B2B Payments

B2B Payments’ Long Climb To Innovation

B2B payments firm AribaPay has secured a sizable amount of attention in the industry, but when the firm won not one, but two Innovation Project 2014 awards last month, we knew we had to dig deeper into how this company is changing the landscape. That’s why MPD CEO Karen Webster spoke with AribaPay Sr. Director of Marketing Drew Hofler about how the company is disrupting B2B payments, and why the industry is only at the beginning of a very high climb toward innovation.

KW: The B2B payments space and AribaPay have been a topic of conversation on PYMNTS.com a lot – in part because you guys really took away so many different awards at our recent Innovation Project and PYMNTS Awards dinner. So I thought it would be great to catch up and get your view of the payments landscape and where you see it going.

First, let’s talk about one of the things that we’re very proud of at PYMNTS: we think that Most Disruptive and Most Innovative are two of our most important awards. We have 16 different categories, and AribaPay walked away as the winner of Most Disruptive – one of the two really important categories.

Tell us what you guys did to disrupt, in a very positive way, the B2B payments space.

DH: I think B2B payments…[were] ripe for disruption. Because, quite frankly, nothing’s been different for decades. The newest, most disruptive and innovative things that have happened recently are just things around different types of p-card. Whether it be buyer initiated payment, or payment on invoice, or ghost cards, or single use p-cards…they’re all variations on a theme around p-cards. But p-card hits maybe 3 to 5 percent of spend, because it’s so expensive.

And, before that, the most recent real innovation in B2B payments was the advent of ACH…for electronic payment from company to company and then obviously from person to person…in the U.S. But that was established in 1975, [during] the Ford administration. The limitations at that time for that electronic payment were significant.

The important thing for B2B payment is the data that’s around the payment. When you’re being paid as a supplier, from your customer, they’re often paying you for multiple invoices on a single payment, and those invoices may have had things altered on them. They may not be paying you the full amount of the invoice because something was broken, or there was a dispute, or a discount. You get this lump sum payment as a supplier for all of these invoices, and the reconciliation of that is very, very difficult, very time consuming, and costs a lot of money in cycles and difficulty of forecasting and all of that.

And ACH, back at the time it was set up, all of that data that’s necessary for that existed in COBOL mainframes behind brick walls, and there was no way to get it to the supplier except to extract out…94 characters that are allowed from the ACH rules, and to put it on the electronic payment and send it with the payment, because that’s the world we lived in.

But now we live in a networked world, where all of that data is flowing between buyers and suppliers on business networks like the Ariba network already. Gigabits of data, at real-time, all day, every day, flowing back and forth.

What we did to disrupt is we took a different approach. Instead of trying to extract the data and attach it to the payment and send it on with that, we said, “Well, why can’t you just attach the payment to the data that’s already there?”

And that’s what we’ve done with AribaPay. We’ve taken the strength of all of this data moving back and forth that’s necessary for buyers to communicate their intent to pay, and suppliers to then…receive that payment and then easily reconcile it and apply it…and combine that with the strength of our partner, the Discover network, that has all of the security in-house to manage and maintain all the bank account information and the payment rails to settle the funds very quickly, easily, securely and simply.

We think that’s pretty disruptive, because that’s just doing things very differently. It’s not a card offering, there’s no financing element involved. It’s a way of settling funds and settling information together, for the first time, we think, in a very rich environment.

KW: That’s really interesting, the whole payments-to-data vs. data-to-payment equation. I’ve never thought of it in quite those terms. But I think you make a very good point, that in a business-to-business world, obviously, payment is very important, but data really becomes critically important, and the ability to bring both of those together is important.

Is that what really makes you distinctive and different? Obviously, it makes you disruptive, but you also won the Best B2B Solution, and there are many of them that are percolating around these days. Is what you just described the thing that also makes it “the best”?

DH: I really think it is, for a couple of reasons.

Settling payment as a fund is really not terribly difficult to do. We do that all the time; the moving [of] money between bank accounts – that problem has been solved, electronically. There’s multiple ways to do it. What has not been solved, we think, really well, until now, is the moving of that information with the payment.

[In the] B2B world, that information is just about as valuable as the payment – not to be too cheeky about it, but it really is. It’s very, very, very important. And why we think that we won the award for the…Most Innovative, and the Best B2B Solution is that really, there are a whole lot of other B2B payment providers, but none of them really tie together that information in such a rich environment as we do. Because really none of them have the base of strength that we have as the Ariba network.

We’re the largest business-to-business network…by a factor of 10 to 15 worldwide. We have close to 2 million companies on our network…transacting billions of dollars on a daily basis and millions of transaction documents. So we’ve already got this strength of rich information.

And we’re not just an invoice platform. We’ve got the contract, we’ve got the P.O., we’ve got the advance ship notice, we’ve got the invoice and all of the comments and changes to the change orders to that invoice. All of that information that ultimately has to describe and define what a payment is for, we’ve got that on a platform that covers that entire P2P process, as opposed to one distinct or discreet piece of the P2P process.

With all of that information, we’re able to tie that together with the payment. I think that makes us the best B2B payment solution because we’re able to bring so much more data and information and visibility and awareness around payment to bear.

But then also…we’ve got this platform of collaboration between buyers and suppliers that will allow us to take AribaPay and make it more than simply an on-time settlement of payment with rich information, but also be able to use that as the building block for other things: for pre-invoice payment, if you will, or supply-chain financing, and dynamic discounting, and all of these types of things that go around this payment and timing-of-payment, can build it into one user experience for that supplier to come to and be able to interact that way with multiple customers, as opposed to a one-to-one type of portal.

So there are those portals, and there are those B2B payment providers that do try and give some…rich detail, if they can get the paying organization to upload the invoice information, but we’ve got all that information native on the Ariba network to tie together with that invoice.

And then the last thing… When we were defining this product a couple of years ago, we talked to a lot of suppliers. And [we] said, “Look, we can have somebody upload remittance to the network now – why does that not work for you?” And we had many, many, many suppliers tell us, “We actually tell our people not to go get remittance now, because it’s not tied directly to the payment.” So it’s not really tied to the source of truth; they don’t know if it’s actually accurate to the payment that finally gets there, because the payment went through one system and the information [went] through another. But now, with those two going through the same place, the remittance and data that they have on the network is tied directly to the payment that ultimately flows through – [that] they receive in their bank account. So they’re able to reconcile with full confidence that it is the source of truth.

So I think that all of that kind of combined, really, on the basis of the strength of the network data that we have really is what makes our offering pretty strong.

KW: You mentioned that you solve for one of the big chicken-and-egg dilemmas in getting any network to actually kick in the network effect: you have data that’s already native to the platform. But what is the chicken-and-egg problem that exists in the AribaPay environment? Because you still have to get both parties to agree to use it. So what does that look like for you?

DH: That’s absolutely right; you have to get both parties to agree to use it. And…it’s kind of funny because there’s a pent-up demand in the receiver-of-payment community. We talk to what we call suppliers; we talk to folks and they all say, “Gosh, we would love to get paid like this.”

But we have to get the buyer to actually want to pay them that way first, right? So they have to pay through AribaPay, so it has to come through the buyer. So that’s really probably the…biggest [challenge] there is; we have to get out there and sell it to them. I think we’ve got a pretty strong proposition with the buyers that gets them beyond the hump of inertia in changing payment methods.

We’ve been trying to go to electronic payment in the U.S. for decades, and we’re still only at about 50 percent electronic payment. There’s pain around it, but it’s what I call a “smoldering” platform as opposed to a “burning” one. But what we’ve got, though, lately, is a couple of different things that are adding to the motivation for the buyers to actually now do something.

One is that the smoldering platform is becoming a burning one with all of the hacks and data breaches around payment information that we see in the news all the time. And buyers…[are] getting very sensitive about…the fact that they’re holding supplier bank account information inside of their ERPs and inside of their internal systems. They’re starting to realize: “You know what? This is probably not the best thing for us to be doing.”

And then secondarily, buyers are trying to get their suppliers to join them on a network platform for transacting P2P business. So P.O.s and invoices and…contracts, and all that stuff that leads up to the payment, they’re trying to automate and do that over business networks and…do e-invoicing or catalogues, or those types of things. Well, that in and of itself is a great thing, but it’s a difficult task for them because it requires changed management, and change on the side of the supplier, and there’s a whole process to go through, and it’s hard work, sometimes.

What AribaPay does – and we’ve found this to be true with our early customers – is that AribaPay makes the process of what we call supplier enablement on to a network platform or an eCommerce platform…it makes that process so much smoother; it greases the skids, if you will. Because when you go out to a supplier and say, “Hey, we want to start transacting with you on an eCommerce platform, and the first thing we want to do is we want to pay you. We want to give you money and give you visibility into…payments; you can see when it’s coming and know exactly what it’s for. So all we need you to do is sign up and join this platform,” well, gosh, that really focuses the mind of the supplier. And we’ve found that their willingness to do that is about four to five times greater than if you’re going out to them and saying, “Hey, we want to send you P.O.s or get invoices from you on…this eCommerce platform.”

When companies are seeing that…if they add this payment layer to it, and lead with that, that their success in…moving toward eCommerce and e-invoicing and these types of things – the path is made so much smoother.

So, when you add the idea of removing the risk of holding on to that bank information and how important that is becoming now to their other motivations of wanting to drive toward eCommerce and how something like AribaPay can help them do that – that’s where we’re really starting to hit that tipping point and get over that hump, and get those chickens laying eggs, if you will.

KW: On the buyer side, though…some of the competition that you face is with the p-cards and the business model that gives the buyer something extra back in their pocket that turns their cost center into a revenue opportunity. How do you compete against that?

DH: P-cards have proven that the best way to sell a product is to pay somebody to use it, right?

The funder of that model, as you well know, is the supplier. The supplier has to pay…on the generous side, 2 percent, but on the more realistic side, somewhere around 3, 3-1/2 percent – a fee, that’s uncapped – for the privilege of receiving payment by card.

And because of that high cost, the statistics historically – and I’ve been in this business, now, for about 10, 15 years, and I’ve looked at hundreds of vendor masters and payment files, and I’ve yet to see a company, with rare exception, that has more than maybe 5 percent of their vendor spend on card. It is typically the…long tail, and that’s great – it’s perfect for long tail. You don’t have to deal with invoices, you pay on P.O., it’s clean, it’s easy, it’s done. Sometimes they’re able to pay the invoice on it, but it’s very expensive and I guarantee you [you’re] going to be seeing that back in their pricing later. But the fact is it doesn’t touch more than maybe 5 percent of their vendors or 5 percent of their spend. So, from our perspective, that’s really non-competitive at this point.

We say to our prospects, “You’ve got a concurrent program; you like getting that check every quarter, every year, or whatever it is you get from your bank issuer – that’s great. Let’s look at the other 95 percent of your spend, and let’s talk about how you can…make headway on that.”

And that’s not to say that there aren’t models out there that…we might be exploring as well about a type of revenue sharing, if you will, on an ACH payment. But it has to be…[a] significantly lower price to the supplier in order for it to gain volume.

KW: And I think, with the data, you can begin to get creative about other ways to engineer business models that provide other value. So it isn’t just about putting something back in the buyer’s pocket; it may be other things that add value along the way.

It’s a very interesting area, though, and you made the point earlier that it had been a very long time since innovation last took hold in B2B – 1975, you said. That’s a pretty long time.

DH: That’s when the Betamax came out, by the way.

KW: It was a good year for someone, I guess. But not B2B payments innovation.

Is it going to be another 30-some years until we see the next big thing? What does the future look like? Are we still slogging through the process of disruption? I know you guys aren’t; but broadly speaking, how long will it be before the environment around B2B really starts to move forward?

DH: I’ve been in the payments business for close to 20 years, now, and…I remember going to my very first…NACHA payments conference, and everybody [was] saying, “the death of the check, the death of the check,” and we have yet to see that. So to make a prediction that we’re going to be in some nirvana in 20 years, I’m reluctant to do that, just based on past history.

But, that said…I think we are at a…beginning of a climb toward innovation in terms of B2B payments. Because we are finally at the place – and this is somewhat self-serving, of course, because we’re a technology company, but – we’re at a place where technology actually can deliver what B2B payments needs. And that is that information.

I think where the friction in B2B payments happens is where there are silos of data…and the transactional pieces of payment happen between silos. There’s stuff that happens in a black box, and then something’s handed off to another black box, and stuff happens within that. We’re trying to solve that, and right now, our first step is into…on-time, net term settlement of B2B payments by…removing the barriers of that black box and making everything transparent…to all parties: what’s happening from the moment invoices are approved and scheduled to pay, every step along the way, all the way until the funds get into the supplier’s bank account and they know exactly what they’re for.

But there [are] other silos and walls and black boxes, if you will…in the B2B payments sphere. You think about things like…foreign exchange. There is so much friction in FX – there are a lot of people, a lot of companies, a lot of banks, making a lot of money on foreign exchange because it’s very opaque, it’s very slow, it’s all kind of stuck within the walls. They say, “[If] you want to move money across borders, and change funds, then you’ve got to do it through us, and we control it.” And…the margins there are huge. To a large part, it’s because of opacity.

Where I think the innovation is going to be happening in B2B payments is where the technology of today – business networks, in particular, are well-poised to make this happen – but that innovation’s going to happen where those layers of opacity are removed and…controlled transparency is brought to the marketplace, where you now can see the opportunities in front of you.

I like to say that benefit comes in B2B payment as a confluence of opportunity, visibility and capability. The opportunity would be to have electronic invoicing and automated processes that create the opportunity very early on, before the settlement of that has to happen; visibility into it, for all the different parties who are involved – the buyer, the payer, the receiver, the funds, and any third parties…all have visibility into their part of the opportunity and into the view of it as a whole. And then the capability – the technology to then click a couple [of] buttons and make that opportunity happen.

I think we’re at the point now where those things are starting to develop. The business networks – Ariba, preeminently – are established and growing at now a very hockey-stick-type of growth…and that brings with it all that data, brings the opportunity, the automation, the visibility for millions of different businesses. And then we’re just…consistently building those…capabilities into it to do different types of things.

So I think the innovation’s going to revolve around that dynamic, but it’s going to hit different areas…like foreign exchange, or financing – whether that be on pre-shipment, or P.O. financing…all that type of stuff.

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