B2B Payments Explained - What are B2B Payments and How to Employ Them
Payment methods have evolved to support several different consumer and business needs over the past decade.
Think about your everyday shopping experiences. When you head out the door (or into a browser), you know you have multiple ways to make payments. Some of these options make it simpler and more seamless to pay, like virtual cards, mobile wallets, and buttons that complete transactions in one click.
Which payment option you ultimately choose can depend on a wide range of factors, such as transaction costs, speed, convenience, reliability, and security. You can reduce outstanding invoices, collect payments faster and more efficiently, and optimize your transaction costs by offering the right payment methods.
The same is true for business-to-business payments. Incredible strides in electronic banking, the rise of fintech firms, rapid fraud growth, labor shortages, and tightening capital contribute to adopting new and improved business-to-business payment methods.
But choosing the best B2B payment method is significantly different than your personal shopping experience. AR professionals and CFOs know the everyday struggle of the finance department. Business-to-business payments need more than speed, although acceleration helps.
That's why we're going to break down the B2B payments space in detail. No more questioning which payment method provides a better cost for value or what will still be relevant a decade from now.
What are B2B payments?
For those financial professionals who may be new to the payments game - business-to-business payments can be defined as transferring money from a buyer to a supplier for goods are services. These payments can be reoccurring or a one-time purchase. But there are clear differences between business and consumer payments.
Some key differences include:
- B2B payments often have complex contracts
- Tax, VAT, and GST payment information need to be tracked for potential reclamations.
- B2B processing requires more approval time.
- Businesses may be required to adhere to strict compliance measures depending on their payment methods.
- Companies need to track and estimate the costs of cross-border payments.
In other words, B2B companies have several additional hoops for processing payments. And the complexity of the process balloons as the organization scales.
What is a B2B payments system?
Many financial professionals opt to invest in a B2B payments system to help alleviate the immense workload related to processing. While not all payment systems are made equal, these platforms can generally provide:
- Payments tracking or analytics
- Secure databases
- Invoicing and receipt generation
- File storage
- VAT and GST tracking
- Tax estimation
- Payment follow-up options
Your B2B payments system may also include your offline processes related to payments.
It's common for an institution to invest in an ERP and choose credit card merchants. But as we'll see later, this isn't necessarily the most efficient setup for most businesses.
You need more B2B payment methods to get paid.
Keeping a steady cash flow is increasingly becoming a problem.
The average B2B payment cycle takes about 35 days to complete, and 47% of invoices are paid late. Businesses need better ways to collect payments quickly, efficiently, and more affordably in today's climate.
A significant factor slowing down payments is the vast volume processed through paper-based methods like checks, which account for 42% of all business transactions. These options aren't just slow to process but also very expensive. According to PYMNTS, paper-based invoices cost businesses about $16-22 per invoice.
One of the best ways to solve these challenges is to offer payment options that make it easy for customers to pay invoices and sales orders. Doing so allows greater control over payment costs and incentivizes your customers to pay on time.
That's why being smart about which payment methods you accept usually has a direct positive impact on your cash flow and revenue:
- Research shows that you're more likely to get paid on time if you offer more ways to pay an invoice. Not only that, but it also improves customer loyalty.
- Different payment methods have different cost structures. Depending on your business model and where your customers are located, it may be better to leverage fast, secure options that come with no transaction fees.
- Offering multiple payment methods also translates to a higher volume of transactions and better bottom-line results.
- Businesses that offer customers multiple ways to pay invoices can increase revenues by as much as 30%.
- Some AP teams will delay payments if their standard payment option isn't available. Offering the right payment options can significantly improve customers' chances of paying invoices on time.
Take a look at this chart on the percentage of merchants using multiple payment methods.
Aside from wanting to improve payment costs and collection times, there are other important reasons why businesses are choosing to offer more payment methods.
Several industries have started focusing on digital and touchless options during the pandemic to stabilize revenue and expand their business — likely because 87% of customers now prefer contactless payment options.
The new B2B payments landscape
The B2B payments space has exploded over the past few years. On top of the traditional ERP, whether that's NetSuite, Sage Intacct, Xero, or other software, companies can now use automation solutions and additional plugins that streamline the payment process.
More and more businesses have been looking for years to simplify the payment process and prompt faster payments, especially after seeing the success of consumer payment applications. But for the most part, it was challenging to find a business version of Venmo. PayPal, Square, and other payment solutions often relied on credit card processing, which stuck businesses with hefty electronic card processing fees.
And while B2B organizations could technically build their own solution for payments, the compliance costs make an in-house B2B payment system largely cost-prohibitive.
Nonetheless, the adoption of B2B electronic payments skyrocketed during the pandemic when businesses large and small were reliant on remote purchases, and customers preferred contactless payments. That created a growing demand for providers who could allow buyers to pay directly using the latest selection of integrated payment options.
As a result, financial professionals (perhaps like yourself) seek to find the best payment strategy. And a successful, cost-efficient solution hinges on choosing a stellar business-to-business payments system.
But the system that works best for your business might require a specific payment type. So before we get into the full-scale business-to-business payment experience, let's review the best B2B payment types available today.
The 7 best B2B payment methods by cost, speed, and customer experience
Whether you need to improve your accounts receivable or meet changing customer needs, offering relevant payment methods to clients can help. There are seven popular payment methods, and each has its own rank based on cost, speed, and experience.
Ideally, you'll want your B2B payment system to have the capability to offer multiple payment methods. But to later create an incentive strategy for your preferred payment option, it can help to know which ones are generally better for business. Every single one of the options below will provide more benefits to your customers. But you should also consider the needs of your small business and use this list to enhance your existing payment selection without increasing costs.
Direct Bank Payments (Best Option)
Direct payments are a convenient, safe, and reliable way for businesses to send and receive payments. It's a form of digital bill payment that allows customers to log in to their bank account and make payments over the internet. Modern payment applications allow you to log in from your invoice or billing portal and pay.
- Cost: $0.00 - $0.20 per transaction
- Speed: 1-2 days
- Experience: Easy, frictionless
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Credit is the most commonly accepted online payment method due to its speed and convenience. To complete the payment online, customers only need to enter their card information or click a "Pay Now" button.
There are over 300 fees to process a card payment via the interchange network alone. But imagine paying the 2-3% fees on a $50,000 invoice. For this reason, credit cards can be a costly option for B2B companies.
- Cost: 2% - 4.35% per transaction + payment processor costs
- Speed: 2-3 days
- Experience: Easiest to use, can be done in 1-click
An eCheck, also called direct debit, is similar to a paper check - except it's far easier and cheaper to process. eChecks use ACH to deposit payments, but they aren't ACH payments. As a result, the method is often faster than its paper predecessor as an electronic payment, but processing still has to jump through a few hoops to verify the B2B transaction.
- Cost: $0.10 - $1.50 + 0.0% to 1.5% per transaction
- Speed: 2-5 days
- Experience: Reliable, but requires multiple steps and more paperwork
Automated Clearing House (ACH)
Transfers made on the Automated Clearing House (ACH) network enable customers to send and receive money between US bank accounts. To collect an ACH payment, customers must provide you with a routing and account number so you can initiate payment from their account.
ACH payments are often cheaper to accept because they are not routed through the card networks, but they're also slower than direct payments and debit cards. While some processors offer same-day ACH transfers, funds usually take a few days before they're deposited into your account.
- Cost: $0.20 - $1.50 + 0.0% to 1.5% per transaction
- Speed: 2-5 days
- Experience: Reliable, but requires multiple steps and paperwork
Debit cards are a reasonably reliable payment method that helps businesses access faster approval times than checks or ACH. They act as a quicker version of ACH and offer the convenience of card payments but often carry fees associated with processing transactions. And because you don't get an immediate approved response with debit cards, there is always the risk a payment may be reversed due to non-sufficient funds.
One thing to know about debit cards is that while they are faster to process, it could take you longer to recognize the revenue from these transactions due to poor reconciliation. Some processors send separate statements for debit cards, and you'll need to compare them with bank statements to see if any differences exist.
Depending on your operations and transaction volume, this process can really cut your time and resources.
- Cost: 0.05% - 0.3% + $0.15 - $0.21 per transaction
- Speed: 1-3 days
- Experience: As easy to use as credit cards, but not supported by all processors. Cash applications and reconciliations can be complex.
Many businesses still prefer checks because they're comfortable paying by check, and it helps them avoid transaction fees, but those small conveniences come with a steep price on the back end. For example, Bank of America estimates that it costs between $4 and $20 to process each check, based on the price of the check and shipping, plus the time employees spend writing, mailing, collecting, and reconciling the check.
Additionally, checks lack security, are error-prone, and are highly manual to process.
- Cost: $1.22 per paper check + payment processor/lockbox fees
- Speed: 2 days + 5 - 7 days mailing process
- Experience: Extremely slow, prone to error and fraud, declining in use
Cash Payments (Worst Option)
Cash handling is not free or cheap. If you think a 3% fee on credit cards is high, consider that many businesses lose $5-15 per every $100 in cash sales. And while cash gives you instant access to funds, this can be a double-edged sword because keeping a large sum of the money puts your business at increased risk for theft and fraud.
Keeping track of cash also gets more complicated when it comes to accounting. If money is lost or there's an error, there's a limited paper trail.
- Cost: 4.7% - 15% of cash*
- Speed: 1-3 days
- Experience: Easy to do in person, but falling out of favor and carries risks
- Cash processing fees are based on the number of bills you deposit. Several costs factor into this, such as surcharges for bills that are not presented in an orderly manner and money for courier services.
Payment Type Strategies
Most likely, your payments solution will include the option to take cash, paper checks, credit and debit cards, and ACH. Some platforms (like Paystand) also offer bank transfer and eCheck options.
You may want to take only electronic B2B payments based on the information above. They are convenient to process, and you can get payments faster. But what happens if customers still ask for checks, cash payments, or credit cards?
These two strategies can help you encourage customers to use your preferred payment:
- Convenience fees One option is to shift the processing costs to your client. This is more common with credit card payments, but you can technically do this with any payment solution you want to discourage. Your client's AP teams also want to save money wherever they can, so adding a fee to an undesirable payment method can prompt them to use another payment type. Worst-case scenario, your team saves money.
- Zero-fees You can also "reduce" fees to offer a "Zero-fee" option for certain payments. For example, since bank transfers are incredibly low-cost compared to credit cards, you may choose to make bank transfers "free" for your client. Typically, you absorb the cost, but wouldn't you rather pay $0.20 compared to 2% of $50,000 (AKA $1,000)?
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B2B payments predictions
The question many upper-management have about shifting to electronic payments is whether or not the technology will be obsolete in five or ten years. On the other hand, payment processing may look incredibly different in just a few years, so why invest in change now?
Well, a few business-to-business trends highlight how the industry is likely to be years from now.
1. More cross-border payments
Today businesses are serving clients globally. Your office may be in the middle of Ohio, but you help companies in London, Cape Town, Singapore, or Mexico City.
Despite the slight decline in payments during the early days of COVID-19, experts at McKinsey are expecting cross-border payments to grow at a 6-7% rate per year, with revenues reaching $2.5 trillion by 2025. In fact, global payments made up nearly 20% of all B2B transactions in Europe, the Middle East, and Africa (EMEA) during its lowest growth year, 2020.
And outside of the United States, many B2B transactions rely on real-time payment technology, such as bank transfers, ACH, eChecks, and digital wallets.
Is this trend likely to stick around? Most likely, yes. The Bank of England highlights several reasons for the rapid growth of cross-border B2B payments, including the increase in:
- Global supply chains for manufacturing
- Cross-border asset management and investments
- International trade
- Work migrations and remittances
2. Business resiliency
The COVID-19 pandemic highlighted the need for business resiliency payments and the importance of streamlined cash flow in a crisis. In addition, government agencies and financial regulatory bodies across the globe are making planning almost mandatory, especially for large and enterprise businesses.
Electronic B2B payment processing plays a critical part in disaster planning. Even with today's technology, the right payments solution can provide compliant services:
- Cross-border VAT/GST tracking
- Ultra-secure data storage and tokenization
- Clear audit trails of every step in the payments process
- Bank account verification
- Certified receipts
- Multiple payment methods for improved cash flow
- Remote access to payment technology
3. Financial institution evolution
Governments and financial institutions alike are looking to revamp their B2B rules and services. Over the past six years, the number of countries using real-time payment options has quadrupled. India has been the biggest adopter, with a 70% increase in digital payments over 2019.
What began as a fintech revolution is rapidly adopted by legacy organizations through in-house products, acquisitions, or partnerships. This means that current business-to-business payment solutions are likely here to stay.
4. The huge fraud threat
The risk of fraud in B2B transactions is only going up. Even before the pandemic, over 80% of fraudulent attempts were made against businesses.
As fraudsters and cybercriminals refine their techniques against business operations and find ways to inject themselves into the payment process, finding secure methods of receipting payments is critical.
Electronic payment methods have been shown to be less susceptible to fraud. For example, According to a study by the Association of Financial Professionals, only 3% of B2B fraud could be linked to virtual credit cards. Traditional paper checks, meanwhile, accounted for 74%.
5. More remote employees and clients
By 2027, approximately two-thirds of every department will have remote workers. Many many businesses are already serving remote clients. Consider all the companies in New York and San Francisco that cater to the entire country.
As businesses increasingly offer services and products across state lines, and as their employees continue to work from home - at least part of the time - fast, electronic payment methods will become mandatory.
6. Leaning into automation
The shift towards digital and electronic B2B payments also lends itself to automation. AR automation provides critical support for financial professionals because of the lack of skilled workers, budget constraints, and an ever-increasing workload. By 2025, AR automation alone will grow to be worth about $2.9 billion.
Currently, most ERPs offer limited or no automation capabilities. Instead, these platforms rely on their strategic partnerships to provide additional features to interested users. According to Ardent's State of ePayables, automating the invoice process alone reduced time costs by over 70%. And the use of automation is likely to increase within the next couple of decades.
The Great Resignation won't last forever. In addition to the 30% of individuals diagnosed with long-COVID, organizations are realizing that many employees are reaching retirement age. Rather than automation taking over jobs, employees will need intelligent tools to avoid burnout and keep up with business growth.
Faster, cheaper, more efficient payments
In summary, many payment methods carry hidden costs, extra fees, and additional manual labor. That's why choosing the right payment options to offer customers should depend on your business model and customer needs.
Our recommendation: Find a B2B payment system that supports several payment methods and is compatible with your accounting software or system of record. The best payment options will help your business reach more customers while making your accounts receivable process easier to manage and scale.
Suppose you're looking to accept new payment methods or need help finding ways to get paid faster and more efficiently. In that case, our payment specialists can help you identify ways to quickly reduce fees, streamline collections, and shift customers to zero-fee options.
More common questions on B2B payments
How are B2B payments made?
B2B payments can be made via paper check, eCheck, ACH, bank transfers, and payment card transactions. Each B2B payment solution has its own processing time and cost.
Typically, you send an invoice to your customer with either your bank wire credentials or a link for an electronic transaction. Many smaller businesses use merchants like PayPal or Square to accept credit card payments. But these merchants have their own set of processing fees.
At Paystand, users pay a flat fee per month, regardless of how many B2B transactions occur. There is a "Pay now" button in your electronic invoice that takes your client to a payment portal, where they choose and save their preferred payment method.
What are the challenges associated with B2B payments?
There are three critical questions every AR professional has when it comes to choosing a B2B payment system:
- Will it work with my ERP?
- Is it secure?
- Will my clients be able to use it?
With so many legacy systems in place, your B2B payment solution must work with your current software. This will lower the learning curve for your team and your clients.
It can be difficult to decode security, especially for those who have little cybersecurity experience. You may know you need to be PCI-DSS compliant, but what does that mean in real life?
Paystand uses bank-grade encryption (only the sender and receiver can see the information), tokenization (data is masked with a random string of characters), and blockchain technology (books can't be tampered with). This combination makes it incredibly difficult for malicious persons to grab sensitive data.
Which type of electronic payment is typically favored in B2B?
Every industry has its own preferences, but generally, bank transfers, eChecks, and ACH payments tend to cost less while being more secure.
What should I look for in a B2B payments platform?
Every B2B payment solution is a little different. We recommend looking at the following criteria when deciding on a platform:
- ERP integration
- Various payment methods are available
- High-end security, such as the use of tokenization, blockchain, or encryption
- Real-time payments
- Multi-currency support
- VAT/GST tracking
- Real-time fund verification
- End-to-end payment automation
- Easy-to-use interface for clients and employees
- Automatic payment reconciliation
- Parent company and subsidiary options
- Enhanced data and analytics
Read our blog post to learn more about B2B payment processing.