#44 B2B Payment Operations

The road towards digitising payment operations and powering embedded finacne

Hi all - This is the 44th edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀

Introduction

A friend of mine recently gave me a refrain about the newsletter, he said that I should talk more about lending rather than focusing too much on payments and payments tech. Actually, I’ve never been much of a payments person, but it's such a critical piece of the global economic infrastructure and it’s completely broken. Behind each element of GDP is a payment, in fact GDP is defined as the total market value of all goods and services produced within a country’s borders at a specific period of time. The fact that “market” value is critical to the definition of GDP gives credence to the importance of payments and a functioning payments system. This document by the Bill and Melinda Gates Foundation shows the importance of Mobile Money in lifting people out of poverty as well as building financial resilience amongst poorer households showing how payments innovation drives real economic outcomes.

Payments and payments tech is therefore a critical pillar of innovation and one that needs constant focus. This week, I’ll focus on an element of the payments business that doesn’t get the attention it deserves and that’s B2B payments operations technology. Most Fintech coverage is around its sexier cousins, B2C payments and Neobanks.

B2B payments are massive. In Kenya for instance, RTGS processes over 330 billion US$ a year in payments value. In the USA, traditional ACH wires processed over US$ 41.7 trillion worth of B2B payments in 2020. Fedwire and CHIPS in the USA combined do over a quadrillion dollars per year in volume. To put this into context, Visa processed US$ 8.8 trillion in global volumes last year. The value of B2B payments is therefore much larger than traditional consumer payments. Nonetheless, very little innovation has been done in this space. A lot of the innovation is happening at the payments layer and is being driven by Central Bank initiatives such as the introduction of Faster Payments in the UK, UPI in India, NIBSS in Nigeria and the ongoing FedNow initiative in the USA.

When you delve deeper into the space, you realise that payments innovation is one thing but a massive job to be done should happen at the meta level i.e. by allowing companies and larger fintechs to manage their whole payment operations from one platform. In this article, I’ll define payment operations, explain the different issues that companies face and why banks are not well placed to serve them, how different companies are emerging to serve this space and what needs to be done.

Business Payment Operations

Payment operations encompass a lot of functions that exist within a business. These typically are managed across the organisation from sales to marketing to finance and compliance. Payment operations at a first level include the ability to make and receive payments across multiple payment methods. On top of these basic capabilities exist higher level elements such as reconciling payments and ledgers, managing limits, handling accounts receivables and payables as well as typical finance jobs such as closing the monthly books. Additional work includes managing customer refunds, resolving payment failures and tracking funds across the business. In essence it’s the main task of the finance department. It’s a complex task with the complexity increasing according to the scale of the business and the type of the business.

Companies like Insurers and Airlines that receive multiple payments per day have very complex payment operations. FMCGs, particularly those that have wide distribution networks also have difficult and complex payment operations. 

Traditionally, the industry has dealt with the complexity of payment operations through adopting internal payment policies that often act to reduce the payment options available to customers. Insurance is a good example. Paying for insurance is a headache, a number of times, insurers companies only allow payments by bank transfers or bank deposits. I suspect that these policies are adopted so as to reduce the reconciliation nightmares that come with multiple online payments as well as the settlement risks that come with card based payments. 

As we move towards a digital future, it’s clear that these payment ops need to be better managed. To better understand this problem and the opportunity set. It’s better to define the problem even better. 

We’re dealing with businesses that are typically mid to large businesses who are navigating technological change, being disrupted by new tech savvy competitors and are witnessing margin erosion due to changing industry dynamics such as increased competition, pressure from imports and evolving business models with the emergence of marketplace business models. The industries include; Airlines, Real Estate companies, Mortgage companies, FMCG, Logistics players, Insurance and Asset Management, Fintechs as well as other non-bank financial services. Typically players in these industries have the following dynamics;

1. Multi-banked - Most companies are multi-banked often with more than 3 banking relationships. This happens for a number of reasons. Banks compete with each other for businesses and some approach these companies with very attractive offer letters for working capital and trade facilities thus luring portions of their business. Diversification also reduces financial risk for the company. Additionally, companies also use bank accounts for financial management with some accounts assigned to making payroll payments, receiving revenues and handling expenses. Companies then have to make separate integrations to the different banks, handle multiple internet banking portals whilst managing user rights across multiple platforms. Often a process fraught with risk. Ultimately this becomes an operational nightmare;

2. With the increase in payment types and the fact that these payment types have different characteristics e.g. Mobile Money payments are text/SMS based whereas card payments are based on ISO 8583, it becomes very difficult to assign these payments to their specific invoices or sales orders thus creating significant accounts receivables and payables headaches. 

3. Commercial considerations are embedded into sales invoices and orders that are often not captured by your payments platforms. For instance, you can assign a 10% discount to a specific customer or allow one to make payments in installments. Matching receipts to these commercial considerations is often problematic;

4. Manual operations tend to drive more complexity. By complexity, this means the fact that one problem can compound into two or three more problems which in turn create additional problems. For instance, a delay in matching receipts to accounts receivables can lead to write-offs which are a cost to the company. In turn, these can cause distributors who pay on time to be denied product which in turn has second and third order effects.

What companies have tended to do is to throw more bodies at the problem. Some companies have 10-15 accounts receivables accountants just to manage incoming payments and book them in their ledgers. This is by definition non-scalable and tends to bring on additional problems such as increasing costs and fraud risks.

The nature of these problems is that one bank cannot solve these problems for a customer. For instance, most banks have developed modern digital banking platforms for their corporate clientele. Additionally, some have gone further to innovate around direct integrations to ERPs and specific AI-driven reconciliation problems. These solutions tend to solve one part of the problem. The decision to be multi-banked is a commercial consideration and partly a finance one. So for instance, a company has lower cost trade finance solutions from one bank and uses another for collections. If one bank has an advanced corporate platform, it won’t solve the reconciliation problems that arise from the financial transactions that occur with the other bank.

Payment Ops and Tech

New digitally enabled companies are getting into these traditional industries and are coming up with these problems as well. Some of these include Lami in Insurance, Twiga in distribution and Lori/Kobo360 in logistics. It’s a crazy problem because these companies are running up against significant payment problems around payouts, collections, receivables management and the dreaded reconciliation! 

What tends to happen is that some of these companies are building out their own payments operations solutions in-house with engineering resources being diverted from their core missions. At worse, some of these companies are throwing people at the problem thus increasing fraud risk and creating constituencies that will, down the road, act as a barrier to payments innovation.

Solving for B2B Payment Operations