Automating B2B Payments: The Next Frontier

Business-to-business payments have lagged far behind in switching from paper to electronic payments methods, but banks and their commercial clients could benefit from emerging automated B2B payments solutions.

When it comes to automation in B2B Payments, we have a long way to go. Too often, payments are disconnected from the underlying commercial transaction creating problems from proper initiation to reconciliation.

In an electronic world, the fact that we are still using paper checks to make commercial payments is remarkable. Still, while there are numerous challenges, the innovations happening in commercial payments are very encouraging.

Making automated B2B payments is complicated for many reasons. First, selling a product or service and getting paid are two different things. Anyone who has run an accounts receivable function knows that collecting payments is challenging. Even when suppliers establish terms to motivate rapid payment such as “2% net 10”, buyers often take 60-120 days to pay. Additionally, disputes and bad debt often mean that significant portions of Accounts Receivables must be written off. These amounts vary by industry and supplier, but industry write-offs range from 2.7% to 4% of receivables.

Controls can be complex on the buyer’s side too. Creating payments automation that replaces paper processes is great, but replicating the flexibility of wet-ink signatures on paper documents is not so easy. However, the rewards for automating payments are significant. For buyers, paper processes are expensive, error prone and time consuming. Multiple studies have attributed $55-$110 to the costs of purchase order, invoice management and payments. Additionally, those paper processes lack any insight and reporting in terms of total spending, categorization, aging reports, deal term realization, etc. All of these are benefits that payments automation can provide.

There are numerous ways to implement automated payments, but one of the simplest and most effective is commercial cards. A basic Purchasing Card (P-Card) program can simplify everyday purchasing for goods and services up to a certain limit. Programs at this level can help clean-up lots of everyday spending, provide transparency on reporting and controls as well as provide a basis for improved supplier negotiation. For larger, more sophisticated purchasing, virtual cards are especially strong. A virtual card is a single-use account number that processes against a master card account. The virtual card is created by an application that can be hosted by the bank or your card’s network, like MasterCard. The virtual card application provides secure, convenient, smart ways for users to sign-in, request a card and specify how it will be used, including things like amount, timeframe, supplier name, number of transactions, etc. You can even set up basic workflow to establish a “four eyes” release principle without having a fully functioning ERP system for payments.

In addition to single-use accounts with workflow and controls, there are alerts that can be applied to payments. These alerts can range from simple text messages if a payment is above a threshold, to sophisticated alerts and/or blocking based on time of day, amount and supplier. These types of incremental controls are great for buyers, but suppliers appreciate them, too. For the supplier, there is a single payment made for a specific invoice. No more bundling at month end and no more waiting for months to get paid. This type of payment automation links the commercial transaction with the payment, greatly simplifying and accelerating collections and reconciliation.

Overall, introducing commercial cards, either as physical plastic or as virtual cards, enables automation, control, information and better decision making. Taken together, it means buyers can do a better job managing their money and suppliers can get paid quicker and easier, enabling both parties to focus on growing their business.

Ed Glassman is the head of global commercial payments at MasterCard Worldwide.