Voice of the Industry

B2B fintech in focus: ready for prime time

Tuesday 20 July 2021 09:02 CET | Editor: Oana Ifrim | Voice of the industry

Put in the spotlight by the pandemic, the B2B fintech industry doesn’t seem to be slowing down; on the contrary, B2B fintechs are booming

The Covid-19 crisis, its impact on businesses, and the surge in new payment methods and digital payments brought on by the pandemic are all well-storied topics.

In a recent global research study of CFOs conducted by Accenture, 79% of respondents said that the effects of the pandemic crisis have compelled them to ramp up their technology transformation. 

The pandemic made small and medium-sized businesses turn to digital services to improve cash flow and modernise their payments ecosystems. In a Mastercard study of small businesses across North America, 76% said the pandemic prompted them to become more digital, with 82% changing how their business sends and receives payments.

Moreover, offline businesses, which weren’t focused on digital channels before the pandemic, were forced to adapt to a needed digital way of operating and, therefore, are now available for PSPs and banks to expand their merchant base.

All the above has created opportunities for B2B fintechs, which began leveraging the learnings and infrastructure from the consumer world to tap into the needs of the business world. 

What`s more, banks have recognised the power of digitalisation, which has created opportunities for another type of fintechs that can provide the digital infrastructure they lack, leading to Software, Payments and Banking-as-a-Service (SaaS, PaaS, and BaaS) business models in payments.

B2B is the new gold

The pandemic has been the burning platform for innovation, accelerating digital trends and the demand for alternative payments models. As a result, the B2B fintech segment thrived as well and investors are coming like bees to honey. 

According to an article by Forbes, the number of B2B fintechs that will be public in 10 years will triple, generating well over USD 1 trillion in total aggregate value. The payments space will most likely continue to be a key focus for investors around the world. Open Banking, in particular, is expected to drive increasingly integrated payments solutions. PaaS, BaaS, Virtual Cards, BNPL are also in the spotlight.

Account-to-account payments

COVID-19 shone a spotlight on payments. Particularly, Open Banking pushed for integrated payments solutions, with players leveraging instant payments and Open Banking.

This is an exciting space, no doubt, as Open Banking-based payments are slowly being adopted worldwide and could undercut cards (make sure to be on the lookout for our Open Banking Report 2021, due in September, to learn more and stay in tune with the industry developments) 

The Open Banking industry is rapidly changing, especially as we see Open Banking players have started to move away from being account aggregators into payments companies.

In Europe, we see investments pouring for successful players that achieved dominant positions in their fields. This growing trend is highlighted by recent capital raises for GoCardless (USD 95 mln funding round), Volt (USD 23.5 mln Series A) - largest European Series A round in Open Banking to date, TrueLayer (USD 70 mln Series D), Tink (EUR 85 mln investment), Token (USD 15 mln in Series B funding)

Other UK-based companies to raise in the space are Trilo, which just raised a GBP 1 mln pre-seed round, and Banked, which has raised GBP 2.35 mln in seed funding.

Payments-as-a-Service 

To remain relevant in the payments industry, every financial institution, merchant, and fintech must look at technology as a critical enabler. However, while it’s easy to say that you want to develop a modern payments system, it’s harder to put things in motion. The solution seems to be a cloud-based platform, PaaS, which allows fintechs, merchants, and banks to outsource their payment processing needs to third party providers. 

In their Global Payments Report, McKinsey defines PaaS: While outsourcing of the full payments stack is a possibility, a new generation of technology providers has emerged allowing banks to expand quickly and modernize their payments product portfolio without incurring high upfront investment. Payments-as-a-Service (PaaS) players operate cutting-edge cloud-based platforms to provide specialised services, such as card issuing, payments clearing, cross-border payments, disbursements, and ecommerce gateways.

For banks, PaaS is a way to digitise payments using the cloud to help manage it all, without the heavy technical lifting that would be required on in-house efforts. It is about how they can be more competitive and provide compelling services to your customers. More and more banks are starting to examine PaaS for B2B, especially for cross-border payments.

Payment players (local or international) have entered the market offering their services for markets including banking, fintech, ecommerce marketplaces. While PaaS is a relatively recent development in the payments arena, it has caught on across the globe. And the future looks bright: according to Penser, the PaaS market is estimated to reach a value of USD 16.9 billion by 2024, especially due to the digital acceleration that has already been in progress, combined with the pandemic which has increased the demand for fast payment methods. 

Ecommerce marketplaces, particularly, have a growing need for PaaS providers given the global nature of their goods and services. PaaS enables both B2B and B2C merchants to accept payments globally using a plenitude of methods, all through a single channel. It eliminates a need to deal with infrastructure, licensing, and technical issues on the back end so that merchants, marketplaces, banks can focus instead on growth and market demands.

The PaaS field seems to be ripe for the taking, especially as we are seeing funding rounds in this area. In the past months, funding rounds have gone to Volante Technologies, which has raised USD 35 mln in growth equity financing led by Wavecrest Growth Partners with strategic participation from BNY Mellon, Citi Ventures, PostePay and Visa.

Modulr also had a successful GBP 9 million investment by PayPal Ventures, while Form3 has secured a partnership and investment deal from Mastercard. 

Most recently, Accenture made a strategic investment, through its VC arm Accenture Ventures, in cloud-based Payments-as-a-Service enterprise platform Imburse, which aims to simplify the way businesses around the world access the global payments ecosystem. 

Virtual cards – back in travel!

Virtual cards have been a high-growth product for several years, and the pandemic has only accelerated that trend with 25% growth projected through 2025, according to Accenture. In the past year, financial institutions, network, processor, and fintech providers have invested in new virtual card solutions for a wide variety of use cases. 

In terms of use cases, one of the winners is the virtual commercial card which can offer better security and provide consumer data and available funds quicker than traditional methods do.

The business travel space has welcomed the opportunity of virtual cards. As business travel comes back to life, it encounters corporate card adoption on a continued climb. This comes with new opportunities for commercial cards providers to innovate in terms of providing value-added products tailored for employee travellers.

The investors seem confident in virtual card innovators’ embrace of the business travel market, with, for example, Ramp reaching unicorn status and announcing a USD 115 mln fundraise in April 2021, one of the largest for a B2B fintech in 2021 so far, valuing the firm at USD 1.6 billion. Its technology combines corporate cards, both physical and virtual, with embedded expense management technology.

Pleo is the latest corporate card fintech unicorn thanks to a growing excitement among investors over corporate card technology. The Danish startup raised USD 150 mln in a financing round. The investment, led by Bain Capital Ventures and Thrive Capital, makes Pleo the latest European fintech firm to reach unicorn status.   

Banking-as-a-Service

Starting with 2020, embedded finance was the hot topic for the industry, besides COVID-19. Through this, the focus switches from financial products to the circumstances a customer needs them.

According to 11:FS, the embedded finance opportunity will be worth USD 3.6 trillion by 2030. This will be supported by the Banking-as-a-Service (BaaS) ecosystem, which offers the full banking stack to any business, regardless of industry, seeking to improve customer experiences with capabilities it would have been unable to build alone. As more and more businesses are embedding finance into their product offerings, traditional banks will follow suit and offer BaaS to companies. 

There are recent signs of serious BaaS momentum. Leading banks show significant interest in BaaS - ABN AMRO Ventures participated in EUR 60 million Series C funding round for Solarisbank. Also, Amount has recently raised USD 99 million in a Series D funding round at a valuation of just over USD 1 billion. The investment comes just over five months after it raised USD 86 million in a Series C round led by Goldman Sachs Growth at a valuation of USD 686 million.  HSBC, TD Bank, Regions, Banco Popular are among the 10 banks that use Amount’s technology to simplify their transition to digital financial services.

Other successful companies attracting a range of investors include: Episode SIX (USD 30 mln) - this additional funding comes nine months after the company secured USD 7 mln of its Series A funding - Thought Machine (USD 125 mln Series B funding round), Qonto (USD 115 mln Series C funding round), Railsbank (USD 70 mln), Synctera (USD 33 mln Series A funding round).

Buy Now, Pay Later 

The one thing everyone is now talking about is…yes, you guessed it right: BNPL (Buy Now, Pay Later). Although in the past years the focus was on the consumer (with companies such as Sweden-based Klarna and Australia-based Afterpay), experts say that 2021 is the year BNPL solutions will begin to pop up on the B2B ecommerce map. 

We notice investors tracking highly-valued unicorns and their business portfolios - In September 2020, Klarna raised USD 650 million in an equity funding round, aiming to expand its presence worldwide and consolidate its position in the US, and in March 2021, it added USD 1 billion. In June 2021, Klarna has confirmed a fresh USD 639 million funding round from investors. 

The potential opportunities of a BNPL solution are even stronger in B2B, especially where SMEs are on either side of the checkout, experts say. According to Payer, the main difference between the B2C value-add and the B2B value-add is that when companies are buying, they do that out of pure necessity, as any goods purchased are intended to have a positive effect at any end of a business spectrum. A B2B BNPL scheme will reduce the risk for the merchant as it is getting the full payment upfront from the BNPL provider who then takes care of charging the customer through the agreed repayment plan.

We expect the model to continue to evolve in 2021 as more fintechs will foray in this space.

Conclusion

Business demands have shaped the current economic background which introduced new payments trends, new services, and offers. This environment will give rise to opportunities ready to be seized by innovative fintechs. Similar to what happened back in 2008’s financial crisis, agile fintechs can take advantage of these new opportunities in payments to innovate and adapt to emerging market demands.

This article serves as a summary and is for educational purposes only. It is not intended to offer investments advice. 

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About Oana Ifrim

Oana Ifrim is Senior Editor at The Paypers. Her research, industry engagement, and content-related activities revolve around Banking & Fintech innovation, Open Banking, Open Finance, B2B fintech. Oana is involved in diverse tasks ranging from content editing, planning & carrying interviews with key experts, representing The Paypers at various banking & fintech events to content research & production and strategic planning and coordination for large-scale, industry-specific research, reports, and projects. She can be reached out at oana@thepaypers.com or on LinkedIn.


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Keywords: fintech, BNPL, BaaS, payment methods, digitalisation, digital payments, virtual card, account-to-account payment, Open Banking, Open Finance
Categories: Banking & Fintech | Payments General
Countries: World
This article is part of category

Banking & Fintech