Even as consumer payments rapidly move online, small businesses are still paying 80% of invoices with paper checks. Now a new generation of automated solutions is emerging that could dramatically cut business-to-business (B2B) payment costs, speed up processing and unleash a wave of small business productivity. We recently caught up with Goldman Sachs Research’s Jim Schneider to discuss why he sees this transition as a $1.5 trillion revenue opportunity over the next decade.
Why have small businesses been slower to move to digital payments than consumers?
Schneider: Smaller businesses — especially those that use paper-based accounting systems — still prefer checks because they provide an easily verifiable trail for reconciling accounts, audits and any exceptions that may arise. Converting to a digital solution requires businesses to shift existing processes and reassign employees who handle accounts payable, which brings its own set of complications. But digital solutions that provide end-to-end services including accounting, pre-payment process management and payment processing can make the digital conversion less painful. Although adoption has been slow, we believe this market is finally poised to accelerate thanks in large part to the new payment and software technologies coming to market.
What are the potential savings?
Schneider: In North America alone, businesses spend about $187 billion a year on direct payment processing and labor costs, a figure that jumps to about $510 billion when you account for indirect costs like credit for receivables financing and cross-border transaction fees. In total, it costs a small business about $22 to pay one invoice with a paper check. Labor is the biggest expense overall, but time efficiency is also a big issue. Almost half of B2B payments require manual intervention, especially when there is a dispute about the good received or the amount to be paid. Employees often spend significant time resolving problems like data entry or matching errors, or even duplicate payments. Ultimately, manual processing is just a slow process that causes companies to miss rebates, pre-payment discounts and even pay late fees. This can make life pretty difficult for small businesses, which often run with minimal working capital buffers.
Which of the new options for managing B2B payments stand out to you?
Schneider: The biggest near-term opportunity is in automating the accounts payable process. Solutions range from the pre-payment stage, such as aggregating bills and automating invoice processing, to handling the payments themselves and account reconciliation after the payments have been made. To cut out paper checks from the processes, there are a number of electronic solutions, including automated clearinghouse, or ACH, networks, virtual cards or push payments.
How do those electronic systems work?
Schneider: In electronic bank transfers, a buyer sends payment instructions to its bank and the bank bundles the requests and sends them to a clearinghouse operator to distribute payments to receiving banks. Or a business can use a charge card, much like a consumer, to make the payments. One twist is the area of “virtual cards,” which offer a single-use account number with a predetermined credit limit equal to the cost of whatever a business is buying from a supplier. Virtual cards can help reduce the cost of international transactions because they don’t need to be routed through correspondent banks. Lastly there are push payments, which are basically credit transfers directly from the buyer’s bank to the supplier’s.
And will these payment solutions make up the bulk of the B2B revenue opportunity?
Schneider: Initially yes. We estimate a $300 billion revenue opportunity in core payment processing and automated payment software services. But we think there’s a $950 billion revenue opportunity when you factor in B2B solutions for cross-border payments, disbursements, cash management and working capital financing. Add it all up and we see this broader B2B revenue opportunity reaching $1.5 trillion by 2028.
Read this great Interview on BRIEFINGS from Goldman Sachs