Thursday, July 27, 2023

B2B: Why the Pain? - Thanks to Glenbrook

 B2B payments keep commerce moving, but B2B transactions can be incredibly painful for both senders and receivers.

  • What makes B2B transactions so difficult, even as digitization transforms other business processes and areas of the payments world? 
  • And What technologies are helping finance teams improve their B2B payments experiences?
 The payment piece of B2B payments is relatively simple; the hard part is data.

Understanding the B2B Context

Commercial activity requires businesses to pay each other on an ongoing basis. Businesses are constantly sending and receiving payments from their customers and suppliers (generically, their counterparties). Some of these transactions are straightforward and akin to C2B transactions: think of your team buying whiteboard markers on a company card, for example. But about half of B2B transactions are invoiced transactions made on credit. This is a unique, distinctly not consumer-like transaction type rife with data challenges, colored by tension between Accounts Payable (AP) and Accounts Receivable (AR) departments… and ripe for improvement.

We think of invoiced B2B transactions in terms of what we call the “financial supply chain.”* This is the end-to-end view of a B2B transaction, from purchase order to invoice, payment, and reconciliation.

The underlying reason for this is that information related to the transaction is exchanged between counterparties leading up to and alongside the transaction, and this information might change between stages of the financial supply chain… or be disputed by the other party. This exchange of data is generally manual and can lock up liquidity as it drags on.

From PO to Invoice…

This data exchange begins with the purchase order, or PO. When a buyer makes a purchase, they send a PO to the supplier explaining what they would like to buy and detailing the credit terms of the transaction. Think of this as the first data element that is passed between the buyer and supplier. Suppliers ingest the PO and fulfill the order. In the back office, order fulfillment is translated into the creation of an invoice describing the order that will be provided to the buyer. 

This is the first opportunity for the data challenge to manifest. The invoice might not represent the same products and services as what the buyer ordered. The supplier’s warehouse may have run out of the buyer’s preferred material, or the purchase may have been negotiated by both parties after PO receipt. Then, the order is fulfilled and invoiced. 

…to Payment and Reconciliation

The next step in the financial supply chain is payment. As we mentioned earlier, payment is generally simple. But the payment must be accompanied by information describing what the payment is for. This is referred to as the remittance detail. Confusion alert: you may hear the term “remittance” used elsewhere in the payments community to describe international P2P payments, such as those made by a worker in the US to their family at home in another country..

This is the next step where a “data mystery” may emerge. The remittance information may not match the information included in the invoice, which may not match the PO. 

So what can organizations do?

The first step is digitization. A startling one in three B2B payments are still made using paper checks in the US and Canada, according to AFP. Even when businesses transact using electronic payment instruments, data might travel via paper or PDF. Getting that information into a machine readable format as early in the transaction lifecycle as possible allows businesses to more effectively manage their payments experience. Digitization opens the door to automation: with AP and AR software can use data elements in the PO, invoice, or payment itself to make business decisions.

Automation in turn opens the door to machine learning. As you continuously ingest data and make decisions using digital information (rather than your own AP/AR acumen or intuition), you can inform machine learning models that begin to predict common issues and corresponding solutions. Think of this as the computer learning from the exception queue.

For example, one supplier might always send you an invoice with an unusual date format. After seeing your AP clerk manually adjust this, your AP software tool can learn to make this change on your team’s behalf.

On the AR side, machine learning can also help predict which customers are more or less likely to pay on time, helping your treasury team better predict cash flow. 

New standards and systems

But despite all these positive possibilities, it might strike you that automation and machine learning are band aid solutions that do not address the root causes of B2B pain. We view automation and machine learning as exciting innovations that meaningfully reduce the pain of B2B transactions, but we are also interested in the opportunity presented by emerging standards, namely ISO 20022. Put simply, ISO 20022 is a format for financial messages that aims to make such messages machine readable. In the ideal world, messages created by one software system can be read by another software system on the opposite side of the transaction and will include all necessary information to tie payments to invoices, even where there are differences between the two. ISO 20022, is employed by many fast payment systems; as fast payments mature in the U.S., we look forward to seeing the impact of ISO 20022 on B2B transactions. We’ll explore what we think this impact will look like in our next B2B Payments Views post.

Aim for incremental improvements

In the meantime, B2B payments will move incrementally towards better outcomes for buyers and suppliers as they continue to adopt software solutions that improve their process efficiency. The B2B space is huge, complex, and slow-moving; we do not expect a single provider or network to solve the problems of the entire ecosystem anytime soon. But between new technology and new standards for future technology, we are hopeful that finance teams will feel less pain from B2B transactions.

*Not to be confused with supply chain finance, or reverse factoring

No comments: