The success of Fintech firms in recent years has mainly been a consumer story: consumers increasingly pay with their digital wallets (Apple Pay, PayPal…), use their banking apps (Revolut, N26…) and send money to family through peer-to-peer apps (Square Cash…).
Consumer payments & banking will undoubtedly keep growing over coming years thanks to the rising adoption of digital wallets and other online financial services. That said, it’s already time to try to find out the Fintech industry’s next growth engine and B2B payments could fit the bill, with Mastercard estimating the opportunity at more than $100 trillion payments a year.
When it comes to digitization, B2B payments lag far behind consumer payments. Companies globally are still paying most of their invoices with paper checks (60% of all B2B payments according to a Goldman Sachs report), notably because they provide a trail for reconciling accounts. Among small and medium-size businesses, checks account for 80% of B2B payments.
Unsurprisingly, paper checks come with a complex, lengthy and costly workflow: when making a purchase, small businesses have to draft checks, obtain signatures and send them to suppliers that will manually process them and reconcile them with invoices and then wait for the payment clearing and cash collection. In all, manual processing of check payments is estimated to average 45 days and to cost small businesses around $22 per invoice.
Some software vendors have identified the opportunity to materially reduce these costs and speed up processing of B2B payments and have come up with solutions that address procurement authorization, electronic orders and signature, invoicing automation, payment reconciliation, fraud detection, travel and expense management and spend analysis.
To go along with these new digital tools, payments will obviously have to switch from paper to electronic. While bank transfers will remain an option, physical or virtual corporate credit cards and online platforms are expected to become a major beneficiary of the digitization of B2B payments as they offer several advantages, notably credit, instant payments and a frictionless experience for customers making a purchase (notably during a trade show or a salesman visit). True, suppliers will have to invest in a payment infrastructure and to support the burden of interchange fees but, in the end, the pros should outweigh the cons.
Obviously, credit card companies (Visa, Mastercard…) and payment processors (Square, Global Payments…) will have a major role to play in the digitization of B2B payments, with the former taking advantage of the ubiquity of their payment solutions and the latter leveraging their relations with large numbers of merchants and small businesses. That should help them sustain a high single digit or double digit revenue growth over coming years.
But there’s also a variety of pure plays, notably companies focused on B2B payment and expense management solutions (fuel cards, travel and lodging…) such as FleetCor that could grow even faster.
The payment software ecosystem should also deserve attention in our view as the B2B electronic payment volume growth coupled with the scalability of business models could spark a massive operating leverage for companies that are currently either loss-making or only slightly profitable. While we have already invested in several of these pure B2B software players in our Digital Banking & Payments certificate, new opportunities could emerge soon as the success of recent IPO Bill.com (December 2019) is likely to drive new listings in this specific software space.