It seems like a pretty simple transaction. One business does a service for another business. The recipient then pays the service provider. How that transaction was traditionally made – using paper checks and the U.S. mail – is going the way of the dinosaur. Automated processes are on the rise. To walk us through this evolution, we spoke with Karla Friede, CEO of Nvoicepay.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
It seems like a rudimentary transaction: one business does a service for another business, that business then pays the business for its services. Still, while it may be the backbone of our economy, and it has been done a certain way for years and years, that doesn't mean it isn't evolving. Today, we'll be talking about the evolution of business to business payments with Karla Friede, CEO of Nvoicepay.
Can you talk a little bit in general about the growth and innovation taking place in the area of business-to-business payments? How rapid is the change that we are seeing?
B-to-B payments is a space where change hasn't come to it for a long time. Lots of change came to consumer payments in the last 20 years. There has been investment in change and dramatic impacts. B-to-B payments is on the other end of the spectrum from consumer payments and there hasn't been a lot of change. For some context around that, in the U.S. today there is $26 trillion in dollar volume that flows between companies making payments to other companies. Or think of these as buyer-supplier kinds of transactions and payments. They've long been dominated by paper checks and they still are. In 2017, it felt to me like the world woke up to the opportunity in B-to-B payments. I believe the disruption is finally beginning to happen at a greater scale. But today less than 5% of the market are using true next-generation solutions that automate all payments and help companies move their payments electronically. It's very early in a very big market. I believe the market will pick up speed. I think it's a pretty horrible state that the first kind of electronic payments that were available to businesses actually introduced more manual touch points and inefficiencies than they resolved.
Because of that, when you look at the space, it's not just 50% of the people may be using electronic payments today. But those 50% probably are having a horrible experience and really 95% of the market needs to move.
What are the benefits that can be experienced by companies who stop paying by paper checks and move on to a process that is more digital and more automated?
The ROI is pretty simple but I don't think it captures the entire story. Electronic payments cost ten times less than paper checks. There is a a dramatic opportunity to lower cost. But I think it's more in the efficiencies as you look across your payments. You can reduce error rates and you can have real-time reconciliation information at your fingertips. I think companies understand the dollar benefits, which are about $5 a payment, but I think the decision-making benefits in terms of managing cash and making better decisions with cash and better efficiencies throughout your building are not well understood.
What are the factors that are driving the growth in this area? You mentioned one: certainly the price tag is going to be something that's going to drive some of this growth. Is it also convenience for the company looking to get paid, or the paying company, or a mix of both? What would you say the factors are?
I think that's a really good question. Because initially in the market it was based on companies looking for a better way to pay. Typically, it was when a new CFO came in to the building and asked "Why are we doing it this way? How can we be managing our business this way?" Or high-growth businesses that simply couldn't handle the back-office inefficiencies of payments. Or industry leaders. We look and we see that the first people who moved by vertical were really people that were industry leaders and look for ways to gain efficiency.
But now what we're seeing in the last couple of years it's really also been suppliers who have reached out and said, "I want to be paid differently. There should be a more efficient way. I want to receive a payment electronically. I don't want to receive a paper-based check." I think what's happened is expectations for business people as consumers have started influencing the B-to-B payment market.
Once you've digitized your payment system, are there other areas of your business that can benefit, outside of the financial department? If so, what would they be?
Well, next-generation payment systems. What I'm talking about is systems or solutions that automate the entire flow, and provide better visibility and control over payments. It enables CFOs and controllers to have better insight on whether they are capturing discounts, as an example, that are available. Maybe they are paying late fees and they don't know they are incurring some of those fees because of the timing with which they are making payments.
A couple of areas I can see that are impacted beyond traditional accounting or finance are procurement and treasury, in terms of being able to manage contracts with suppliers better as well as manage cash better. But we are also seeing from an industry competitive standpoint that the relationships with suppliers – paying your suppliers electronically, paying them on time, and having a better supplier relationship – can create a competitive advantage. We see this in construction where some of our customers, their construction companies, their suppliers or subcontractors provide them better bid rates because they know they are going to get paid on a timely basis, which results in a competitive advantage and a bottom-line impact that goes beyond just the numbers for those businesses.
There might be some people out there who think they are automated but they might not be fully automated. Can you…
No, I think that's most of the market.
There you go. Can you tell us a little bit about that, the difference between being partially automated and then full payment automation? What are the benefits for taking that extra step and fully adopting?
I think half the world, if you would, has partially automated their payments. They probably have a solution from their bank. When we walk in to a company, they'll have some payments that are made electronically, via ACH, some that may be on a purchase card, and then some that are on paper checks. What happens with that is now that accounting department has three work flows to manage. They have multiple flows which can have multiple error points, multiple reconciliation points, multiple files that go back in to their ERP system, and multiple contact points for issue resolution. It has added a lot of work and fully automated flow would provide visibility, control, and traceability over all those payments. Now you've reduced the workload across your team and you have fingertip data on if payments have cleared or not cleared. You have a dramatically lower error rate. You are not rummaging through paper files looking for an invoice to resolve some sort of error between a supplier and a buyer.
The difference is kind of night and day between early bank-based solutions and a solution that automates all payments. The first ones really didn't do the trick. I think that at the surface because tons of people think they already have electronic payments and they don't understand that what they got wasn't a real version of electronic payments and probably didn't help. I think the other thing that businesses don't understand is a lot of time when you think of automation you think of ERP, what it took to get to your ERP system or your CRM system or your procurement system and you don't fully understand that payments automation is so much simpler. It is literally weeks without the deep impact across your company that those other types of projects have.
It's an immediate impact that can benefit many businesses across many industries and it's a relatively easy win for the accounting and finance teams to impact their business.
There's been a lot of talks about we can see maybe some banks, maybe a majority of banks, and their struggle to adjust to evolving fintech solutions. How is that relationship at this point? Are banks catching up to these solutions or should companies expect complications when working with that?
I think the banks have decided "We can't beat them we should join them." Banks are embracing fintech solutions and trying to find ways to offer solutions to their customers so they maintain that customer relationship. So in the small business side, we see banks embracing solutions that will be sold through their portal or the bank's online portal, but for larger enterprises, larger mid-market companies, I think those solutions with still be sold directly by fintech companies. But banks will be able to provide an introduction and recommend a solution that they didn't do before.
Blockchain is still a technology that is in it's early stages but it's been around for a little bit now. How does it play in to the payment landscape?
I think the blockchain is a tremendous opportunity to change the way international payments are made. Today, international payments have to hop through a series of corresponding banks. Each of those banks causes perhaps a delay, definitely a cost, and a nightmare of not knowing, “Did the payment arrive? Did it arrive in the amount that I sent or is there a problem?” The blockchain can change that and break through that web of international bank relationships and provide money from point A to point B with no middleman. So the impact would be just huge for international payments. But it still feels a long way off to me. I was talking about this the other day and I think five years ago I said, "In five years, I think the blockchain will impact international payments and have this impact." And the timeline certainly has not been five years. But I do believe that the opportunity exists, it's just a lot slower. Sometime in the next five years, maybe.
If you could walk us through the next five or so years of business payment development, what's coming down the pipe?
I think first it's a move to intelligent payment automation. The first-generation systems really didn't solve the problem. I think when companies look for payment automation they really need to do some homework because, on the surface, people sound the same, but when you dig in the systems are very different. I think the move to intelligent payment automation is just beginning. It's going to pick up steam. In the next five years, a big portion of the market is going to go to that.
The second thing is better intelligence. I think the rest of the world is already talking about intelligence and data and analysis and how that leads to better decisions. Payments, at the end of the day, are really about cash, managing cash flow, and the deployment of cash. And having better insight, both on who you are paying, when you are paying, why are you paying, the control of fraud prevention, all those things insight around the payments provides. I think we'll see a move toward a much higher order of business intelligence around tasks that will enable businesses to be more efficient.
Third thing, I think we'll see more vertical specialization in payments. That is, providing value outside of a single flow for all kinds of companies. If you look at the vertical markets, and colleges and universities are an example of this, if you can provide a payment type, for example, that's kind of a consumer payment, a push to debit. It's unique. It solves a very big problem in colleges and universities who are distributing single payments to college students. It's an example of how I think payment solutions will become more vertical and have more specialization to meet the needs of markets.
I think that says that as you are looking for a solution look to vertical solutions because I think they will add more efficiencies.