The Real-Time Payments Receivables Conundrum
P.T. Barnum perfected the art of showmanship, a reputation burnished by the spectacular fame of the traveling circus and side show that bore his name: the Ringling Bros. and Barnum & Baily Circus. Barnum grew a series of small but well-marketed performances of human oddities into a full-blown traveling circus/freak show extravaganza for 146 years before the “big top” folded forever in 2017.
FYI, his first show in 1841 featured a woman who was then reportedly 161 years old and George Washington’s nurse.
Lesser-known about Barnum are his many business and financial ups and downs, including his fight back from bankruptcy in the mid-1800s. In 1880, he published a book titled “The Art Of Money Getting” to share what he had learned as an entrepreneur and local politician in the town of Bridgeport, Connecticut, where he and his family lived.
True to Barnum himself, the book is filled with quotable quotes – including an entire chapter titled “Don’t Blab,” advising entrepreneurs to never talk about losing money, and one reminding them to always “Preserve Your Integrity.”
One quote in the book that is particularly relevant to one of the hottest topics in payments today goes like this: “Comfort is the enemy of progress.”
In business, comfort is commonly referred to as inertia.
Inertia can be the death knell of any innovation – and in payments, it’s the proverbial showstopper.
For innovation to ignite, stakeholders must find enough value to switch. It’s not enough for switching to be easy (although that definitely helps). Switching has to create enough value to invest in the people, processes and technology to make the move. And they must be convinced that switching will give them a shot at improving their customer relationships and business propositions to get a return on those investments.
That is the crux of the dilemma playing out on the new real-time payments rails arena as it relates to the B2B side of the payments ecosystem. That’s where the big payments flow – and where the big opportunities for innovation, change and disruption lie.
Businesses now see the value and competitive opportunities in many C2B, C2C and B2C real-time payments use cases. They are investing in ways to make them happen right now, using the rails available to them. For example, businesses are paying insurance claims to consumers and loan proceeds to borrowers in real time – and banks and FinTechs are enabling payments between people in real time.
Businesses and marketplaces see payroll as an emerging real-time use case, to pay their W-2 workforce and avoid tying up their cash two days in advance with a payroll provider and also to pay gig workers instantly as services are performed. There, existing rails and new flows are giving people and SMBs access to funds faster with an obvious ROI for the business.
Interest is also building to make instant settlement available to qualifying SMB merchants via their payment service providers. PayPal, Square and Stripe already are.
Clearly, those use cases are game-changing – and the ROI is direct and compelling.
But those use cases don’t drive the bulk of payments flows, which happen between businesses – and, increasingly, when those businesses transact cross-border. Many of these transactions are between large buyers and small suppliers. There, payments terms – not the speed of the rails or whether they’re real-time or batch-based – dictate how fast payments move between buyers and suppliers.
And that’s where inertia reigns supreme.
Real-Time’s Receivables Dilemma
Cash flow may be king, but as that wise cartoon sage, The Wizard of ID, told us in 1964, “he who has the gold makes the rules.”
Buyers in the B2B payments ecosystem have the gold and, therefore, can largely make the rules about when money flows out of their bank accounts and into the sellers’ accounts. They decide from whom they will buy, how much they will spend on those purchases and – most relevant to payments – when they will pay for them.
Terms – ranging from 30 days (which, for most suppliers, is like dying and going to heaven) to 45, 60 or 90 days, or even longer – are often dictated in the end by the buyers, particularly larger ones. Those decisions are driven by one thing: how long they can push out payment without losing access to a valuable supplier.
Suppliers, unless they are large and/or very strategic to the buyer, typically have very little to say about it. They can decide not to transact with buyers that take too long to pay, but that rarely happens, as they want the business. Buying organizations not only operate with set payments terms, but also have strict policies and procedures baked into their payables processes.
That dynamic is the bedrock of how business is done between trading partners today – and the very intractable B2B payments dilemma that characterizes those trading partner dynamics.
It’s a dynamic that can be solved by access to speedy real-time rails – but it also comes with a hefty price tag for suppliers.
PYMNTS research estimates that in the U.S., buyers owe suppliers $3.1 trillion in outstanding receivables. That trade credit, which suppliers have extended to buyers by accepting their terms, isn’t what’s late – it’s what’s owed.
And a large part of that is owed to small businesses from much larger businesses.
The payments to support that $3.1 trillion are all scheduled by payors to be paid according to those terms, scheduled at the last possible minute so the money can stay in the buyers’ accounts for as long as possible.
Real-time rails might give buyers access to their funds a few days longer, and some big payors might find that valuable. But for suppliers, receiving a payment over real-time rails on day 45 or 60 is the same old, same old – it doesn’t solve their real payments pain point, which is the need to get paid faster.
Why Incentives – And Business Models – Matter
At the heart of this trading partner dilemma is the question of how fast is fast enough, and how much each is willing to invest to make payments instant (or faster), in a world in which terms still dictate how fast payments move and buyers still control those purse strings and those decisions.
However, recognition is dawning that to ignite a faster, even real-time payment network, simply making investments to move from a batch-based system to one that clears and settles in real time isn’t enough to move the B2B payments innovation needle. Igniting new networks and new ways to pay requires going back to the basics – understanding that there are two distinct customer groups for every platform, and that both of them must find enough value to invest in trying something new.
At the PYMNTS B2B payments event held two weeks ago, our many conversations that day led to a new and interesting call to action for FIs, innovators and corporate treasurers.
Warning: Ignore the supplier at your peril.
It was an interesting admission, a reality check of sorts, that most of the innovation in B2B payments to date has been to the payors’ benefit. After all, he who has the gold makes the rules, and is eager to consider innovations that enable them to make and keep more of it.
But those efforts – and the lack of supplier incentives for accepting many of those innovations – haven’t moved the B2B payments innovation needle as far or as fast as many across the payments ecosystem might prefer. Even if the suppliers aren’t interested in new methods of payment, they won’t put any pressure on buyers to move – and those buyers won’t have much interest in doing anything differently than they do today.
Innovations are starting to emerge that pay suppliers faster – much faster – yet give buyers the chance to hold onto their money for as long as they want or need to. That is, innovations that benefit both sides of the platform.
These programs are varied, as are the rails that they ride, but they all share a few common characteristics.
Many leverage existing rails, but use tech to solve for the underwriting or fraud issues that prevent good funds from moving faster between accounts. Many also leverage existing contractual relationships to create network effects across banks to accelerate the delivery of those good funds.
Nearly all of them leverage business model innovations that play to the inherent trading partner standoffs, which reinforce the notion that comfort could remain the enemy of progress. Suppliers will pay to get their money faster, but want to have the option to do so (or not). Similarly, buyers want the option to pay faster at a discount if they so choose.
Only when both sides of the transactions are assured that there is enough value will we see FIs and their corporate customers move from being the couch potatoes of B2B payments to being agents of innovation and transformation.
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