By Dale Laszig
Lego logs are the perfect analogy for today’s software solutions. Individually, Legos and binary digits are small, uniform and dormant. Together, they’re a miracle of modular energy that can be molded and shaped at will. Not surprisingly, coding can be a lot like building with Legos, so it makes sense for developers to envision the features they would want in a technology stack, then find the right partners to help deeply integrate those capabilities.
Designing payment software can be like building with Lego logs, according to Andre Machicao, global head of product at Visa. You can follow an outline to get a serviceable product, he stated, or create from scratch. At the Electronic Transactions Association’s April 2023 conference, TRANSACT, he walked the big stage, describing how children who build without blueprints outperform others who follow clearly defined patterns. The payments industry is building without a blueprint, he told the audience, and free builders are outpacing legacy architects.
In today’s blog, we will explore modularity as a principle of modern software design, and how it is helping developers embed payments into highly flexible, configurable software applications.
Principled design at the core
In a digital-first world where consumers transact in real-time with wearables, smartphones and connected devices, surprisingly few business-to-business (B2B) transactions are conducted digitally, according to a recent study by Goldman Sachs, which identified B2B commerce as the next payments frontier.
“We believe B2B payments currently account for $127tn in payment flows – and we expect this figure to reach nearly $200tn by 2028, over 5X the volume of the retail payments market,” researchers wrote, noting that the vast majority of B2B invoices are still being processed manually and by paper check.
Modern B2B commerce has the potential to improve efficiencies and create new revenue pools for all types of enterprises, researchers stated, especially for small and midsize businesses that pay and process 80% of invoices by check. It seems self-evident, they noted, that faster, lower-cost payment and remittance options will continue to replace outdated systems.
In part one of our two-part series on the rise of B2B commerce, we explore the inflection point of B2B payments, including key drivers and consumer payment preferences, the explosion of subscription services and digital payment processing, and the role that embedded finance and SaaS is playing in the trillion-dollar B2B commerce market.
Fresh $1 Trillion Inflection Point
For decades, paper checks and Automated Clearing House (ACH) transactions have been the hallmark of B2B payments. Lately, however, new trends in ecommerce, digital payments and consumer payment preferences are changing the cadence of commerce. Gen Z consumers and executives, for example, use buy now, pay later (BNPL) mobile wallets, and alternative payment methods, underscoring the need for businesses to meet customers across all digital channels.
While digitization in business-to-consumer (B2C) payments has historically outrun the B2B sector, researchers suggest that B2B payments are approaching an inflection point, as systems and processes enter a new phase of sophisticated and seamless commerce. Technology and market pressures are key drivers of B2B payment digitization, Goldman Sachs researchers noted, as individuals and enterprises increasingly rely on real-time, omnichannel commerce. These trends create a fresh $1 trillion dollar opportunity in payments and software, they stated, and sizeable cost savings for payment providers, software companies and financial institutions.
“In total, we see a $950bn global revenue opportunity (with an estimated $186B in North America) across invoice processing, AP payment processing, working capital management and factoring, and cross-border payment optimization,” researchers wrote. “Our analysis assumes that B2B payment solutions can drive up to 75% savings in total costs (both direct and indirect) for business, with more savings accruing to small businesses than enterprises.”
Massive, Untapped Opportunity
With experts estimating that B2B payment volume will reach $200 trillion by 2028, subscription service offerings and digital payments options are poised to streamline processing and further propel growth. This equates to a massive, untapped opportunity, Manhattan Venture Partners proposed, for B2B payments, cross-border commerce and embedded finance applications.
“In addition to verticals including checkouts, processing solutions, and corporate spend management, investors are betting big on the startups in the cross-border payments, banking- as-a-service, and embedded finance space,” MVP researchers wrote. “The next phase of the disruption is plug-and-play solutions helping integrate financial products seamlessly with non-financial digital platforms.”
As Manhattan Venture Partners have noted, legacy systems, a lack of data standards, limited interoperability and fragmented approaches to accounts receivable and accounts payable have hindered market growth. Fortunately, advanced technologies are solving for these issues and driving market growth by creating new opportunities in the digital and virtual worlds.
As businesses struggle to cope with the challenges of integrating with multiple banks and legacy systems, embedded finance could spark the next wave of innovation in financial services,” MVP researchers wrote, citing a study by Bain & Company, that predicts embedded financial services, led by payments and lending, will continue to scale.
Bain & Company observed that embedded finance, enriched by value-added insurance, tax, and accounting services, accounted for nearly 5% of U.S. financial transactions in 2021, and predicted continual growth from $2.6 trillion currently to more than $7 trillion by 2026.
“Demand will grow because the ‘better together’ proposition promises to improve customer experiences and financial access, along with providing cost reductions and risk benefits to companies,” Bain & Company researchers wrote.
Additional survey data from the Boston Consulting Group found SaaS B2B revenue rose by 179% in 2022, due to strong demand among enterprise customers. Competition can be fierce, BCG researchers noted, and results have shown that not all SaaS B2B providers are created equal; digital-first companies that leverage technologies are outperforming others.
“As our analysis shows, a subset of fast-growing companies has grown faster than the pack,” they wrote. “Their actions offer a playbook for other B2B SaaS players to follow.”
Propelling B2B Payment Forward
In “The Future of Sales: Transformational Strategies for B2B Sales Organizations,” Gartner predicted that 80% of B2B transactions between suppliers and buyers will occur through digital channels by 2025. Researchers credited the global pandemic for helping to accelerate the business community’s migration to real-time, omnichannel, personalized digital commerce.
“B2B buyers increasingly want to engage with suppliers through digital and self-service channels,” Gartner researchers wrote. “To support this shift to multi-experience buying, and the associated growth in the number of touchpoints and interactions between buyers and suppliers, sellers will need additional skills and technology capabilities.”
Thanks to changing demographics, faster payment infrastructure and new software, the future of B2B payments will be agile, digital and embedded, conducted anytime from anywhere. And Payfactory is on the cusp of embedded, B2B payment processing with our low to no-code payment facilitation platform. Contact us to learn more.
Dale S. Laszig is a payments industry journalist and guest columnist for Payfactory. Previous to her writing career, she managed business development for leading payments acquirers and POS manufacturers. Connect with her at [email protected], LinkedIn and Twitter.