Why VC’s Aren’t Investing In B2B

Welcome to PYMNTS.com’s VC Voices: a weekly column where we bring you commentary from the best of the best around the world of payments investment. Want to know what the biggest backers of our industry’s innovators and disrupters think? We give our VCs 500 words of unedited space to do with as they please, so you’ve come to the right place. 

This week, we’re joined by Matt Harris, managing director at Bain Capital Ventures, who notes the incredible opportunity that exists in the B2B payments space.

By Matt Harris, Managing Director, Bain Capital Ventures

As anyone paying attention has observed, the venture capital world has grown increasingly obsessed with the consumer payments eco-system.  At the physical point of sale, we’ve seen the explosion of mobile payments acceptance and tablet POS systems.  In the card-not-present environment, we’ve seen innovative gateways and processors offering embedded payments and elegant UX based on tokens.  We’ve seen innovations in peer-to-peer payments, from CashEdge to Dwolla to now Clinkle, each with some aspiration to eventually serve merchants as well.  On the cardholder side, the wallet wars continue to rage, despite the lack of any semblance of user adoption. 

So all of that is interesting, in that it focuses on the $16T US consumer/retail payments market: $Trillions usually do get people’s attention.  So why is it that comparatively so little focus has been paid to the B2B payments opportunity, which is estimated at $78T … five times larger?  Why has well under 20 percent of venture funding in the payments space gone towards business payments? 

The primary reason is that the interchange model has created a robust and standardized profit pool in consumer payments, delivering 200-250 basis points of value to the issuer, network and acquirer; the same model is only modestly penetrated within B2B payments.  That said, banks are earning phenomenal revenues and profits in wholesale transaction processing, averaging 45 percent pretax margins.  And customers are feeling the pain:  the average check payment costs over $20 to process, between sender and receiver, and most B2B payments are made with paper checks in the U.S.  Shockingly, paper check usage is still growing in the category, as the rise of alternative solutions is still in its infancy.

At Bain Capital Ventures, we’re very focused on this opportunity.  There are lots of ways to look at this market, but we use the following chart as illustrative of the key segments and some of the leading players.  In the comments, please let us know what companies we are missing, and we’ll keep this updated.  

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