Emerging Alternatives in B2B Payments
The emergence of diverse payment alternatives as well as digital acceleration has completely redefined the B2B payment landscape. As cited in our previous blog, virtual cards are gaining tremendous attention in response to the waning use of paper checks. However, there are other alternate digital payment methods that are also making headlines. This includes real-time payments (RTP) system, Same Day ACH, and Blockchain technology such as Ripple and Chain. Until a decade back, there were primarily four basic types of business payment methods, including Paper checks, Automated Clearing House (ACH), Cards, and RTP. On one hand, the use of paper checks is shrinking due to its several limitations and other digital payment models have grown over the years. On the other hand, the application of blockchain technology is also gaining traction in the global B2B payment space.
As per the B2B Payment survey report 2019 by Strategic Treasurer, 43% of corporations are using or interested in using new payment services. The top focus is on real-time payments (55%), followed by Same-Day ACH (44%) then blockchain-based networks (35%).
The Global Adoption of Real-time Payments
The last decade has witnessed the emergence and evolution of RTP systems, and many international markets have already deployed either real-time or near-real-time payment systems. They are particularly transforming the landscape for cross-border payments. Due to technology advancement, rapid penetration of the Internet, and the global massive adoption of smartphones, businesses do not like any lag in payments and prefer them instantaneously. According to research by PYMNTS, roughly 76% of small- and medium-sized businesses (SMBs) report struggling with cash flow needs. Moreover, with the growth of global trading, many organizations, including SMBs are involved in cross-border transactions and trade in multiple currencies. For this reason, Fintech companies have entered the B2B payment vertical and are competing with many banks and other financial institutions (FIs) to offer real-time payment solutions.
As per the B2B Payment survey report, almost 50% of the companies plan to increase or significantly increase fintech deployment for B2B payments, while only 8% plan to increase their use of bank payment solutions.
Notably, many banks are either collaborating with fintechs or aggressively investing in B2B payment capabilities, to drive innovation and offer RTP solutions. In 2019, 76% of the banks indicated that they deploy fintech solutions in delivering payment solutions to the market. For instance, AvidXchange partnered with Fifth Third Bank to enhance B2B payment solutions while cashing on the RTP capabilities from The Clearing House.
Real-time payment systems are not a novel concept. It was successfully introduced in the UK in 2008, as Faster Payments Service (FPS). By 2019, as many as 54 countries activated RTP systems, recording a fourfold increase since 2014, as per the FIS report. The United States considerably lagged behind other nations including the UK, Mexico, and India in launching its RTP solutions. It is not until 2017 that the Clearing House (TCH) rolled out its real-time payment service in the US. Also, FedNow is another real-time payments platform being developed by the Fed, which will be launched in 2023. This will be an interbank real-time gross settlement system (RTGS) with immediate access to funds. FedNow will have an initial transaction limit of $25,000, and thus will be more suitable for SMB's payment needs.
According to PYMNTS research, 66.7% of the US executives consider themselves “very” or “extremely” aware of Real-Time Payments, while 71.9% said they are “very” or “extremely” interested in the system. Indeed, 85.3% are either currently implementing RTP or plan to do so within the next three years.
Noting the fact that each year, more than $18.5 trillion in B2B payments are sent in the U.S, the real-time payment system is gradually accelerating and picking up the pace with other nations.
Modern ACH Payments with Same Day Settlement
While there is an increasing demand for RTP, there are other parallel efforts being undertaken in the B2B payment landscape, like Same Day ACH introduced in 2016. Usually, the ACH payments take 2–3 days to settle, however Same-day ACH allows the settlement on the transaction day itself if initiated before 04:45 pm. While this is a faster payment solution, it does not deliver payments in real-time. At the time of the launch of Same Day ACH, there was a per payment limit of $25,000, which was increased to $100,000 in 2020. With this reform, Nacha estimates 97% of all ACH B2B payments are now eligible for Same Day ACH, compared to 91% under the previous $25,000 per payment limit. While it has proved efficient in getting the funding faster and improving cash flows for small business owners, it has also helped in making account-to-account (A2A) transfers for large organizations. Interestingly, Nacha is also considering further increase the payment limit to $1 million in March 2022.
The chart below illustrates the remarkable growth in Same Day ACH transactions over the last 4 years, as Nacha made continuous efforts in improving its services, to meet the industry standards and also based on the feedback from the customers using ACH Network for making and receiving payments. Notably, in Q12021, the Same Day ACH volume increased 88.1% y-o-y to 141.1 million, while the value of transactions surged 133% y-o-y to $187.6 bn.
Blockchain Application in B2B Payment Space
Payment solutions based on blockchain applications are reaping significant attention. Blockchain is the technology of today and making its roads in multiple arenas. B2B payment is one such area where there are many challenges in terms of pricing, security, traceability, speed, and accuracy-related to sending and receiving payments. Consequently, many payment companies have launched blockchain-based payment systems to help banks, FIs, and users overcome these pain points.
Blockchain is a distributed ledger technology that records, shares, and synchronizes transactions, without the need for a central authority to manage these transactions. This decentralized ledger technology (DLT) has the potential to address the challenges pertaining to B2B payment ecosystems, by increasing overall efficiency and lowering remittance costs.
Authored by Ekta Bhatia for Finquisitiv
