The launch of Apple’s contactless payment system in 2014 marked the first significant change in the way people made purchases in stores. It’s still early but increasing numbers of vendors now accept Apple Pay, and in early 2016, one in five iPhone 6 users said that they had used the system at least once.
The most popular method of making retail payments still remains debit and credit cards. Around two-thirds of in-person sales are placed on a card. According to one study, by 2017, cash will be used in less than a quarter of point-of-sale purchases while checks are used to settle just 7 percent of all retail purchases, a figure that continues to decline.
B2B sellers can only dream of such clarity for their own payment options. There are basically five main ways in which businesses invoice and receive payments from other businesses, and each has its own advantages and disadvantages.
Other than cash, checks may be the oldest form of payment still in use. They’ve been used in the United States since the late seventeenth century and they’ve been printed since the mid-eighteenth century. For businesses, they’re a simple and apparently cheap way to authorize the movement of funds from a buyer’s account to a vendor’s account. There are no set up costs or complex systems to operate, and they also provide a relatively long float, the period of time between the payment being acknowledged as accepted and the money being deducted from the buyer. Those funds can continue to earn interest for the buyer even after the seller has accepted payment.
The simplicity, low price and even the value of the float may be deceptive. The NACHA estimates that the actual cost of processing a paper check is about $8, a figure that does not include the price of the check books themselves. The high fees incurred when a check has to be stopped, and the time spent by account staff who have to enter payment details manually into records, file the paperwork, fill the envelopes and mail the checks is daunting. Float time, too, has been reduced over the years. Now that checks are digitally scanned instead of physically mailed, the float has been virtually eliminated. Checks can also be lost or stolen in transit.
But the biggest disadvantage that checks present is the paperwork with limited visibility in approvals. Checks don’t have a reliable reporting capability for analytics, and the waste of time to find supporting documentation for the paper trail also demonstrates checks can be laborious. However, checks are simple to write and easy to create, which is why they’ve survived for so long. But they’re also more expensive than they look and demand a great deal of work from accounting staff.
Automated Clearing House now supports the largest percentage of electronic payments in the U.S. This network claims to be the largest, safest and most reliable payment system in the world. Payments are fast, taking no more than a day or two, so there’s no float; like a wire transfer, the full amount must be available in the account when the payment is made otherwise the buyer will face heavy overdraft charges.
Set-up is complex, and is usually performed through a company that processes ACH payments. Each client that receives or pays money through ACH must complete a form. For merchants, that usually happens online during enrollment. The complexity of the sign-up process usually means that ACH payments are only used by businesses for regular payments, such as payroll and regular supplies. The time required makes ACH unsuitable for paying one-off bills.
The transactions are encrypted; unlike a check the payment details, as well as account number and signature, aren’t available for anyone to see. The payments will also pass through fewer hands than a check, and federal regulations and banking rules supply some protection for electronic payments. However, buyers will need the supplier’s bank account information, which they may not wish to provide. The payments can also be reversed by the seller in the event of a dispute, increasing the risk of losing the funds. If the complexity of sign-up isn’t enough to make a seller think twice about using ACH for a single sale, the risk that the buyer can simply take their money back if they’re not happy with the merchandise is a good second reason.
And the paperwork isn’t great either. The remittance details are not usually detailed enough for automatic processing, shifting more work and costs to accounting staff. ACH can be a good solution for a business that makes regular purchases with other businesses that they know and trust. But it’s a problematic solution for companies with a variable client base or which makes purchases from a changing list of suppliers.
The use of credit cards in B2B payments doubled between 2012 and 2014, boosted in part by the promise of perks for frequent usage but mostly by the attraction of a 30-day float at a time when banks were unwilling to provide credit. The ability to close a payment on one day but only have to transfer the funds a month later has been a big pull for businesses with weak cash flow. For a business that needs a loan quickly and for a very short duration, a credit card can provide easy access to a source of credit.
Credit cards are also convenient, especially for small, one-off purchases. The card is fairly secure and disputes are handled through the credit card company. Buyers can ask for a charge-back but they can’t retrieve their funds in the same way as the ACH transfer user can.
But credit cards are expensive, especially for large purchases. Fees tend to range between 3 and 4 percent of the value of the invoice. Large business transactions can become very expensive indeed.
Electronic Funds Transfer
Wire transfers can seem good a good alternative in certain situations. The transfers can happen immediately so there’s no float, and depending on the amount and the set-up at the bank, they may be simple to execute. Online banking platforms may even demand no more information than the recipient’s email address. For large B2B payments the bank will require details including account number and SWIFT code. The transfer may have to be transacted through a phone call to the bank and they don’t generate the kind of remittance information that allows for easy reconciliation. Nor can any charges be reversed or stopped in the event of a dispute; once the bank has transferred the funds, the wire transfer’s role in the process is finished.
The biggest disadvantage of wire transfers is that they’re expensive. Typically costing between $20 and $35 for each transaction, they’re only worthwhile for very large payments. For small payments a check or credit card may still be the best option.
Online Payment Platforms
The move away from checks has largely been driven by the demand for the convenience, speed and efficiency of digital payments. Businesses would like to be able to authorize payments from their offices and receive the kind of remittance information that makes it easy for them to maintain their records.
A number of services have arisen over the last decade or so offering those services. Paypal is the platform most commonly used by small businesses in Europe and the United States (Alipay provides a similar service in Asia.) Other platforms include Due, Traxpay, Basware Pay and Apruve. Add in Pencepay, Bluesnap and Tipalti to name just a few, and it quickly becomes clear that online payment platforms targeting B2B transactions has become a thriving industry.
Each platform will have its own criteria, different charges and facilities, and supply remittance information in its own format.
In a post on Paymentsviews.com, Erin McCune, a payments consultant at Glenbrook, a consultancy specializing in B2B payments, predicted three developments in payment systems. “Business payments,” she said, “will be dominated by an ecosystem of interoperable solutions that allow data to flow freely between suppliers and buyers. The process will be transparent so that suppliers always know exactly when they will be paid.” McCune continues with the idea that pricing will change so that fees are based not on the method of transfer but on the many other changing variables.
Those may well be the directions for B2B payments, but until then companies will have to review their transactions and decide which of the options available best suits the way they do business.