Cheques, lags & fraud control: the enduring challenges in B2B payments

By Sarah Gill | 22 March 2016

Expected to be worth 1 trillion by 2020 in the US alone, B2B commerce is by any measure a lucrative market, but businesses risk being hamstrung by an outdated payments culture that continues to rely heavily on paper and manual processes. While the use of cheques is falling slowly, the continues prevalence in B2B payments offers low hanging fruit to fraudsters, while delays in invoice payments and the complexity of carrying out cross-border payments all adds up to a challenging place to do business.

Cheque fraud

First off, it’s hard to underplay the role that paper cheques still play in day to day business, especially  in markets like the US. In the Association for Finance Professionals (AFP) and JP Morgan’s 2015 fraud survey, 62% of companies were subject to some sort of fraud in the previous year with cheques far and away the most common vulnerability – accounting for 77% of targeting methods. While that’s actually a decline from 82% a year earlier as businesses begin to rely less on paper, checks still account for around 50% of B2B payments in the US. The report said that paper cheques continue to be the type of payment most susceptible to fraudulent attacks and also accounts for the largest dollar amount for financial loss from fraud – even though their use is slowly declining.

Into the breach, a new generation of businesses are reshaping B2B payments for the digital age. In the US Bill.com is one to watch, with 1m network members processing USD25bn in payments per year. Claiming to save companies up to 50% of back office time through automation, it says 35%of the top 100 accounting firms now use its service, plus three out of the top ten banks – though they are not named. Launched by Rene Lacerte in 2006, the service simplifies the management of payments for accounts payable, receivables and cash flow management.

“My dad and grandad were both entrepreneurs with five or seven businesses each and as a kid I’d go in with them on weekends and watch them pay the bills and collect the receivables,” said Lacerte, speaking in an interview at Money2020 in Las Vegas. “When I started my first company trying to work out who to pay and who to collect from was very painful. That need to dramatically simplify how a business pays and gets paid was very real.”

Invoicing lag

Meanwhile, for small businesses, not getting their invoices paid up can be lethal, cutting off access to liquidity and stuttering growth. That’s put into focus by a recent survey from credit insurance group Coface, which says just over 80% of respondents  experienced late payments in 2015 and 10% of respondents said on average they waited more than 150 days. Around a fifth said they’d faced “ultra-long” delays of more than 180 days on amounts that were worth 5%of their total annual turnover.

This is creating demand for invoice financing – and not just from small business either. A report from the UK-based Asset Based Finance Association (ABFA) claims the number of larger UK businesses using invoice financing to supplement more traditional sources of cash rose 25% to 893 last year from 713 in 2014. One of the appeals is speed. Financing is secured against assets, which means it is seen as a less risky form of lending for funders and means larger companies can access finance faster than through traditional channels. This gives companies the option to capitalise on upticks in demand from customers and drive future growth by securing financing against existing assets. For smaller businesses it could mean going out of business. Some 80% of asset based finance is secured against unpaid invoices, with the remaining 20% made up of asset-based lending where businesses can secure financing against debt, inventory, property and machinery.

In the UK this is driving innovation, with P2P platform Market Invoice one of the startups to watch in the space. It picked up USD5m last year.

Investment

Until recently in payments it’s tended to be the shiny new consumer-facing apps and services that get the most time in the limelight, but change is now gathering momentum on the corporate side and investors are putting more cash into innovation around B2B payments.

One of the most recent deals was StoneEagle Services, which scored UDS76m from FTV Capital in January to drive business payments out of the paper and manual world. Last month, Aria in San Francisco hooked USD50m to help businesses shore up recurring revenues by streamlining billing services.

B2B payments with blockchain-enabled payments firm Align Commerce was another recent deal, picking up USD12.5m in a new round led by Kleiner Perkins Caufield Byers in November. Align plans to use blockchain to make cross-border B2B payments as cheap as other firms have been making P2P payments on the consumer side. This touches on another big issue facing businesses, especially smaller businesses, and that’s the cost and fragmentation around cross-border payments.

More recent investments include Massachusttes-based MineralTree’s USD11.1m to provide mobile and online accounts payable automation software for finance professionals at growing organisations. Then there’s Traxpay, based in Frankfurt, which picked up USD15m from investors including CommerzVentures, the coporate investment arm of one of Germany’s biggest banks.

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