B2B Payments: Unlocking a Multi-Trillion-Dollar Opportunity

Exploring opportunities and startups in B2B payments.

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Let’s get into it.

While much of the fintech and payments innovation in the past has been consumer-facing (digital-native platforms like Stripe; POS / terminal solutions like Toast and Square), B2B payments presents an extremely attractive market for upstarts and investors, alike.


Why?

  • Existing payment flows & processes are vastly inefficient.

  • 80% of SMB invoices are manual and paid by check. Other reports indicate that only 10% of B2B transactions occur online.

  • 40% of B2B payments happen via check. This number is down from 80% in 2014. Though, there is still a ways to go.

  • Buyers want the B2B payments experience to closely mirror that of a B2C experience. There is a need for the consumerization of B2B transactions, while still solving for the complexities associated with B2B transactions. 

  • B2B payments volume is $120T+ today and is expected to rise to north of $200T by 2028. This is ~5x the volume of B2C payments.

  • Businesses are largely required to offer payment terms such as net 30, 60, or 90 days (due to buyer demand), which allows buyers to pay up to X days after receiving goods / services, interest-free. These terms help buyers unlock cash flow / working capital, albeit, at the expense of sellers.

  • Increasing threat of fraud means that businesses need to take more steps to combat such fraud. Most payment systems have built-in fraud protection.

  • Invoices are not standardized and, as previously mentioned, are typically received in a manual format.

Digitalizing B2B payments can significantly boost productivity and lower costs for buyers and sellers, alike, while also turning payments “from a cost center to a revenue generator.” Other benefits of digitalizing B2B transactions include improved cash forecasting, speed of settlement, and straight-through processing to A/P or A/R and general ledger (as indicated by AFP’s 2020 Survey). 

What are B2B Payments?

In its most basic form, B2B payments is the process by which businesses make and receive payments. While this sounds rather similar to B2C payments (e.g., the payment experience when you buy a pair of shoes on Nike.com), B2B payments face a number of complexities that defer it greatly from the B2C payments experience and process.



Amidst these differences, many B2B payments solutions of the past have tried to cater a B2C-like experience to B2B transactions. And, while many business buyers expect a payment & checkout experience similar to what they would get in a B2C scenario, the complexities of B2B transactions and payment flows mean that these two processes cannot be identical



While Stripe provides a seamless, almost effortless payment and checkout experience for consumers, B2B purchases are much more difficult and nuanced. Consumers typically pay for items with credit or debit cards. Businesses, on the other hand, can pay for items via card, check, wire, ACH, cash, or one of several newer methods such as virtual cards and digital wallets.

Companies like Balance and Routable are capturing business buyers’ desire to have a B2C-like checkout experience, while ensuring that these experiences are still built for (and around) the complexities that make up the B2B purchasing flow.


Areas I’m excited about:

  • B2B payment solutions for SMBs & mid-market companies. SMB-focused solutions like Bill.com and Libeo typically depreciate in value for companies with greater than $50m in revenue. Enterprise solutions, such as AvidXchange, are often too bulky and expensive for non-enterprise players. The result is that mid-market companies are frequently left underserved. By focusing on payment flexibility, high levels of automation, and the ability to handle complex workflows & scale, players can drive significant productivity growth in the mid-market and capture ample market share. Looking more specifically at SMBs, the value-add opportunities here are clear, given that 80% of SMB invoices are processed manually and paid by check. Companies that excite me here include Higo, Plooto, and Dimpl.

  • Payment solutions for B2B marketplaces. Over the next decade, we are likely to see a sharp rise in B2B marketplaces. Companies like Faire, Ankorstore, and Provi are already leading this wave. As more B2B marketplaces continue to arise, the need for payment solutions catered specifically toward marketplaces becomes increasingly evident. Companies like Balance, Sprinque, and UNIPaaS offer payment solutions built specifically to handle the complex workflows and transactions inherent to B2B marketplaces.

  • Virtual cards & spend / expense management platforms. In January, I published a post on the SaaS management space. These companies (Torii, Productiv, Intello, Blissfully, and Cledara, to name a few) help organizations manage SaaS spend, and the greater SaaS ecosystem, as a whole. While SaaS spend is certainly growing within organizations’ spend stack, it does not capture the whole picture. Companies like Ramp, Divvy (acquired by Bill.com), Brex, Airbase, Spendesk, Pleo, and Mesh Payments have all built full-suite spend / expense management solutions that help businesses better track spend and make payments (typically, nowadays, via virtual cards). Other exciting companies here are Float, Kodo, Teampay, penny software, Yordex, and Fuell.

  • Unlocking working capital and cash flow for buyers and sellers, alike. As Deloitte pointed out in its exploration of B2B payments for the middle market, 55% of middle-market businesses find it challenging to maintain sufficient working capital. One potential solution here is buy now, pay later (BNPL) for B2B. While most BNPL value-add to date has been on the B2C side of things (Afterpay, Klarna, Affirm, etc.), I expect to see BNPL solutions start creating and capturing significant value in the B2B world, too. Hokodo, Slope, Resolve, and Tillit are a few early-stage companies that excite me here. Other exciting companies that are helping unlock working capital for merchants include Parafin (marketplaces) and Settle (e-commerce).

  • Vertically-focused payment processors and PayFacs. Given the vastly divergent workflows across different verticals, vertically-focused B2B payments solutions seem poised to capitalize on driving workflow- / vertically-specific efficiencies and cost savings moving forward. Companies that excite me include MazumaGo (construction), Coast (fleet), Relay Payments (fleet), Shieldpay (legal and financial services), and PayEngine.

  • Cross-border payments. Cross-bored B2B payments provide a number of complexities and inefficiencies, including high costs and low speed. Uruguayan-based dLocal, which went public in June and has since risen to a market cap of ~$20b,  helps businesses manage cross-border payments and minimize operational costs. Earlier-stage companies helping businesses manage the many complexities of cross-border payments include HamsaPay, Staqq, and Fairexpay. Wise, Rapyd, and Ripple are exciting later-stage players in the space, too.

  • Other. In addition to the areas listed above, I am excited by pretty much any other B2B payments company helping serve unmet needs and customers. The list of companies that excite me in the broader space are practically endless, but to name a few: Plug, Novo Payment, Tink, Lockstep, Likvido, Airbank, Weavr, Wyre, Dwolla, Upflow, and Zuro.

While startups will drive and capture significant value in the broader B2B payments space, don't sleep on the ability for legacy players to innovate, too. Card networks like Visa and Mastercard, Big Tech companies like Google, Apple, and Facebook, B2C fintech / payments companies like Stripe and Adyen, and banks like Citibank and Capital One are all poised to ramp up their B2B payment offerings, adding significant value to both buyers and sellers in the process.


Conclusion.

Seemingly, there is a massive opportunity to unlock significant value and efficiency for businesses via new and improved B2B payment offerings. I look forward to watching the space develop and getting to know some of the early-stage players building in the B2B payments ecosystem. 

If the last decade or so saw the rise of massive value add and capture with respect to B2C payments and checkout, expect the next decade to do the same for B2B payments and checkout.

While many software markets are winner-take-all / winner-take-most, given the many complexities and immense market size of the B2B payments space, we are likely to see numerous multi-billion-dollar outcomes.

If you are building in the space, reach out. I would love to learn more about what you are building and see how I can be helpful.

Note: while this post primarily focuses on early-stage startups, a number of more established B2B payments companies (and startups with significant funding) are also driving incredible innovation and value-add in B2B payments. Companies like Bill.com, AvidXchange, Coupa, tipalti, Melio, Stampli, Payoneer, and Finix Payments, to name a few, will undoubtedly continue driving significant growth and value creation in the ecosystem.


🧠 For furthered knowledge on B2B payments, check out some of the resources below:


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Thanks,

Michael


Written by Michael Spiro. Find me on Twitter @mspiro3, on LinkedIn at Michael Spiro, or visit my personal site to learn more about me.