How are B2B payments different from consumer payments?
If you sell primarily to consumers, you might not be immediately familiar with B2B payments. B2B stands for business-to-business and covers any transactions between businesses. It’s complement, B2C, represents business-to-consumer, which includes the bulk of transactions we’re all familiar with.
Both businesses and consumers need to purchase goods and services. And businesses are run by people who also happen to be consumers. So you’d think their payment methods and preferences would be pretty similar, right? Wrong. Because of the way businesses operate, they’re a bit behind the curve when it comes to adopting new payment technologies.
For those in the payments industry, driving adoption of new payment methods could have massive impacts. According to a recent B2B payments report by Business Insider, B2B payments totaled approximately $18.5 trillion in the U.S. That’s a lot of cash that could be flowing between burgeoning payment providers.
So how are B2B payments different from consumer payments? All the same payment methods are available, it’s just a matter of who adopts which ones and why. The main inputs for using any given B2B payment are comfort level, clearly-articulated fees, and security - and they seem to go in that order.
Here’s a quick download on the different types of payment options available, and what motivates businesses to use (or avoid) them:
It seems like eons ago when we were all carrying around our checkbooks for consumer purchases. And though we might still write the occasional check to pay a bill, some consumers have phased it out altogether. According to a recent Federal Reserve study, the number of checks written between 2000 and 2012 decreased by 50%.
However, over half of U.S. businesses still prefer to stick with checks for B2B payment. Given that B2B transactions don’t require upfront payment in full (like consumer transactions do), it’s feasible to expect products and services prior to payment. And transactions are often split into multiple installments, due to the complex (and sometimes lengthy) nature of services rendered.
The costs of printing and mailing paper checks are considerable. Buying checks and envelopes, using your printer, paying for postage, and the labor costs of the person doing the work add up quickly - between $4 and $20 per check, according to an estimate from Bank of America. For all those fees, businesses get to keep their status quo and a few more days of holding onto their cash.
Credit card payments would seem like an easy option for businesses to adopt, both for the payer and the receiver. But businesses are just as cost-conscious as the rest of us, and those credit card processing fees add up. As consumers, we’re used to merchants eating the credit card processing fees. With high volume consumer purchases, that makes sense.
Business-to-business transactions may be lower volume but higher amounts. They can really take a bite out of profits when you consider slicing 3-5% off the payment amount. Many businesses will trade a few extra dollars for a few days of waiting on a check in the mail.
And then there’s the issue of whether or not the business (or purchasing employee) has a line of credit. As individuals, most of us have them, but not all employees have access to a corporate credit card.
Automated Clearing House (ACH) payments have become a highly used option for businesses paying employees via direct deposit. However, they still lag behind when it comes to B2B payments.
Historically, barriers to entry for ACH payments may seem too high. With a check, accounts payable simply needs the name and address of the receiving business, the amount, and a referring invoice or PO number. Manual effort is high for both the payer and receiver. ACH used to require recipients fill out a series of forms, and delivery of funds could take 3-5 days and included a fee.
Now those forms have been reduced to a handful of online inputs, and the introduction of same-day ACH speeds up the receipt of funds tremendously. Businesses may start to choose ACH over checks, depending on fees charged by their originating bank.
Related: A Beginner’s Guide to ACH Payments
Wire transfers have been around for upwards of 150 years, so they are a well-established payment method. Consumer use of wire transfers is generally limited to emergency situations - i.e., a friend or family member needs money today, and there’s no faster way to get it to them.
For businesses and consumers, wire transfers really only make financial sense in specific settings. Fees can run between $15-$50 for domestic wire transfers, and $35-$65 for international wire transfers.
Given the high fees, wire transfers are a fit for businesses that require very large payments, thus reducing the impact of the fee. If the receiving business requires quick payment, wire transfer may be the only fast option the paying business can provide.
Online payment platforms
Online payment platforms like PayPal, Venmo, Stripe, and Authorize.net have absolutely skyrocketed in terms of consumer usage. Just in the last quarter of 2016, PayPal processed $99 billion, which represents a 22% jump from the same period in 2015.
But like credit cards, online payment platforms have percentage-based fees that make U.S. businesses think twice. There are a handful of ways to get around them, like using PayPal Business Payments through an approved PayPal partner. But there are drawbacks: by using PayPal Business Payments, you’re automatically ineligible for PayPal’s Seller Protection program. So you’re trading security for lower fees.
Adoption of newer B2B payment technologies is coming.
According to the Business Insider report, change is on the horizon. But the complicated nature of B2B payments continues to block progress, so it might be a while before a uniform standard emerges.
Want to learn more about how an online invoicing platform can support your B2B payments strategy? Contact Invoiced today to schedule a demo.