B2B Payments Surpasses B2C In Profit Potential, Experts Say

In terms of innovation and profits potential, B2B payments are surpassing those in B2C according to a new report. The report was released by the Global Payments Innovation Jury, an group comprised of 70 industry executives from 37 countries.

Released last week, the report assesses payments innovation in the geographic and industry hubs of the world. It contained several surprising nuggets of information, including shifts in geographic locations of payments innovation hubs and which technologies are — or, more importantly, aren’t — likely to make an impact.

Perhaps most surprising was the Jury’s support for B2B payments.

“Overall, the Jury considers the business payments sector to have the best profit potential going forward,” said the report.

According to the findings, B2C payments’ low-margin, high-volume business model — with a continuing expectation among consumers that innovative services will be offered for free — is a significant growth barrier for the industry.

“In contrast, the majority of the jurors believe that B2B payments firms tend to deliver a service for which it is easier to build a profit margin,” the report said. “This is because business customers are more used to being charged for payment services and because, to date, there has been less intense competition in the B2B payments market.”

According to data compiled by the Jury and sourced from PitchBook, investment in B2B technologies reached $12 billion between March 2015 and March 2016, a 40 percent increase. Investments in consumer solutions doubled that figure but represented a nine percent decrease year-over-year.

“Consumers are hard to acquire and hard to retain,” said one juror. “It’s much easier to have a path to sign up a business.”

“B2B has better profit potential, however, there is a lack of appreciation in many markets for this and our local banks are still trying to do it with legacy solutions,” said another.

Regional Differences

Overall, members of the Jury agreed B2B payments represent major potential, but the report noted that jurors differed in opinion based on their geographic locations.

For example, those based in Asia, Africa and the Middle East still believe consumer payments hold the largest potential to disrupt their markets. This is due to an ability to provide financial services to un- and under-banked consumers, and also bolstered by rising mobile device adoption in those areas.

Asia was pegged as the hotbed of the world’s payments innovation space. The Jury estimated 64 percent of all payments innovation would take place in Asia over the next two years.

While it does not occupy the top spot, Europe’s ranking as the number-two market for payments innovation is noteworthy, the Jury said, because it “leapfrogged” North America, Latin America and Africa.

“While Europe has never been rated favorably for payments innovation in the past, the 2017 Jury sees real grounds for optimism,” said John Chaplin, Global Payments Innovation Jury chairman, in a statement. “There is now a much more progressive regulatory environment in Europe, world-leading innovation hotspots have developed in London and Berlin, and we are starting to see that consumers are more willing to give new financial service providers a go.”

The Jury predicted Europe would be the center of 14 percent of the world’s payments innovations in the next two years, surpassing Africa (12 percent), North America (8 percent) and Latin America (2 percent).

The report cited London as a particularly bright spot on the continent, where more than 600 payments startups launched every day in the first six months of 2016. Coupled with the fact that many established payments players are choosing to take root in Europe, the region seems ready for innovation. With PSD2’s potential to continue boosting innovation, regulators are also poised for progress.

The Hype Of Technology

The Jury determined that certain technologies are driving patterns of innovation, according to the report’s findings.

For example, the report found that faster automated clearing house (ACH) capabilities across the globe have significantly impacted a market’s ability to innovate, and have particular potential in the B2B payments space.

Still, the Jury found the consumer-to-business space to have the highest potential for impact in the next three years, with faster ACH capabilities ready to disrupt bill pay as the default method of payment. Conversely, faster ACH is unlikely to have a major impact in the area of point of sale (POS), the report found.

A lack of dispute mechanisms and a continued lag in real-time ACH were listed as top barriers to faster ACH capabilities gaining prominence among other payment rails of the world, the report added.

Interestingly, other much-hyped technology — including cryptocurrency and blockchain — may have the potential to disrupt B2B payments. According to the Jury, though, the hype is far too high.

Nearly half (46 percent) of Jury members stated cryptocurrency would not be successful in the next five years. Blockchain, meanwhile, might fare a bit better, with experts predicting its greatest potential in B2B spaces including trade finance and capital markets.

“My working hypothesis is that blockchain is potentially valuable where assets and workflows are relatively complex, participants are diverse (including geographically), and transactional provenance/history are important,” said one Jury member. “Trade finance is the ‘most likely’ right now.”

But while 15 percent of Jury members said blockchain offers the greatest financial return in the B2B payments space — the same percentage that identified P2P payments and eCommerce for the same designation — 30 percent said there is no area in which investors will see large returns.

“Payments is an area that is characterized by hype — every few years there is a new development that is going to fundamentally change the payments market and then later, having failed to live up to expectations, it is quietly relegated to the back row and replaced by the next game changer,” the report concluded.

Indeed, distributed ledger technology took the top spot as most hyped technology of 2017. One juror’s comment on the over-hype of blockchain put it more bluntly.

“If I read another piece about a blockchain-enabled fridge or hairbrush,” the juror said, “I think I’m going to retch.”