We’ve all seen the significant impact of the pandemic on our daily and professional lives. Suddenly entire offices working from home. Widespread furloughs and layoffs. Bankruptcies and other business interruptions. And more recently, slowdowns at the US postal service with resulting mail delays. At least toilet paper is back on the shelves.
But how is the business-to-business ecosystem responding to these unprecedented times?
If we follow the lifecycle of B2B transactions, it’s clear that business practices have changed dramatically in this new environment. Far from being temporary changes, these trends point to a new normal and the companies positioned to take advantage of these trends will potentially dominate their domains for years to come.
1. Adios to the paper check
If you’re a Gen X or Boomer, you probably still have a check book and whip it out monthly to pay some of your bills. However, if you’re any younger than that, you probably think of a check book as in the same category as a cassette player or dial up internet – something you’ve heard about but never really experienced. Amazingly, paper checks have proven to be remarkably persistent in B2B payments, still accounting for 42% of all B2B payments in the US in 2019, according to the AFP.
As you might expect, paper check use has been decreasing over the years, though painfully slowly. But now, the pandemic could prove to be the death knell for the paper check. With many offices empty and no accounts receivable staff to process paper check payments, many suppliers are requiring electronic payment rather than physical checks. In fact, a recent survey by Citizens Commercial Bank found that 66% of businesses expect that they will stop making or accepting payments with cash or paper checks.
This leads to the next trend . . .
2. Turbocharging Account Payable and Accounts Receivable automation
As companies have been forced to move much of their back office processes online, leading providers of Accounts Payable (AP) and Accounts Receivable (AR) automation are picking up the slack. Just look at their recent results. On the AP side, Bill.com reported just last week that subscription and transaction revenue was up 59% YoY. Pretty impressive growth for a public company. And as an example on the AR side, newcomer Paystand notched 200% growth in monthly network payment volume YoY as they recently joined the 2020 Inc 5000 list.
However, even as AP and AR processes are increasingly automated, the current challenging economic environment has resulted in many suppliers struggling just to get their customers to pay, regardless of the payment channel. A recent study by credit risk analytics company Atradius found that 43% of the total value of B2B invoices is affected by late payments. This is an increase of 25% from a year ago. Ouch. How can companies manage their working capital as they struggle to get paid?
3. Supply chain finance to the rescue
As banks and other lenders have ratcheted back on extending loans to all but the most established companies, working capital providers have seen a significant spike in business. Companies are seeking working capital to stem losses or fund growth, and supply chain financing has emerged as a leading option. Supply chain financing (SCF) offers suppliers access to early payment, albeit at a slight discount, rather than wait 30, 60 or even 90 days after a sale to get paid. Buyers benefit from obtaining discounts by paying early, and suppliers get the benefit of early access to funds without having to tap into their available credit.
In my recent discussion with the CFO of Taulia, a provider of working capital solutions, he felt that their recent surge in volume validated the critical role that supply chain financing can play for businesses seeking working capital. As small business lenders scale back their lending (see the recent travails of Kabbage as an example), a survey by Taulia found that over 60% of businesses are more interested in requesting early payment as a result of the COVID-19 pandemic. Indeed, Taulia reported a 208% increase in early payment volume month-over-month in March, as the economic slowdown took hold.
It’s worth noting that not everyone sees SCF as a panacea. In fact, when implemented by a particularly predatory large company on the purchasing side, their smaller suppliers can be forced into accepting discounts that they may not want to accept. I found it telling that as the use of SCF continues to grow across industries, the Global Supply Chain Finance Forum recently felt compelled to issue a statement against what it says is the bullying and misuse of payables finance programs.
4. Real Time Payments in the US, finally
If you’ve ever conducted a bank-to-bank transfer in the US, you probably know that you can choose either an ACH (Automated Clearing House) transfer, which is cheap but slow, or a wire transfer, which is fast but expensive. Why can’t we have fast and cheap? Well, it looks like that option is finally here in the form of RTP (real time payments) from The Clearing House, a banking association and payments company owned by the world’s largest banks.
Although launched back in 2017, RTP is finally gaining significant traction among banks and corporate payers, resolving the chicken and egg challenge of rolling out a new payment network. According to The Clearing House, the RTP network is expected to be available to all bank accounts by the end of 2020. And on the corporate side, a recent survey from Citizens Commercial Bank found that 81% of corporations surveyed expected RTP to “dramatically transform the way business is done”. A further nail in the coffin of the paper check.
Following the Money
The current pandemic has forced a reckoning for many companies large and small to reevaluate their existing business practices and react to the rapidly changing environment. Following the money trail for B2B transactions illustrates how key trends are impacting the way businesses work with each other, and shines a spotlight on the huge opportunities for those providers poised to take advantage of this new normal.