#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

To solve payments operations, you have to solve the pain points described above. Essentially;

1. A bank agnostic solution that can pull integrate to all your accounts and pull data from them;

2. The capabilities to initiate payments across multiple payment types such as EFT, RTGS, Mobile Money etc;

3. The capabilities to match payments and receipts to the commercial actions behind them and reconcile;

4. The ability to manage mandates and user rights across the organisation and generate reports that can be consumed by audit;

5. Integration into a companies ERP or where one doesn’t exist, the capabilities to offer it via SaaS;

6. Continuous accounting based on real time data rather than the typical end of month accounting jobs that are prone to data entry risks;

7. The ability to create and handle counterparties. Existing internet banking portals enable counterparty creation for payments only. Nonetheless they don’t handle counterparty relationships including existing exposures, future payments and the netting of positions. This would be useful particularly for marketplace models;

8. The ability to embed finance into your operations including tax management and payments;

An API driven company that sits between an operating entity, its internal systems and the financial system consisting of banks and payments methods is best suited for this. The best example globally is Modern Treasury which as its name suggests, it wants to be the treasury solution for businesses.

In essence, every company does payments and every company has a finance function but not every company is a finance company. Payments and Finance in general is expected to work but is not core to commercial value creation. This then makes it perfect for API-Fication. It fits perfectly into Packy M’s definition of the value of API businesses captured in the diagram below;

Source: Notboring

Stripe intends to play this role by becoming the payments infrastructure for the internet with the ultimate goal of growing the internet’s GDP. Through a number of innovations such as Stripe Capital, Stripe Treasury and Stripe Revenue, it’s building out the tools that will enable businesses to manage all elements of their payments operations. This is being done under the ultimate vision of building Stripe’s Global Payments and Treasury Network that will be like a mesh that sits between businesses and the financial system.

Payments Operations in Africa

Payment operations in Africa are slowly being digitised nonetheless, the market is disintegrated with different players focusing on different aspects of payment operations with most being focused on payment facilitation.

At the larger end of the spectrum are players like Flutterwave and Paystack that enable businesses to accept and initiate payments across multiple payment methods. Flutterwave for instance is an enabler of Fintechs around the continent enabling Fintechs to build out their payment ops through a simple integration. Paystack which was acquired by Stripe is also playing this role. These companies are increasing their value proposition around invoicing, payment links and merchant operations. They are yet to build out rich and extensive functionality for larger corporations. One other issue is that payment requires deep focus in a specific market and thus their execution differs based on the markets they are in. Flutterwave’s value proposition in Kenya is not as robust as its Nigerian value prop, but this is something they’re working on.

For cross-border payments and treasury management, AZA Finance has a very interesting proposition for companies that are managing payments and cash across multiple markets. AZA was born out of the former Bitpesa whose value proposition was enabling cross border payments through Bitcoin by availing on/off ramps into local Mobile Money. Nonetheless, Bitpesa came across regulatory hurdles and they pivoted to AZA Finance. Essentially, the insight is that cross-border payments are broken and AZA is working to fix this particularly for businesses. It’s one of the few companies that can avail spot trading by providing liquidity for infrequently traded currency pairs such as Naira/KES or KES/Cedi.

Some of the core products are;

1. Corporate Treasury management including counterparty risk assessment, currency swaps and pre-funding;

2. Comprehensive FX solutions including pre-funding;

3. Payments including remittances, collections and mass payouts;

At the other end are Fintech companies that are evolving into B2B payments companies. One thing that I have constantly mentioned in this newsletter is that building a consumer Fintech in Africa involves a lot of technical heavy lifting requiring horizontal capability developments across payments, collections, integrations into partners, risk management and regulatory capabilities. A number of these Fintechs are evolving into B2B payment operations companies. Eversend is one with a B2B API offering. A very interesting player in the space is Tanda in Kenya. Tanda started off with a bank agnostic agency banking service that enabled consumers to deposit and withdraw from any Tanda agent. Of course, this required specific capabilities to be built around bank integrations, integrations to Mobile Money, integrations to local payment services such as Pesalink and Kenswitch as well as capabilities around card such as issuance. They have then successfully built out these capabilities as a service enabling companies to make payouts to banks and M-Pesa with industry leading uptime statistics.

All the above are money movement related and not focused on the elements beyond money movement such as reconciliation, ledger management and ERP integrations for AR/AP services. The post money movement layer has a lot of players. Kippa in Nigeria for instance is building accounting and money management tools for SMEs in Nigeria. Churpy in Kenya is handling accounts payables and receivables by sitting in between corporate ERPs and Banks in Kenya. This enables companies to improve their AR/AP management leading to lower write-offs whilst surfacing the kind of data that can power better receivables financing. Players such as OnePipe and Bloc in Nigeria are building solutions around embedded finance with the key insights as defined by Ope Adeoye as “The caveat goes like this, the moment you make a positioning play for banking as a service, all you really need is one partner bank that lets you go deep because the embedded finance [offering] is about depth and not breadth,”

However, Stripe and Modern Treasury are building towards bringing all these elements together under one hood. It’s easy for a Flutterwave or Paystack given their economic heft to strategically acquire some of the smaller companies whilst building up a comprehensive solution.

The diagram above is a good representation of the whole payment operations cycle. At the top are integrations to store of value frameworks such as banks as well as money movement partners such as Visa, SWIFT, Mobile Money and local payment methods such as RTGS and ACH. At the middle of the stack are payment initiation capabilities, forex and treasury services, admin management including counterparty management for payments and position management, and the accounting stack that includes AR/AP, ledgers, reconciliation and real time accounting services. All these interface to corporate ERPs below.

Barriers to Payment Ops Modernisation

Despite what seems an obvious solution to the problem, there exists significant barriers in the continent to robust payment ops modernisation technology.

1. Cash still accounts for the majority of payments particularly collections. This is particularly the case in FMCG and insurance where cash deposits into a collection account are dominant. This is not necessarily an issue for payment ops providers, however cash payments often lack proper narration and are hard to manage particularly if they’re partial payments or have features such as discounts. 

2. Most companies in Africa are still operating manually i.e. through a mix of Excel at best and paper documents. It’s hard to build a solution based on manual workflows and processes. This could be seen as an opportunity if a payment ops provider embeds industry specific ERPs sold as a service;

3. Integrating to banks is a complex task from a technical perspective with different banks at different levels of technical sophistication around APIs and access. Without a mandated approach to open banking in most countries, this will remain a significant pain point in payments innovation;

4. On the above, regulations around third party access are still a problem. Without open banking and clear data regulations this could be a legal land mine. This access should be designed in a way that’s scalable so as to drive the benefits of such a business model.

Despite all the above, the general trend points towards such capabilities becoming widespread in the mainstream. These capabilities will in turn power new business models to blossom, one of them being marketplace models embedding finance into their offering.

As always thanks for reading and drop the comments below and let’s drive this conversation.

If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@frontierfintech.io or samora.kariuki@gmail.com