Five years ago, all anyone wanted to talk about was Facebook and Twitter. Now, VCs are more focused on the B2B enterprise payments space than ever before. Bain Capital Ventures Managing Director, Matt Harris, shared his insights with MPD CEO Karen Webster on everything from the future of Bitcoin in enterprise payments to what makes enterprise payments innovators different from their retail payments counterparts.
KW: What’s your interest in venture funding in the B2B Payments space?
MH: In the early days, I was more focused on the merchants and consumer payments ecosystem but as the space started to heat up it surpassed my expectation for how much value could actually be created. About four years ago we really started focusing on commercial payments as the next big thing.
KW: So why is it that there aren’t more investors like you? Is there a lack of supply of innovators who are focused on this space – or a lack of interest on the part of investors
MH: Clearly the first wave of investing was focused on consumer and merchant interactions – a lot of those were companies like Square, etc. A lot of that as you point out is that there is a great deal of entrepreneurial interest in consumer payments from Jack Dorsey to the Samer Brothers. In a sense the venture capitalist followed the entrepreneurs.
Often times you see these arcs, whether they’re in consumer payments or media, or in software, some will be hot for a while but then eventually investors and innovators start to focus on the enterprise and we’re just in the middle of that transition at the moment. You see it with the internet – 5 years ago all anyone wanted to talk about was Facebook and Twitter and now people are talking more about business to business companies like Ariba and Salesforce. What happened in the software world and on the internet is what will happen to the payments space.
KW: Are there differences between the entrepreneurs on the commercial payments side than are on the consumer payments side?
MH: In general, enterprise payments entrepreneurs are different than consumer based entrepreneurs. It’s not the same in every sector but I think we see that playing out in payments. What we have seen is the transgression revolutionary, “start from nothing” play hasn’t worked in commercial B2B payments. It’s often the businesses that have been around for five to seven years that often feel comfortable meeting the enterprise where it is, which is to say “taking over” paper processes. For example, not being software only, etc. but actually transforming them having taken them over. That is a different temperament – it takes an entrepreneur who is comfortable with a 15 year arc and who doesn’t feel the need to break the rules on day one. I think that’s what’s going to make sense in the inertia laden world of AR, AP, and treasury management, all those concepts we’re dealing with in B2B payments.
KW: What’s so funny is that on the consumer payments side there is also the understanding of a 15 year arc – people just don’t go in thinking there is one!
MH: Right, there’s a healthier sense of delusion on the consumer payment side.
KW: I’ve heard two established Bitcoin protocol players who have moved their focus to the enterprise commercial payments world. Are you seeing that as well and what’s your reaction?
MH: Take Ripple – they, frankly, are agnostic to the Bitcoin protocol. They believe in distributed transaction clearing and they are clearly focused on a B2B. You and I have talked about digital currency and we share our excitement and some healthy skepticism, at least about timing. One of the questions people need to ask is what is the problem that’s being solved?
Take merchant payments for example: does Bitcoin really solve a problem at all? That’s an area where consumer card payments are mature and deeply penetrated. If there are issues, especially in the case of breaches, Bitcoin is arguably just as susceptible if not more so. I don’t really see merchant payments are necessarily crying out for digital currencies.
By contrast, if you think about cross-border B2B payments, which rely on a variety of interbank messaging and money transfer methods, I actually think there is wide spread discontent with SWIFT and the other “wire” systems. That said I think there is room for something better whether it will be based on the Bitcoin protocol or something like crypto-currencies is still an open question. At least, think that that’s a point where entrepreneurs are going to find pain points. Which sounds like a good position from which to build a business to me.
KW: So this would be one of the exceptions to the rule of embracing what exists in the enterprise and trying to fix it. This is something that is really trying to disrupt it.
MH: Well, we’ll see. I think there are various layers to the stack. There are the layers that face the customer – the treasury management systems – I don’t think people are going to overthrow those and move to crypto currency for all their all of their payments. But if there are ways to introduce some kind of multiple gateway mechanism more lower down in the stack that doesn’t change end user behavior, I think that you could look at those existing flows and replace Swift with something like Ripple and you could make some headway. Going in and saying “you’ve got this multi-step chain that leads from your software to your local bank then to a corresponding bank to their affiliate corresponding bank, to the recipient” and we’re going to blow up that whole 6 party chain to be able to go to Ripple.com – I just don’t see that happening quickly. I do think, however, that there are other ways to attack it that are more respectful to existing behaviors that can still provide the introduction to digital currency type methodologies.
KW: You mentioned cross border payments as a pain point. Are there other enterprise payments pain points that you’re seeing real innovation in that space?
MH: We think of invoicing as a PO to an invoice to a check, a three step process each of the 3 steps being predominately paper right now and then you can layer cross border onto each of those 3 flows. Fundamentally that’s what needs to get fixed. All that you can build on that currently requires digitization of currently paper flows. We are seeing interesting stuff above that in the supply chain finance space, however. But I do worry that those efforts won’t effectively scale until the digitization problem is solved. I think great efforts are being made on the invoicing side and the progress is happening quickly, based on what we’re seeing from Billtrust. What I’m most interested in next is the payment sides – so once invoices are digitized, does it still have to end with a paper check? How can that be done better so that economic suppliers are excited about the change rather than resistance to change. That’s the set of thorny issues I’m interested in looking at next.
To hear more from Matt, and the innovators who are using new tools and technologies to transform the B2B payments space, join us on October 15th in New York to discuss “What’s Next in B2B Payments?” Register today!