Sailing Ships In The Polar B2B Waters
B2B payments innovation is the “meta” layer on which companies manage money movements themselves.
Welcome to Money In Transit, the newsletter for founders who see through the ice of the conventional, so their startups may push through with their ingenuity.
This week’s piece focuses on the not-so-cool side of payments: those happening business to business, or B2B. While the side that’s most familiar to the general public enjoys the attention of most fintech media, B2B is operating mostly in the cold, far from the warmth of the spotlight.
A recurrent theme in this newsletter is the attractiveness of insane business strategies. If you’re onboard with that sentiment, you’ll probably enjoy this piece.
Consider sharing this post with a founder who has just planned their startup’s technical roadmap for 2024. It’s too late to change course now, but it’s never too soon to appreciate the magnitude of a looming crisis.
How much attention should companies pay to payments? Amateur founders think “not much”. Successful founders can’t stop thinking about payments.
Moving money is a pillar of innovation. It is testament to this idea that “market” is a vital component of the definition of GDP. Functioning payment systems are the bedrock of any country’s economy.
Most fintech coverage focuses on the tastiest side of payments. That is, what people experience firsthand, the direct to consumer side. Its less palatable cousin, B2B, is massive but unappreciated. Visa processed north of $14 trillion globally in 2022, but that dwarfs compared to the $77 trillion that ACH processed that same year in the US alone.
Nonetheless, the B2B payments landscape is frozen. The most innovative players in B2B payments are central banks, which is like saying that penguins are the best fliers in the Antarctic. That's because B2B payments
Work well
Their regular cadence make speed and convenience less attractive
Move money in huge amounts and as a result are very sensitive to percentage fees
Governmental entities are breaking the ice of B2B payments innovation, looking to create efficiencies or to crack down on tax evasion. This sentiment is behind the launch of UPI in India, NIBSS in Nigeria and PIX in Brazil.
In my opinion, it’s not at the payments layer where B2B precise innovation. Instead, I believe there is an opportunity at a "meta" layer on top. One that would enable companies to manage money movements themselves.
Successful founders can't stop thinking about payments because their companies sit on top of payment applications that are as fragile and unstable as thin ice.
No two companies are alike, but most develop such protocol in three stacking layers:
A lower layer to receive and make payments.
A middle layer to reconcile payments and ledgers.
An upper layer to manage refunds and fraud risk.
The API-fication of these 3 layers is what’s driving innovation in the B2B payments space. Unfortunately, each company is figuring things out independently of each other. Progress is as a result much slower and less effective than in the B2C space.
Building payment applications is hard, and the benefits manifest only at scale, a few years down the line. No wonder small startups seldom build their payment applications in-house at the beginning. They’ve got bigger fish to fry.
As they mature though, companies start narrowing the payment options available to end customers in an effort to tame the complexity of their payment operations. Take insurance companies. Haven’t you noticed how often they allow payments only via bank transfers or bank deposits? Not coincidentally, reconciliation is way easier than if they accepted credit cards.
Bank transfers may become hot again thanks to the efforts of central banks. But as companies make a growing piece of their revenue online, it is becoming obvious that B2B payments could use some heat too. Yet, companies are simply throwing people at the problem. Headcount ends up insulating the company from payments innovation.
What's worse, its most straightforward allies when it comes to money stuff, banks, can only do so much. That’s because, as the company scales, it tends to partner with many acquiring banks. The added complexity makes total sense, at least commercially. Partnering with several banks becomes a game of benefit arbitrage that companies use to their advantage.
But this added complexity sits between the company, and any bank’s ability to help them. A bank’s hottest new reconciliation tool can't do anything about payments processed by the others.
What can companies do in view of all this? Build.
A bank agnostic solution in-house. This would give them the ability to start payments across many payment domains and benefit the most from what their partner banks have to offer.
The capabilities to reconcile payouts and receipts “to the penny” to their correspondent commercial actions. This would make it possible to generate accurate reporting in a quasi-real time fashion.
The systems that enable financial options embedded into their operations. That includes providing consumer credit to their most valuable customers, or issuing private money in the form of gift cards, promo codes or loyalty points.
Every company makes payments. It stands to reason that they should approach them as if they were a core component of their business. Getting to this end state isn’t going to be a quick or easy process. But I’m excited to see that this is no longer a wild proposal in some forgotten strategy deck. It’s actionable, and it’s happening.