The CFOs Guide to Digital B2B Payments

Digital payments are the key to unlocking optimisations in payment transactions. Digital payments have been the way for many B2C transactions for years but haven’t gained the same prevalence in the B2B space until recently. With the COVID-19 pandemic accelerating e-commerce and increasing customer expectations toward using technology, B2B organisations will inevitably march toward digital payments.

But the march has been slow – the reality is not many companies have adopted B2B payment automation yet. A study published in the Next-Gen Digital Payments Report shows that 51% of the B2B respondents are yet to digitalise their accounts receivables and accounts payables, which means more than half of the respondents do not have a solid payment digitalisation plan.

Here, we discuss what digital B2B payments are, the challenges of B2B payments and how you can start to leverage digital technology to improve your payments process. 

What are Digital B2B payments?

Any payment or receipt of money for goods or services made between two businesses using an electronic medium is a digital B2B payment. B2B payments can be a one time or recurring transaction depending on the contractual agreement between the buyer and supplier.

Digital B2B payments include online payment platforms and use technologies such as APIs for integration with other software and automation to streamline workflows. Advanced technologies such as blockchain and artificial intelligence (AI) are also making their way into the B2B space. It won’t be long before we see these technologies further redefine digital payments.

Economies worldwide recognise the importance of digital technology in improving business efficiency and profitability. In Australia, the latest tax break incentive for businesses adapting digital technology – including payment systems – emphasised just how crucial it is in building healthier businesses.

Additionally, giving your B2B clients an automated payment system will ensure you:

• Receive your money on time, every time. 
• Protect your financial details and the safety of your clients. 
• Have less to worry about defaulters. 
• Have sufficient funds to ensure you can supply your goods to your buyers.

Related blog post: Modernizing B2B Payments For the New Normal

B2B payment methods

There are different options available for businesses regarding payment receipt methods. Here are the most-commonly used B2B payment methods with their pros and cons.

Paper cheques 

Paper cheques are still one of the most popular payment methods today. It is much safer than direct cash transactions, and they are also the easiest to adopt – being used for years as a standard B2B payment method.

Pros:

• Cheques are a great way to encourage conservative or old-school companies who haven’t digitised yet, to do business with you.
• Since cheques don’t charge convenience fees, they will be inexpensive for your clients.

Cons:

• Clearing a payment using cheques is time-consuming.
• Start-ups and businesses run by millennials and younger cohorts may not be as familiar or interested in paying you through paper cheques because they’re accustomed to digital payment systems.
• Both the paying and receiving companies need always to keep a minimum balance at all times.

Direct Debit

Direct Debit authorises another party to collect payments from an account when they are due by completing a Direct Debit Authority Form. Direct Debits are used for any kind of payment, but it’s most often used as a safe and convenient way to make recurring payments.

Direct Debit used to be the privilege of bigger and more established businesses with many customers, but technology has democratised and simplified the systems involved. Now any business – big or small – can benefit from the Direct Debit payment’s speed, convenience, and security. 

Pros:

• Automatically collects payments from customers, so payments are never forgotten or delayed.
• Direct Debit payments integrated with your accounting system can save you a huge time in reconciliation.
• Cost-effective – Direct Debit transactions fees are much cheaper than credit card fees which charge around 3-5% for transactions.

Cons:

• Possibility of payments not being collected due to insufficient funds.
• There’s a certain level of trust required for customers to authorise direct debits. Customers might need some time to feel comfortable approving suppliers to collect automatic payments. 

Wire transfers

A wire transfer is a bank transfer wherein your client has your bank account details, and they make the payment directly from their account to yours. 

A wire transfer is different from a Direct Debit in that it is not limited to the currency of a business’ local banking system. Wire transfers are also usually processed within the same day, whereas Direct Debits can take a couple of days.

Pros

• Wire transfers help you receive same-day payments.
• You can receive wire transfers from both domestic and overseas bank accounts.
• Wire transfers are safe, and you can track your receipts using the ID generated for each transaction.
• For businesses dealing with international clients, wire transfer payments can easily be converted to your local currency.

Cons

• Wire transfers are expensive compared to ACH or Direct Debit due to processing fees, service tax and foreign currency conversion fees (if applicable). 
• If your client wants a refund, you will be unable to reverse the transaction.
• If your payment receipt transaction ID becomes known to someone else, it is easy to manipulate the wire transfer.

Credit cards

Credit cards are a borrowing mechanism that banks give both B2C buyers and B2B companies. Any business using a credit card can borrow money from their bank to make payment to you for the products/services they have purchased from you. But you will always be assured of your payment since the bank pre-pays you on your buyer’s behalf.

Many banks offer credit cards that are specifically designed for business payments. These cards also offer desirable deals that enable users to waive certain fees, earn bonus points, allow business savings and avail of a cash advance facility, amongst other features. 

Pros

• Easy set-up for suppliers and adaptable to digital payment platforms
• Convenient to use for your clients.
• You receive payments quickly since your clients borrow money from their bank to pay you.
• Banks always share a credit card receipt report with their B2B clients, helping you track who made payments to you and when. You can also identify any clients who have defaulted their payment to you.

Cons

• Merchant fees can be expensive. However, there are online payment platforms that will let you surcharge the fees at checkout, or absorb all or part of the fees.

B2B Payment Terms

B2B Payment Terms sets the payment agreement between you as the supplier and your clients. While creating a standard agreement across all of your clients is ideal and is the simplest option, the reality is each of your clients may require different terms depending on their financial situation.

Instalments

Instalment payments allow your customers to choose a plan and pay in portions rather than paying full price up-front. With this agreement, you can receive consistent payment amounts to your business over the time period you’ve agreed upon, thereby reducing your financial risk by not waiting for your client to pay the total amount.

You can sync your instalment payments to a milestone met. We’ll touch upon milestone payments later in this article. But to illustrate, let’s say you receive the first instalment of your entire bill when you deliver the first batch of raw materials to your clients. Then you continue to receive each instalment as subsequent deliveries are made. You can choose even to charge interest on instalments, but that’s not mandatory. An equated monthly instalment (EMI) is an example of a commonly-used B2B instalment scheme.

Instalments are essentially a flexible payment method and can help with customer retention. You can offer your clients the payment technologies mentioned earlier to make each instalment payment.

Milestones

Milestone payments are frequently used in the services industries and help buyers build trust with suppliers. Payment upon delivery is a good example of milestone-based payment. For suppliers, milestones help you retain your end of the deal—you receive the payment only when you make any progress to the service/product you have to deliver.

Net Terms

In B2B transactions, it’s common for suppliers to extend their payment terms to their customers – called Net Terms. Net Terms allow businesses to pay for orders within a certain period after invoicing instead of paying it upfront.

The most common set-up is for businesses to be allowed to pay 30, 60, or 90 days after they receive goods or services, with no interest. From a buyer’s perspective, this can be beneficial to their working capital as they have a chance to resell goods or to use the raw materials for manufacturing and send the goods to distributors before the bill is due. Some suppliers may even offer discounts if the invoice has been paid before they are due.

As net terms are important to buyers, it will do well for suppliers to offer them. Suppliers benefit by providing a more attractive payment scheme, thus improving customer retention, and that is reflected in an improvement in sales and an increase in order volume.

However, Net Terms can also affect the supplier’s cash flow. The supplier must monitor payments via Accounts Receivable automation to ensure that payments are made on time as agreed upon by the two parties.

Challenges of B2B Payments

Choosing a B2B payment option isn’t always easy. Here are a couple of challenges that you need to look out for when evaluating which B2B payment method to offer your customers:

1. Interoperability between businesses – Check if the payment method is compatible with your client’s preferred method. Or, select two or more payment methods that can support all of your current and future clients.
2. Security issues – When receiving money, your payment method should offer you and your client security. It’s best to check what security features each method offers before selecting one.
3. High transaction fees – Depending on the payment method, your transaction fees can range from 2% to 5% per transaction. This may drive away budget-conscious buyers who don’t want to pay these processing fees. 
4. Lack of visibility and efficiency – Some payment methods aren’t transparent, and it can be hard to identify which stage of the transaction your payments are in during processing periods. 
5. The disparity in fund payment days – While some payment methods offer a 24-hour payment cycle, others can take up to 30 days to clear. It can be challenging to keep track of what is owed to you and when you may receive it.

To address the issues surrounding B2B payments, the efficiency and reliability of systems used are essential, and the ability of payment systems to accept various payment methods.

Benefits of Digital B2B payments

Understanding the nature of B2B payments and the issues that can arise during transactions has paved the way for B2B payment automation. And with digital technology becoming more sophisticated yet accessible, automation takes a step further with digitalisation.   

Indeed, Digital B2B payments are increasingly becoming the payment method of choice for many businesses in today’s economic landscape. Here’s why:

• B2B digital payments involve self-service platforms for customers, which they can use to pay invoices irrespective of their location and the time.
• Modern B2B payments automation technology has safe authentication measures. From credit card pins to 2FA on mobile/desktop payment management apps, you can safeguard the financial privacy of your client and yourself.
• Digital transactions are easy to track, with payment details stored in easy-to-access databases – reducing duplication and ambiguity.
• Digital B2B payments are less expensive in the long run. Processing fees associated with B2B digital payments are low compared to traditional payment methods like paper checks.
• Automation helps you maintain good relations with all of your stakeholders because of the ease, efficiency, and promptness of digital payments. 
• Many digital payment systems integrate with AR automation software that can generate detailed reports about your financial health. You can use these reports to gain insights regarding customer payment behaviour to help your collections strategy.

Related blog post: Top 5 B2B Payment Hacks for Digitising Your Business

Steps to digitalise B2B Payments

According to new predictions made by FIS in the latest Global Payments report, only 2.1% of payments will be made by cash in Australia by 2024.

There’s no doubt that there is an ongoing shift toward digital payments. With the benefits accompanying it proving to be substantial, now is the right time to start planning how you can digitalise your payments. Here are some tips to help you get started:

1. Think of your B2B payments experience as a B2C experience. Consider what people may prefer in a payment system and try to make it happen for your B2B needs. Features such as a digital ‘Pay Now’ button on your invoices and SMS reminders can make the payment experience better for your clients.
2. Identify the nature of your B2B payments system. Figure out what may need changing and how you can improve your payments management system. For instance, you may need payments to automatically write back to your ERP so you don’t have to worry about reconciliation. Also, identify what you wish to retain from the old system if it is good.
3. Think of which payment methods your clients are most likely to use and try to offer multiple payment methods. Some clients might prefer credit card payments, while some may prefer a direct debit payment. The easier it is for them to send payments, the more likely they will do business with you and pay you on time.
4. Make available digital offers that provide your clients with the buy-now-pay-later options, helping you improve client loyalty. Consider financing solutions to offer to your clients for them to be able to complete payments.
5. Implement identity-management protocols and premium security measures to safeguard your payment system users.

Transform B2B Payments with ezyCollect

Contact an accounts receivables automation expert to help customise a digital payment system for your business. Book a free demo of ezyCollect and discover how AR automation and B2B digital payments can work for you.