New products and business models in B2B instant payments?

The ability to make a payment instantly presents, intuitively, a good fit with our increasingly mobile lives as 21st-century consumers; but will it also fit well with the more formal, structured, and controlled workflow and processes used by businesses and corporates?

Will instant payments catch on in B2B space?

Payment is a part of a B2B transaction, which is typically more complex than a person-to-person or a consumer-to-merchant transaction. The selection of (a) provider(s), agreeing delivery process and conditions, drawing up contracts, confirming orders and delivery times, taking acceptance of a delivery, and verifying quality of delivery represent steps and validations that are taken in a controlled manner, before a business makes an actual payment to another business. This is not just a matter of speed or convenience, but also and most importantly, a matter of quality and risk control, multi-level validation and authorisation.

The role of the payment in any trade transaction will vary – depending on the specific trade value chain and the type of service/goods. Parties may arrange for pre-payment (Pay Before), for payment at delivery time (Pay Now), or after (Pay Later). The balance of perceived risk between buyer and seller plays a role, as does the relative bargaining power of suppliers in determining what payment instrument is used.

What features of IP could provide potential B2B benefits?

There are three features that can potentially offer benefits for trading businesses:

Speed (immediate availability of funds, within seconds) coupled with irrevocability. Standard digital funds transfers take much more time to arrive in the receiver’s bank account, and are not always guaranteed. In Europe, a SEPA-credit transfer must legally be delivered to the receiver’s bank account no later than ‘the next banking day.’ A Direct Debit collection, even if it is irrevocable, could bounce and not be executed due to insufficient funds, or a blocked account of the payer. A ‘Pay Now’ arrangement based on IP could remove risk for the seller and the buyer.

24/7/365 execution: Ability to make and receive payments outside banks office hours could signify quite an important change, but currently, businesses have processes in place enabling them to interact with banks in an optimal fashion without such availability. For existing businesses, it will often seem more costly to change contractual arrangements than just continue using them, whereas startups have more potential to build new 24/7/365 services.

Fees and charges: B2B IP has the potential to break the current dominance of credit card (low-value payments with payment guarantee) and correspondent banking models (high-value payments, with long execution time). Different examples have been seen: in Poland, banks position IP as a premium service, charging ca. EUR 1 per transaction. In the US, initial attempts to charge USD 4-6 per transaction to business users have been thwarted; competition between banks drove down fees – within a year – to circa USD 4-6 cents.

Examples of B2B IP use cases

Based on the three elements, we could see some initial use cases where IP can deliver improvements in the B2B space.

Traditional (offline/physical) value chains with specific characteristics refer to trades where a delivery cannot be returned and is technically irreversible – eg delivery of bulk fluids (oil, gasoline, chemicals, dairy food), pumped through pipes, or trades where services once rendered cannot be ‘returned’ (transport services, live art performances).

Online value chains: Distribution centers can demand upfront payment and have 100% certainty of payment before releasing goods to be shipped to a webshop customer. The webshop can, in turn, demand upfront payment from its retail customer before accepting a sale. IP can speed up the whole value chain and costly reconciliation, while chasing bad debts as they decrease.

Intracompany payments and treasury operations: For companies with large international money flows, working capital inefficiency can be improved by faster and more frequent pooling of cash balances, netting deficits and surpluses across parts of the business. Companies may do this themselves or through a house-bank.

Enabling the ‘gig-economy’: In many sectors, such as household services (window cleaning, babysitting, gardening), taxi industry, entertainment (art performance), home deliveries (fresh food, packages), online marketplaces are emerging as platforms, matching freelance supply to market demand. If the platform (example: Uber or Deliveroo) is collecting the service revenues from customers, it usually pays the freelancers a ‘per-gig’-fee, for which IP is well suited as it is immediate and irrevocable.

What could hinder B2B IP-adoption?

Firstly, a factor that should be considered is change of risks. Fraud and AML screening are a big responsibility for banks, handling typically large business payments. UK banks experienced increases in fraud in the early days of Faster Payments. If money is stolen, it is dissipated very (for example, after a successful ‘CEO fraud’).

Secondly, schemes usually put limits on amounts, at least initially, on amounts allowed (SCTINst: EUR 15.000, planned to increase end 2019; not clear by how much). Such limits can deter businesses from using IP. Banking communities may decide to not impose limits (the Netherlands and Belgium).

Lastly, B2B IP-adoption could be affected by changes in administrative processes, or customer service processes. When payments will be made or received outside business hours, payments visibility may need to be updated to externally facing parts of organisations. Or internal administration may need to be adapted.

A look in the crystal ball: new business models?

Just-In-Time delivery with automated continuous ordering has been around for decades. AI processes are increasingly taking over control tasks in these value chains. Banks require business payments to be initiated only by pre-authorised registered persons, which today means ‘natural persons.’ Will this practice evolve and eventually accept payments authorised by ‘avatars’? If so, that could give rise to a series of new types of value chains and accompanying business models. A medical robotic home-companion, ordering and paying for new medicines? A fridge ordering ice cream, beer and burgers for the coming hot summer weekend? A car paying for a live music stream? As happened with other inventions, the supply of instant payments may well create its own new demand.

This editorial was first published in the B2B Payments and Fintech Guide 2019 - Innovations in the Way Businesses Transact, which offers insightful editorials and use-case analyses on how to envision a proper regulatory and technological framework for safe and effective cross-border and instant B2B payments.

About Fred Bär

Payments expert with 15 years of experience as director and advisor at payments processors (equensWordline, EBA Clearing, Vocalink). Partner in PAG since 2013, working with clients, in Europe and beyond. Prior to payments, Fred worked in the telco, energy and IT-sectors.

About Payments Advisory Group

Payments Advisory Group is an international business consultancy specialised in payments. Founded in 2011, PAG supports clients active in the payments value chain in Europe and beyond, to create strategies for business/IT change and regulatory compliance, in the rapidly changing field of payments. Clients range from corporates, merchants, processors, to payment service providers and banks.