2015 was a banner year for financial technology companies, with a record amount of investment flowing into innovative companies. Banks are taking notice, and some have even started looking around for fintech partners. Back in April of this year, Chase Bank CEO Jamie Dimon made headlines with his letter to shareholders. “Silicon Valley is coming,” he wrote. “There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking . . . We are going to work hard to make our services as seamless and competitive as theirs. And we are also completely comfortable partnering where it makes sense.”
One area where it makes sense is B2B payments, and we’re starting to see banks express interest. It’s a win-win-win for banks, fintechs and most of all for customers.
Banks have never done B2B payments well. That’s why so many companies are still writing paper checks. Electronic payments—ACH and card—are separate programs within the bank, requiring a separate accounts payable workflow for batching and transmitting each. Cross-border payments are a different animal altogether, literally requiring payments to be made one at a time.
Banks have not innovated in this area for decades. For ACH payments, they typically contract with white-labeled service providers who provide a portal where a customer can submit an ACH file that transmits payment information through the bank’s pipe. It’s a very rigid pipe that can only handle this specific type of file.
If a customer wants a card program, that’s a different program and a different workflow and file. There are little or no services tied to any of these payment programs; the bank’s role is mainly to move the money.
That leaves accounts payable with a lot of manual work to administer electronic payments. On the front end, they’re constantly chasing down supplier payment preferences and bank account information, taking on the responsibility for handling it in a secure manner. On the back end, they’re saddled with a never-ending process of reconciliation, payment follow up and error correction.
Moving the money is arguably the easiest part of B2B payments. It’s all the manual work that has to happen before and after that eats up the most resources. As a consequence, most companies aren’t utilizing electronic payments as effectively as they could.
This is probably not an area where banks can make their services as seamless and competitive as fintechs. If banks wanted to step up to provide all the necessary services around B2B payments, they would have by now.
Even if they suddenly decided they wanted to do the services piece, they’d still have to contend with their legacy technology. Banks historically have not invested in technology. It would be expensive for them to catch up and unlikely they’d want to try. They may have tons of money, but they invest where it's most profitable, and that is not in B2B payments.
Payments are just a little piece of their business, but it’s a service commercial customers want.
Specialized fintech companies using cloud technology, supplier networks and good old-fashioned human-delivered customer service can do B2B payments at scale and at a price banks can’t match.
The “I go to my bank for everything” mentality is changing as banks see technology companies chipping away at their strongholds in lending and consumer payments . Fintechs are taking aim at every part of their business. In payments, tech companies are grabbing market share from banks in the $3 trillion consumer payments space. Now banks are looking over at the $38 trillion B2B payments market for opportunities.
It’s a win for bankers to bring their customers an enterprise-level payments solution, even if it’s not homegrown. They retain their trusted advisor status with the customer. The bank benefits financially as their B2B payments partner uses technology and services to increase the volume of highly profitable card payments flowing through their pipes. This is definitely an area where it makes sense for banks to partner rather than build.
It makes sense for the fintechs too. Banks have the customer relationships, and for the most part people still trust their banks and see them as safe. Fintechs are as safe and secure as banks; they’re still using regulated bank pipes to move the money, just adding technology and services to make payments in a smarter, more efficient way. Still, they don’t have the long track record of banks, so if the customer’s bank says, “This is our payments partner,” it provides a certain level of comfort for doing business with a fintech.
The biggest winner is the customer. They can free themselves from writing so many checks, and make about 80 percent of their payments electronically. They can maximize card payments, and make money from card rebates. They can hand off the supplier information management piece, roll payments into a single workflow and let the payment provider handle the tedious follow up.
Customers are looking for solutions. It’s mattering to them less and less whether it comes from a bank. It’s unlikely that banks will launch modern B2B payment solutions in the foreseeable future, but highly likely they’ll look to grow their piece of the pie through partnerships.