Why banks should partner with fintechs for B2B payments
Banks have never done B2B payments well, says Tana Law. When it comes to finding solutions for customers, banks could benefit from fintech partnerships.
2015 was a banner year for fintech companies, with a record amount of investment flowing into innovative companies. Banks are taking notice, and some have even started looking around for fintech partners. In April 2015, Chase Bank CEO Jamie Dimon made headlines with his letter to shareholders. ‘Silicon Valley is coming,’ he wrote. ‘There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking … We are going to work hard to make our services as seamless and competitive as theirs. And we are also completely comfortable partnering where it makes sense.’
One area where it makes sense is B2B payments, and we’re starting to see banks express interest. It’s a win-win-win, for banks, fintechs and most of all for customers.
Banks have never done B2B payments well. That’s why so many companies are still writing paper checks. Electronic payments – ACH and card – are separate programs within the bank, requiring a separate accounts payable workflow for batching and transmitting each. Cross-border payments are another animal altogether, literally requiring payments to be made one at a time.
Banks haven’t innovated in this area for decades. For ACH payments, they typically contract with white-labeled service providers who provide a portal where a customer can submit an ACH file that transmits payment information through the bank’s pipe. It’s a very rigid pipe that can only handle this specific type of file. If a customer wants a card program, that’s a different program and a different workflow and file. There are little or no services tied to any of these payment programs; the bank’s role is mainly to move the money.
This leaves accounts payable with a lot of manual work to administer electronic payments. On the front-end, they’re constantly chasing down supplier payment preferences and bank account information, taking on the responsibility for handling it in a secure manner. On the back-end, they’re saddled with a never-ending process of reconciliation, payment follow-up and error correction.
Moving the money is arguably the easiest part of B2B payments. It’s all the manual work that has to happen before and after that eats up the most resources. As a consequence, most companies aren’t utilizing electronic payments anywhere near as effectively as they could.
Looking for a way to stay in the game
This is probably not an area where banks can make their services as seamless and competitive as fintechs. If banks wanted to step up to provide all the necessary services around B2B payments, they would have by now. Even if they suddenly decided they wanted to do the services piece, they’d still have to contend with their legacy technology. Banks historically haven’t invested in technology. It would be expensive for them to catch up, and unlikely they would want to try. They may have tons of money, but they invest where they’re going to make the most money, and that isn’t in B2B payments. Payments is just a small piece of their business, but it’s a service commercial customers want.
Specialized fintech companies using cloud technology, supplier networks and good old-fashioned human-delivered customer service can do B2B payments at scale, and at a price banks can’t match. As banks see technology companies chipping away at their strongholds in lending and consumer payments, they’re realizing that the ‘I go to my bank for everything’ mentality is changing. Fintechs are taking aim at every part of their business. In payments, tech companies are grabbing market share from banks in the $3tn consumer payments space. Now banks are looking over at the $38tn B2B payments market for opportunities.
This is definitely an area where it makes sense for banks to partner rather than build
It’s a win for bankers to bring their customers an enterprise-level payments solution, even if it’s not homegrown. They retain their trusted adviser status with the customer. The bank benefits financially as its B2B payments partner uses technology and services to increase the volume of highly profitable card payments flowing through their pipes. This is definitely an area where it makes sense for banks to partner rather than build.
It makes sense for the fintechs, too. Banks have the customer relationships, and for the most part people still trust their banks and see them as safe. Fintechs are as safe and secure as banks; they’re still using regulated bank pipes to move the money, just adding technology and services to make the payments in a smarter, more efficient way. Still, they don’t have the long track record of banks, so if the customer’s bank says, ‘This is our payments partner’, it provides a certain level of comfort for doing business with a fintech.
The biggest winner is the customer. They can free themselves from writing so many checks, and make about 80% of their payments electronically. They can maximize card payments and make money from card rebates. They can hand off the supplier information management piece, roll all payments into a single workflow and let the payment provider handle tedious follow-up.
Customers are looking for solutions. It’s mattering to them less and less whether it comes from a bank. It’s unlikely that banks will launch modern B2B payments solutions in the foreseeable future, but highly likely they will look to grow their piece of that pie through partnerships.