The History of B2B Payments: The Slow Shift From Paper Money To Virtual Cash

Online companies delivering the B2B experience have not just “appeared” nor happened on their own, and would not have been possible had there not been years of groundwork laid through the financial industries. Just 37 years separate the launch of American Express as a fast mail service in Buffalo, New York in 1850, and the publication of Looking Backward, an early science-fiction novel by Edward Bellamy, a journalist in Chicopee Falls, Massachusetts. Looking Backward, was published in 1887 and is a utopian science fiction novel. It takes the reader to the year 2000 where the government owns the factories, workers retire with full benefits at age 45, and salaries are paid into a kind of debit card that people can use to make their purchases. The book is reported to have been one of the best sellers of its time, outsold only by Uncle Tom’s Cabin and Ben-Hur: A Tale Of The Christ. The New York Times has a great article entitled, “‘Looking Backward’: We have seen the future and it didn’t work.”

American Express was slow to take up the payment system that Bellamy described. In the late 1920s, oil firms and department stores moved first, using charga-plates, rectangular sheets of metal stored in leather or paper pockets and embossed with a customer’s name, city, state and account number. On some cards, the customer was required to sign the back. When a buyer made a purchase, the store would lay inked paper over the card and press or rub another paper over the plate to “print” the details. If that sounds like the way credit cards were used in the days before electronic submissions, it’s pretty close.

Other businesses soon picked up on the idea of collecting bills but wanted the banks to collect the payments on their behalf. The “Charge-It” was America’s first bank card, and was issued by the Flatbush National Bank of Brooklyn. Customers would leave their sales slips in the bank, the bank would bill the customer and the debts would be settled at the end of the month. The cards were also accepted in local stores, and by the 1940s Diners Club was issuing its own cards, initially for use in restaurants. American Express was now quick to offer its own version.

So credit cards have been around for more than half a century, allowing businesses to sell to customers without the use of cash and by using some degree of credit service. In the beginning, some businesses used their cards to make occasional, minor purchases from other businesses, and in particular to cover entertainment expenses racked up their executives, but when it came to making purchases themselves, few businesses were willing to put their own operating costs on their cards. Even by 2011 credit card payments made up just 3 percent of B2B payments. Between 2012 and 2014, use of credit cards for corporate payments ballooned to 10 percent, boosted by perks handed out by the card companies and the difficulties of obtaining business loans from banks. But the costs of using those cards revealed more clearly than ever the main reason businesses had spurned them before. According to a research firm, REL Consulting, a B2B firms spend an average of $2.2 million in credit card processing fees for every billion dollars of revenue they receive.

California was the first to establish a committee to reduce the volume of paper checks flowing through the banking system. They were looking for a way to automate payments between business accounts that produced less paperwork, would help lower fees and have faster speeds. In 1974, the National Automated Clearing House Association (NACHA) was formed to coordinate the activities of ACH associations across the country, and in 1978, all of the local ACHs were linked electronically. By the year 2000, ACHs were processing more than 4.8 billion payments a year at a value of more than $12 trillion through the Federal Reserve System. Most of those transfers are made up of credit card payments but they also include salaries, corporate bill payments, interest and dividends, as well as Social Security and other government entitlement programs. In 2014, those figures reached 22 billion in payments, an increase of 4 percent over the previous year.

A host of options that allow businesses to invoice and make payments over the Internet have multiplied. PayPal, a system that helps small sellers, particularly eBay users, to collect and make payments for online purchases has tried over the years to target business customers as well as garner payments made by retail buyers. The PayPal company has slashed withdrawal times to “next day” payments and in 2014 introduced a group invoicing, a feature that allows companies to send as many as 100 invoices at the same time.

Finance companies have developed a number of other platforms now that offer increased security while still maintaining the paper trail required by accounting departments. In 2000, a meeting in Starbucks between entrepreneurs Michael Praeger and David Miller led to the launch later that year, of a Software-as-a-Service platform that aimed to provide a simple Accounts Payable process “from invoice receipt through vendor payment.” From some of these early ideas, many companies have adopted a similar business model and can now offer this same service of online payments and transfers.

Even as companies now have a multiplicity of different ways of paying their suppliers and service providers, from corporate credit cards to automated transfers and online bank accounts, one method of making and recording payments continues to thrive: paper. In April 2015 Pyments.com reported from an online discussion that checks were usually the only method of payment most financial institutions and businesses ever saw even as late as the 1990s. The first years of the new millennium saw a slow move to ACH payments, but companies still continued to worry about the reviewing processes when they couldn’t pull out a physical copy of the check. It took years to get companies and financial institutions to feel safe without someone having a hard copy of a check on hand right there in front of them.

Even as businesses are beginning to digitize their payments, an overwhelming 50 to 60 percent of businesses continue to use paper to process their B2B payments.

From the first metal “credit cards” kept in stores and rubbed with inked paper – to updated online platforms that can be used in any office and accessed by any customer – the ability to make B2B payments has changed dramatically. There still remains complex accounting needs of businesses—the need for security to ensure that funds are safe, and for records that allow accounting staff to ensure that payments were made and declared. There will continue to be the quest for low fees so that the payment system doesn’t eat into business profits. Many businesses find it difficult to change and shift from tried and trusted methods of making B2B payments. Too many businesses have chosen to remain with what they know best, and what feels familiar – even as better options have developed. Companies are still spending too much money and too much time maintaining and organizing their payment processes.

In the next chapter, we’re going to look at the current most popular methods of making B2B payments, and we’ll assess their strengths and weaknesses.