstream that community banks can implement to help reduce checks and settle payments faster.”
This technology includes same-day ACH and real-time payments, as well as tools that automatically re-associate payments with remittance information, Baumann says. While innovation in this space is still nascent, industry experts and B2B-focused community bankers foresee opportunities in using cloud, mobile, digital currency and emerging real-time payments platforms to provide better, faster and more diverse payment alternatives to business customers.
“The days of using checks as a business’s primary payment method are over,” says Kai W. Catlin, vice president for deposit and treasury operations at $707 million-asset Commerce State Bank in West Bend, Wis. “Businesses want to move funds quickly, easily and safely.”
It’s no wonder why. Across North America, 50% of invoices were past their due date in 2018, compared with 48.8% in 2017, according to a report from credit risk company Atradius. A 2019 Intuit study found that roughly six in 10 small businesses worldwide face difficulties when it comes to managing cash flow. Intuit also found that only one-third of businesses can pay vendors on time, and 43% have occasionally not been able to pay their employees on time.
Experts say that enhancing companies’ abilities to process B2B payments more quickly and efficiently could help speed things up. And there are big opportunities for community banks to help their business customers get their money where it needs to be in a timely fashion.
“The large and thriving U.S. middle market historically has been underserved in its [B2B] payments needs,” said a recent Deloitte report on B2B payments. “As a result, many sellers and buyers are experiencing significant frustration with the B2B payments process.”
A business imperative
PYMNTS.com recently reported that roughly seven out of 10 of companies (69%) expect their banks—not fintechs—to deliver B2B payment solutions, and 82% consider banks to be leaders in the payments innovation space.
“People are still relying on banks to push the envelope of innovation when it comes to delivering B2B payment solutions,” says Suresh Ramamurthi, chairman and chief technology officer at $80 million-asset CBW Bank in Weir, Kan.
“People are still relying on banks to push the envelope of innovation when it comes to delivering B2B payment solutions.”
—Suresh Ramamurthi, CBW Bank
“It’s been said over and over that 2019 [could be] be the start of the payments revolution. We’ve seen new entrants, disruptors, legislation, regulations and rising demand from consumers and businesses alike, not to mention the expansion of partnerships between traditional banks and fintech firms that are transforming not only B2B payments, but also how companies operate.”
Avidia Bank in Hudson, Mass., is one community bank with its finger on the pulse.
“The majority of B2B payments are by paper check, which is the most inefficient and expensive alternative,” says Erin Curry, assistant vice president for business development and payment solutions at the $1.7 billion-asset community bank. “Subsequently, there is a tremendous opportunity for community banks to begin providing B2B payment services to small- to mid-sized businesses.”
“Digital B2B payments are right around the corner; people want to see B2B payments solutions that allow for instant easier payment solutions.”
—Erin Curry, Avidia Bank
In 2015, Avidia Bank went live with an online clearinghouse, linked2pay, which offers instant merchant settlement. As of this writing, Curry says the bank is also slated to offer real-time payments through The Clearing House by January 2020.
“If there’s an opportunity and you wait and you don’t take advantage of that opportunity, by the time you decide to get in, many times, it’s too late,” Curry says. “Digital B2B payments are right around the corner; people want to see B2B payments solutions that allow for instant easier payment solutions.”
Faster payments in the spotlight
Faster payments are getting lots of airtime after the Federal Reserve announced that FedNow, its real-time payments network, will debut in 2023 or 2024. And customers’ desire for faster or more versatile payments options from commercial deposits to invoicing is starting to nudge more banks to work with fintechs or their core vendors. In September 2019, JPMorgan Chase & Co. rolled out same-day deposits for its small business customers through WePay, a payments platform company the New York bank acquired two years earlier.
Core processing vendors are getting into the game, too. In October 2019, Jack Henry & Associates offered 15 of its clients real-time payments to business customers through its proprietary payments hub, JHA PayCenter, which in turn connects to The Clearing House. JHA PayCenter promises a single integrated hub from which banks could eventually offer evolving business payments offerings and help clients compete with disruptors in the payments space.
Payments security considerations
Curry says community banks should put greater emphasis on a payments strategy that includes faster payments.
“Rather than including payments as a strategic initiative, most banks continue to focus on initiatives that are generic in nature and do not provide a strategic advantage,” she says, adding that many board members and senior executives “need to get out of their comfort zone and begin providing [real-time] payment services that are in high demand.”
That said, Ramamurthi advises community banks to consider the whole picture in terms of risk.
“As community banks begin to embrace the need for faster B2B payments, there are also concerns about risk management and compliance preventing financial institutions from enacting a real-time payments model,” he says. “Focusing on accessing real-time data and monitoring that data in real time can help financial institutions predict, detect and respond to potential risk. Financial institutions can use real-time data to analyze transactions faster, including details about recent payments from specific customers and concerns surrounding specific transactions.”
Ramamurthi says building out application programming interfaces, or APIs, will allow financial institutions to access a number of payments networks and channels. This will facilitate interactions with connected partners and bring these channels to the end user, or, in this case,
Catlin says, “I would say the biggest obstacle we face as we continue to aim for faster B2B payments is fraud.”
As fraudsters take advantage of the newly perceived urgency of payments and target B2B payments, which are typically larger dollar amounts than business-to-consumer (B2C) payments or person-to-person (P2P) payments, fraud monitoring and prevention has become a big part of the day-to-day operations at some community banks.
“We have invested in multiple layers of security to protect our business online banking platform from unauthorized access, including the use of security tokens and out-of-band authentication methods like phone verification,” Catlin says. “However, as we strive to enhance and adapt our defense systems, fraudsters continue to find new ways to penetrate them.”
With any payment type—checks included—security will always be a challenge. But with everything to play for in the B2B payments arena, it’s a challenge worth facing.
Karen Epper Hoffman is a writer in Washington state.