In the world of consumer payments in 2017, seeing a paper check out in the wild has become a genuinely rare event. Sure, there’s the occasional rent check or the $100 birthday check from Great Aunt Sue, but for the most part, the debit card put a fork through the heart of the consumer’s appetite for writing paper checks.
Not so on the B2B side of payments, where payments between trading partners remain dominated by the 20th-century’s favorite payment method — where, staggeringly, 50 percent of all payments between business are made by check.
As horrifying as that sounds, that number is probably underestimating its use, when the businesses trading are the “Mighty Middles” — businesses with between $5 million and $1 billion in annual sales, where, according to AvidXchange CEO Michael Praeger, it’s even higher.
“That number [50 percent] is probably skewed upwards a bit by the larger enterprise-size players,” Praeger noted. “If you take the middle market, it’s probably a lot closer to 70 percent to 80 percent. They are very clearly an underserved market.”
A market that Praeger’s firm, AvidXchange, is in the business of serving by offering invoice automation and payment processes services solutions for those “Mighty Middle” businesses in North America. Currently, the firm boasts integrations into 130 accounting and other back-office systems across 5,500 customers in North America.
It’s a firm that, as of yesterday (June 8), also announced $300 million in new funding to expand that platform further — and a partnership with one of its newest investors, Mastercard, in launching the Mastercard B2B Payments Hub.
“Who likes paying people through a million different methods or being reliant on paper checks?” Mastercard’s Head of Global Commercial Product Development Richard Crum asked.
“The problem,” Crum said, “is that medium-sized businesses have so far missed out on automation. The enterprise players have teams of people and tech budgets to manage that — even larger medium-sized businesses don’t have that, and so they missed out. And that is why the check lives on today, after many, many years of trying to fight it off. Medium-sized businesses never had the tools and technology to make that possible.”
But not for long, Crum and Praeger added. The new Mastercard B2B Payments Hub will enable an end-to-end automated solution for invoices and accounts payable to those businesses. And those services will be delivered through Mastercard’s issuing banks. The solution requires no changes to the accounting and backend software already in place at businesses and will allow Mastercard to offer these businesses easy access to more digital payments options, including virtual cards.
Building a B2B Payments Hub
Payables are a time-consuming and onerous process for SMBs, and having a solution that automates invoicing and access to digital payment methods, Praeger said, is something that SMBs find particularly valuable, especially if it can be done via an integration via an accounting solution that’s already in place.
“What we have heard most often from our SMB customers is that any payables solution has to originate in the accounting system, because they aren’t going to a bank portal to make payments,” Praeger noted.
The Mastercard partnership, Praeger noted, not only lets the firm scale their solution via Mastercard’s robust network of issuing banks — but also gives AvidXchange the chance to help SMBs transition from a check-dominated world to one that includes virtual cards, the ACH network and the next generation of payment innovations.
“This continues on a theme at Mastercard that we are growing beyond the world of card payments into the whole world of electronic payments that we can help bring to our customers who are consumer and business,” Crum added.
Working with Avid, Crum believes that the network will not only see an acceleration in the use of Mastercard virtual cards, but also the introduction of new payment types that leverage ACH rails and the ability to send more data across those rails — made possible via the recent acquisition of Vocalink.
Because while payments are important, the bigger picture and the bigger set of needs that the hub is designed to tap into is helping all sides of the business-to-business transaction run more smoothly with the end goal of better managed cash flow — possibly the only universal issue of all small- and medium-sized businesses everywhere.
But that, both Crum and Praeger noted, is what really sets the Hub apart — it isn’t really just a payment solution so much as a network designed to add convenience and improve all sides of transactions.
Also important to the “Mighty Middles,” Prager added, is that these businesses don’t have developed treasury resources to manage vendor relationships and payments options.
“What these firms want to do is to create an invoice list, hand it off, have everyone get paid and have the accounting system reconcile automatically,” he said, adding, “the goal of automation is to do less, not more, after all.”
Unlocking Value
While the Hub will do more than it does today as time goes on, both Crum and Praeger noted that its clients exist in all parts of the transactional relationship — they have buyer clients and supplier clients.
Buyers, Praeger noted, get the great benefit of transparency and real-time expense management.
“There is no invoice sitting in a regional back office on a desk threatening to bring down the entire spreadsheet,” Praeger noted.
Suppliers, however, get the benefits of automation in invoice generation and the benefits of the cash flow management too.
“This is where we have really evolved in the last 18 months: designing the supplier interface and the tools associated with managing their cash flow so they have visibility into their cash position at all times,” Praeger said. “Suppliers can make decisions to accelerate their payment cycle to next day — and the banks that are integrated with the Hub can help facilitate the funding of that kind of transaction — and we can make sure they have access to the right kind of tools to make those calls,” including data about payables cycles and trends that can help issuers manage risk and create specialized B2B lending products.
And it will likely be that access to data, Crum noted, that will hopefully draw more smaller and middle-sized banks into the Hub.
“Virtual card programs started at the larger banks because they have the capital and the larger enterprise customers that can justify the expense of devising an onboarding process for those customers,” Crum explained. “Giving those banks access to the Hub and Avid’s solutions will smooth the road for many of these smaller banks.”
What is remarkable about the B2B space, both men noted, is how ripe for innovation it has remained — and how long into the digital age it has remained that way. Companies that were once resistant to these kinds of changes are now actively seeking them out and finding that the market as present has a hole.
A hole that Mastercard and AvidXchange are going to make a very large and scaled-up effort at filling in Q4, when this service goes live in the United States. And yes, it is geared for global expansion from there.
Will automation and online payments finally #KillTheCheck? Hard to say. Until now, it has looked immortal.
But businesses don’t like them, and if they have an easy way to move away from them, well, maybe the days of the paper check in the B2B payments world might actually come to an end. Mastercard’s B2B Payments Hub, at least, seems determined to give it a go.