Embracing Electronic B2B Payments

By Kyriba

Electronic payments are expanding in the business-to-business (B2B) space, according to recent research. While checks and wires still dominate B2B transactions, the COVID-19 pandemic has prompted many organizations to modernize their payment streams to address challenges in staffing and remote work.

Payment Trends in the Pandemic

Although many companies have been reluctant to embrace digital B2B payments, the pandemic forced some organizations to rethink their approach, explained a 2021 survey from Research and Markets. Over the course of a year, the number of companies that make over 90% of their payments electronically increased by 12%—accounting for about one quarter of total B2B payments volume.

All key indicators point to an ever-growing use of electronic payments; multiple studies have displayed this emerging trend.

  • Fully 85% of CFOs said their businesses are making more card-enabled digital payments than they were prior to March 2020, according to research by PYMNTS and Billtrust.
  • Digital payments through direct deposit or account-to-account (ACA) methods like PayPal have been prevalent throughout the pandemic; 71% and 62% of CFOs said their organizations have used these payment types.
  • ACH has been strong for B2B payments throughout the pandemic. Nacha revealed that 5.3 billion transactions valued at $50 trillion occurred over the ACH network last year—up 20.4% over 2020. And over the past two years, ACH B2B payments increased 33.2%.
  • While the 2022 AFP Payments Cost Benchmarking Survey found that 86% of organizations still use checks for outgoing payments, the median volume of checks processed per month in 2021 was 500-999. That’s a significant drop from 1000-1999 in 2015, when AFP last conducted the survey.
  • Fully 73% of respondents to the AFP survey said their organizations are in the process of transitioning their B2B payments away from checks.

ACH—and more specifically Same Day ACH—is likely to see a major increase in B2B payments this year, now that the threshold for payments has increased to $1 million. Same Day ACH performed incredibly well in 2021; Nacha revealed that 603.8 million Same Day ACH payments were made, valued at $943.7 billion.

The prospect of making high-value Same Day ACH transactions will likely make the service even more appealing to corporate treasury and finance teams. Payments were initially capped at $25,000 back when the initiative first launched, and financial professionals lamented this low threshold. Nacha eventually raised the limit to $100,000 in 2020, but upping the threshold to $1 million should boost corporate usage even further.

Real-time Payments Usage

Executing real-time payments requires the use of an API. APIs allow two or more pieces of software to communicate and instantly transmit data, facilitating immediate payments. Legacy file transfer technology doesn’t offer the same capabilities. For companies that don’t mind waiting for files to download, ACH or Same Day ACH may be sufficient. But for those organizations that want payments to settle under a minute, API capabilities are a must.

Building the business case for adopting real-time payments typically requires identifying certain pain points that the service can address. Kyriba’s Real-Time Payments eBook includes a list of use cases, including:

  • Emergency/Last-Minute Payments: Particularly in times of crisis like the pandemic, companies may need to make emergency payouts for payroll and other demands. Last-minute bill payments may also be needed.
  • Cash Visibility: Clearing payments in real time reduces settlement risk and provides a clear liquidity picture.
  • Cash Conversion: Incoming payments can be immediately turned into accessible cash.
  • Fraud Prevention: Checks continue to be the payment method most susceptible to fraud. Businesses can eliminate this slow and risky method with real-time.
  • “Un-batched” Payments: Rather than relying on batch payments that are locked in at key times each day, real-time payments can be sent at any time.
  • Extended Remittance Information: Modern real-time systems contain extended remittance information that travels with the payment.

Real-time payments have had a difficult time infiltrating the B2B space, but recent activity suggests that might also be changing. Some companies are already using real-time for payroll, and The Clearing House anticipates growth for instant payments in account-to-account (A2A) space and corporate disbursements this year. If such growth in all three of these areas occurs, it stands to reason that B2B payments can’t be too far behind.

Furthermore, data from The Clearing House revealed activity on its Real-Time Payments (RTP) network has surged over the past two years, going from just under 10 million transactions and less than $4 billion in first quarter 2020 to over 36 million transactions and nearly $16 billion in first quarter 2022. And with the RTP network raising its payment limit from $100,000 to $1 million in April 2022, corporate payments over the network appear poised to surge even further.

Corporate interest in real-time may increase further in 2023, when the Federal Reserve is expected to launch its own domestic, instant payments service, FedNow. There has been some speculation that companies have been waiting to get on board with real-time payments until at least FedNow launches.

Barriers to Corporate Adoption

While adoption of B2B electronic payments is trending upward, there are still substantial barriers at many organizations. As Research and Markets noted, wire transfers are still many companies’ go-to B2B payment method, followed by bank debits and checks.

In the case of real-time payments, there is even more hesitancy, as many businesses might not see a need for payments that settle in under a minute. But the greater concern may stem from the fact that payments are irrevocable once they have been sent. Therefore, if a fraudulent payment occurs over the network, there isn’t the usual lag time that occurs over ACH or a wire transfer that may allow the sender to claw the payment back. The RTP network has attempted to mitigate this risk with a process in which the sending and receiving banks can consult one another after a transaction and attempt to retrieve funds sent in error.

The Fed is also attempting to address these concerns; in its final rule governing payments over FedNow, the central bank explained that it will allow a FedNow participant “additional time” to determine whether to accept a payment order if there is suspicion of fraud.

Some industry participants urged the Fed to make similar exceptions for banks experiencing operational issues, or for errors that can occur due to mismatched payment information. However, the central bank said that it would not create exceptions for these types of incidents.

There is also a question of how “immediate” real-time payments truly are. Payments over the RTP network are transmitted “within seconds,” according to TCH. And in the FedNow final rule, immediate funds transfer is described as taking place over “a matter of seconds.” However, the Fed declined to establish specific time parameters for transactions, which it said would allow flexibility in the future.

A timeframe of a few seconds or just under a minute may not matter much to a corporate who is used to a payment settling later that day or the next day. But it is something to keep in mind if a payment is extremely time sensitive.

Looking Ahead

Over time, demand for electronic B2B payment services will only continue to increase as more companies see the benefits. Both real-time payments and the expansion of Same Day ACH create appeal for organizations who want large transactions to settle faster, and if handled correctly they can reduce the risk of fraud. Still, the prospect of payments settling faster does increase the potential for fraud and errors. Therefore, companies that are considering these methods need to make sure they have the proper protections in place. Working with a trusted technology partner with real-time payments and Same Day ACH capabilities can help to ensure that all outgoing payments are legitimate.