This blog talks a lot about consumer to business (B2C or C2B) payments, but we’ve not spent much time talking about B2B payments.
The international B2B payments market is massive, estimated at $120 trillion per year.
In the US that number’s about $25T annually.
US consumer card payments, by comparison, rang in shy of $10T in 2021 per Nilson.
So B2B payments has a lot of credit card players licking their lips. The numbers are wobbly, but estimates generally put the B2B payments opportunity at 4x that of consumer payments.
The Federal Reserve has argued that processing a paper invoice costs between $4 and $8, so digitization would save a lot of money.
But will that B2B payment volume move to card payments?
Pff, not hardly.
CEO’s everywhere are like “Oh boy, can’t wait to report EBITDA declines of 200 bps so we can take card payments!”
Not.
That’s because a $50,000 transaction paid by card is basically $1,500 gone.
Whoosh.
Some proponents of B2B card payments will argue that businesses can use card balances as cash floats.
In other words, a business could put $50,000 on a card today without the need to have the cash in the bank.
Sure, but what’s the APR on a missed card payment?
According to the balance, business credit card rates now stand above 20% thanks to the Federal Reserve’s rate increases.
There are plenty of funding alternatives.
Banks will offer revolvers or lines of credit for much lower rates: typically prime rate or LIBOR plus a few hundred basis points depending on the type of business.
So only the desperate or financially illiterate businesses (i.e. retailers) are really trying to pay with cards, but that doesn’t mean that their vendors will accept them.
At least, not without surcharging.
Because unlike retailers, CFOs at respectable organizations can do math.
You think SYSCO Foods is cool to lose 300 bps of margin by letting their SMB restaurant customers pay with cards?
SYSCO’s EBITDA margins are under 6%.
If you took out 300 bps to card payments – which goes right to the bottom line – they would halve their margins.
What do you think that does to shareholder value and enterprise value? The management team would be instantly fired.
Which is why the civilized world uses bank-to-bank transfers.
Traditionally this has been over a network like NACHA’s ACH network.
Among the sectors experiencing tremendous growth in 2021 was business-to-business (B2B). The 5.3 billion B2B payments—valued at $50 trillion—reflect a 20.4% increase from 2020, as the pandemic fast-tracked businesses’ switch to ACH payments. Over just the past two years, ACH B2B payments are up 33.2%.
https://www.nacha.org/news/ach-network-sees-291-billion-payments-2021-led-major-gains-b2b-and-same-day-ach
With FedNow and RTP there will surely be more competition for NACHA, especially because of the chargeback concerns with ACH, but this will collectively drive payment modalities away from cards, which are prohibitively expensive for anyone with a functioning brain.
We get why payment companies pitch B2B card payments: large TAM with virtually no competition.
But that’s not true.
Competition is brain cells.
And big-boy CFOs at real companies have them 1,000,000x over retail merchants.
Sorry payment bros.
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