How did a couple of decades as an executive in the enterprise software space prepare John Bruggeman for his role as CEO of a major B2B payments platform? It gave him a unique perspective on the problem that he knew he needed to solve and the certainty that banks weren’t the answer.
Bruggeman, CEO of Traxpay, sat down with MPD CEO Karen Webster to give her his take on why B2B payments doesn’t have an ignition problem, the “10X” problem that investors have with the space and what’s really holding businesses back from moving off of the inefficient systems they use today.
In making the transition from the enterprise software world to B2B payments, Bruggeman quickly realized that he was moving from a risk-tolerant—almost risk-comfortable—world to something quite the opposite.
(Listen Here) “Payments are complex. They’re difficult. They’re regulated. They’re carefully scrutinized. A single mistake can destroy years and years of work,” he said. “None of that is an issue in the enterprise software world. We make mistakes all of the time. Systems crash. Bugs are found. That’s acceptable. But in this (B2B payments) world, it’s completely and totally unacceptable.”
(Listen Here) “B2B payments is really a natural extension and, in fact, a natural conclusion to the B2B business process. And processes that we’ve been working on in the 80s, the 90s and the otts and are continuing on in this decade, we’re finding that they’ve fallen short. They get right up to and ready to conclude, but that conclusion requires a payment. And payments are things that enterprises, B2B businesses, have left to banks and other financial institutions,” he said. “The integration of banks and traditional financial services to core enterprise business processes has been weak. That lack of clear and tight integration has made it really difficult to optimize and deliver on the promise that these software (packages) could ultimately deliver. We see that as a great opportunity to fix rather than an excuse for breakage. We’re all about bringing banking and payments and financial services all the way inside the enterprise. In a dream world, in a perfect world, each and every enterprise would have their own unique custom banking capability to better serve their supply chain . That’s our endeavor.”
The CEO sees the key hole in B2B payments systems today being that the systems can’t complete its mission: pay for something. That’s forced companies to rely on banks for the final processing and that means a major loss for the businesses. Most of today’s B2B payment systems “get right up to and ready to conclude, but that conclusion requires a payment. And payments are things that enterprises, B2B businesses, have left to banks and other financial institutions. The integration of banks and traditional financial services to core enterprise business processes has been weak. That lack of clear and tight integration has made it really difficult to optimize and deliver on the promise that these software (packages) could ultimately deliver,” he said. “We see that as a great opportunity to fix rather than an excuse for breakage. We’re all about bringing banking and payments and financial services all the way inside the enterprise. In a dream world, in a perfect world, each and every enterprise would have their own unique custom banking capability to better serve their supply chain.”
Banks are good at many things, but, Bruggeman argues, payments aren’t one of them. Banks are technically proficient at processing payments, he said, but they do so without any of the payments context and data.
When invoices get paid today, he said, the payments may be processed through specialized payment networks, but when they get to the final stage, the bank, the most important data is tossed.
(Listen Here) “What happens today is that the minute the invoice is approved, it goes off that network and goes through the traditional bank network. The most important thing that gets lost is the data because banks are not set up to keep or maintain the data that got to the point of the payment,” Bruggeman said in a Pymnts.com podcast Thursday (Aug. 21). “We lose all kinds of information like ‘What was that order? Why did I order it? Why did we agree to this price? Why did it change mid-stream? Why were the delivery conditions changed?’ All of that information gets lost when we go to the bank because all the bank cares about is ‘What’s the account number? Who owns the account? What’s the amount?’ There’s a total disconnect. Our goal is to keep the data with the payment because the knowledge, the information, is critical.”
Like so many things in life, Bruggeman said, one of the implementation challenges in B2B payments is good old-fashioned fear.
(Listen Here) “A lot of our customers really see the value in how they work with their supply chain. The value is never questioned. It is the fear of trying to do it. They’re afraid of concepts like ‘Know your customer’ and anti-money laundering. They’re concerned about security and (cyberthief) fraud and theft and embezzlement,” he said. “These are natural things that should scare you, but that fear is preventing them from taking the step. That step enables tremendous value. New financial services and new transaction types that could forever change the way the supply chain works. I think that the fear and the risk is worth it to address in order to realize the benefit.”
Given how closely B2B payments investments are watched—and mimicked—Webster asked Bruggeman to explain the apparent lack of substantial and sustained investment in this space.
(Listen Here) “The space is horribly broken, which is corollary to ‘filled with tons of opportunity.’ Depending which analyst you believe, it’s 3-4 times bigger than the B2C or the peer-to-peer spaces, which are so popular to invest in, yet the investment equation is reversed. The reason is that most traditional investment vehicles—venture capital, different debt vehicles—are smart and they know that enterprise sales cycles are twice as long, three times as long, as a consumer cycle,” he said. “The decision process is much more scrutinized, more people are involved. Typically, packages are bigger and more complex to build and therefore take more capital and more capital investment. To give you an order of magnitude, if an investor were looking and said ‘This would probably be a $10 million investment in order to get to a transaction, the equivalent on the B2B side would be $100 million.’ So investors are smart. They say that the payoff may not be as big down the road, the opportunity may not be as big, but it sure is a lot easier and a lot faster to get there.”
The CEO added that the nuances in B2B payments—such as the differing levels of payment approving authorization—is what makes it difficult to do well.
(Listen Here) “We need to be a little bit careful about whether we’re talking about little b or capital B. When it’s little b, the challenges, the buying behavior is almost like a consumer. But when you talk about bigger B, you start thinking that the behavior is different. Take the four-eyed principle, meaning that you need multiple people to look at an invoice and approve an invoice before we agree to pay that invoice,” he said. “And before a payment instruction can be issued, multiple people have to sign off on it. And there’s hierarchy of signing. For example, you may have signing authority up to 1,000 euro. I have signing authority up to 5,000 euro. Board approval for 50,000 euro. (Consumer payment firms) aren’t designed to deal with the very basic issues that are required in a traditional B2B space. Every business process has these kinds of checks and balances and a PayPal, a Square are not designed to handle that. So they’re not true B2B approaches. They are being adapted because of a lack of alternatives.”
He also made a case that there exists today a huge series of payments networks, but they can’t handle the final handoff.
(Listen Here) “B2B communities exist and they exist in scale. You can go out there and you can see where buyers and suppliers are connected. One-and-a-half million are already connected. And they’re connected using traditional B2B software. Things like e-invoice. There are several companies out there that are e-invoicing or purchase to pay or order to cash software suppliers who have built out buyer-supplier networks to the tune of a million businesses,” he said. “These millions of businesses, since they are connected, handle on the order of 100 million invoices or more a year to the tune of hundreds of billions of invoice volume a year. These companies are already connected. They’re already doing the beginnings of a purchase cycle and invoices are a simple example where a buyer may go and look at different suppliers. They may be able to source, they may be able to configure, they may be able to place an order, they may get that order shipped. All of this exists and the supplier can send an electronic invoice to the buyer. That buyer can receive the electronic invoice. They can route it for approval. They can inspect it. And the very last thing they can do is approve the invoice. They can’t pay the invoice. That’s very very important because on first blush, you look and every one of these software companies have payments capabilities. But they can’t settle and reconcile. What we’re seeing is the natural extension, the next step for these software companies is to very simply add the capability to pay the invoice. Paying the invoice becomes the starting point for companies like Traxpay. We can work with the accelerators, the companies that already have these networks connected, they’re already used to setting up and conducting business together. We now can extend it all the way out to concluding the business by paying and reconciling the payment.”