Why do paper checks still dominate B2B Payments? According to Eric Mettemeyer, CEO at Store Financial, it’s because big banks, tied to important lines of credit, make it hard for innovative solutions to flourish that could jeopardize that revenue stream. Mettemeyer tells Karen Webster that while banks do offer e-payment solutions, they have a low value-add compared to many offered by non-bank players. He and Webster talked about the ways in which Store Financial is breaking through that barrier, reinventing how payers and suppliers interact and disrupting the traditional B2B bank services along the way.
KW: Let’s start with something no one really likes to talk about – that’s the cost of payments. That’s certainly something a lot of organizations have a keen eye toward and think a lot about. From where you sit and the market you serve, what are some of the biggest misperceptions about what it costs to enable payments with respect to commercial cards.
EM: If I start with the payer side, even the payer organizations have some concerns about the cost. One of the misperceptions is that there is a significant IT effort on their behalf to implement virtual card payments or to optimize supplier payments. The reality is that a virtual card functions a lot like a check from an AP system standpoint, so you can leverage those processes in place within the system. So there’s not a significant IT effort.
The second misperception is the belief that there is heavy lifting required of the accounts payable department, and the procurement department if not the broader organization. But the reality is that many vCard programs today come with supplier enrollment campaigns as well as ongoing supplier support, so the effort by the broader organization is fairly limited.
The last piece is even the payers themselves – the buyer organizations – have a misperception that suppliers won’t take cards, or that they’re too costly. The reality is that suppliers do accept cards. What we’ve experienced with the buyer organizations that we’ve worked with is they’ve been through a past campaign around a P-card and the result of that campaign failed to impress. Part of the problem is that a P-card is simply the wrong product for supplier payments. It has a place in an organization but a P-card, compared to a vCard, has much lower security in terms of unauthorized charges on the card. It’s got the highest acceptance cost of any card in the market, and it generally comes with a one-off reconciliation process for the accounts payable organization.
So their experience with P-card initiatives is not necessarily positive, and they’re hesitant to talk about vCard programs and not understanding the difference there. The reality is that vCards are different, and tools exist to decrease the cost of acceptance to the supplier. What’s important is that a buyer organization chooses a vCard program with those tools.
KW: So who do you have to spend most of your time convincing on the buyer’s side within the organization? Who decides to do this?
EM: It’s generally a combination of the CFO office, or the accounts payable department specifically, and the procurement team. Another thing that we noticed in past P-card initiatives is that those were pushed through the procurement department. The procurement teams have a lot of pride in how much they extract out of their suppliers, and to ask them to then go back and place a potentially costly card program into the middle of that met with a lot of internal resistance.
So we found that it’s much better to drive these programs through the accounts payable process, and take procurement a bit out of the process and not make it a burden for them, and to allow treasury to conduct more of the negotiation with the supplier in terms of offering them lower cost B2B virtual cards as opposed more costly vCards.
KW: So it sounds like there is a lot of merit to considering vCards in the B2B space, except that paper checks still dominate. Why is that?
EM: I think the biggest reason is that the big banks are impeding progress on that front. They provide a lot of credit funding to organizations, and attach strings to those credit lines. They typically require or ask that the buyer organization exclusively use that bank for all of their treasury management services. The large banks’ business models rely on slowness – they rely on snail mail, lock box revenues, and they love checks and fees.
They do offer e-payment options, but I find them to be low value add. If I think about an ACH world where I have a lot of experience, it’s not a very value added e-payment option – it’s not real time, it generally requires 48 hours for full settlement, it doesn’t process on the weekends, it requires you to get bank account information of the party you’re paying, and if it’s a relatively dumb payment. It doesn’t have a lot of room for remittance detail.
So I don’t think an ACH is very well designed to drive true conversion from check. It’s an arduous process to go out and maintain bank account information on all of your suppliers. It doesn’t provide the type of remittance that you can send along with the check. So it’s not a very good option.
The second big e-payments program that these triggered management services have are p-card programs, which I described before are not the right program for supplier payments. We are seeing the banks roll out their own vCard programs, and they are getting better – but adoption is going at their pace. It’s going slowly.
KW: Does the same-day ACH proposal threaten what you do?
EM: No, I think it certainly improves an element or component of the ACH. There’s a lot there that it still doesn’t address. In some instances ACH is the right solution – it’s not to say that a VCard is the right solution every time. It’s just a matter of fitting it into the portfolio of payments.
Buyer organizations should have available to them all tools and all options, and use the ones that offer them the most value in each particular situation. I think that both ACH and vCards will improve over time, and we’ll all continue to have a role in the ecosystem.
KW: So how do you breakthrough? That’s a pretty tough barrier to overcome, especially when that requirement is tied to a very important line of credit, which businesses need for working capital and other reasons.
EM: Well, I think you have to educate the CFO office and the buyer organization that that’s not something they should agree to. You need to continue to demonstrate that your program – a non-bank program – is going to provide a lot more conversion of spend. If they want to derive the benefits from that, they’re going to have to make decisions in that area. In some cases, it’s a matter of waiting out that exclusivity and in other cases it’s a matter of a negotiation with the bank partner.
Not all buyer organizations have agreed to those strings, but I think it’s time, education and more people hearing about the benefits of these programs that will over time cause them to not agree to lock themselves in.
KW: So how do you see the space evolving over the coming year? It seems to me that there’s been a lot more about alternatives to existing methods of payments between businesses. Do you think 2015 is a year where you’ll see a lot more progress on the education side, and a lot more progress on the adoption side?
EM: I think that will definitely be the case. Every few months that go back, our need to educate the supplier or buyer gets a little bit easier because these things are working their way to the marketplace. Despite the efforts of banks to slow the process, the non-bank supplier payment programs will make progress. In the end, innovation will have its share of wins.
The banks themselves will drive their own adoption of vCard payments. I’ve noticed a trend of outsourcing components of their vCard programs to improve them. For example, I’ve seen them outsource their supplier enrollment side of the program, as well as B2B acquiring. One of the bigger challenges on the supplier side is that they tend to use a retail credit card terminal to process payments, which is going to give them the highest cost. So if you can go in and give them a B2B acquiring account – a virtual account – there are many tools that can be used to get those costs down. I’ve seen issuing banks use other companies who are experts in that area to help increase the amount of flow taking place through these vCard programs.
KW: So tell us how you at Store Financial are going to be helping this process accelerate. What are you up to in 2015?
EM: Really just the same things we were doing in 2014, and probably the same things we’ll be doing in 2016. That is continuing to find ways to increase the value for both sides, but particularly the supplier, and innovative ways to provide more visibility to the cost of payments, getting those costs down, adding more remittance value, and improving the reconciliation process – removing the friction. I’ve seen some neat things in the industry where companies are focusing on acquiring solely virtual cards for B2B purposes, and the tools they’re building to help automate process on behalf of the supplier are commendable. We’ll take a cue from that and add that to our program.
Really, we’re just continuing to innovate and improve the process, and we’re seeing results across the industry.
KW: Do suppliers have any power in moving buyers to considering the kinds of solutions that you described? On the retail side of payments, merchants have a lot of power because they control the POS environment. Does that analog hold fast on the commercial side of payments?
EM: That is a great question. Yes, I think they do. I think the challenge they have is that they’re unaware of the fact that there are these tools in the marketplace. When they are approached by the buyer, they should demand lower cost options if they feel that’s warranted because of the size of the flow of payments. I think that education will continue to increase.
KW: I think suppliers of course just want to be paid, so often they probably don’t feel they have the ability to suggest an alternative. It sounds like from what you’re saying, they just don’t know that there are other options to suggest.
EM: Right, I think if the average payment size was relatively small, they wouldn’t have as much ability to negotiate there, but if you’re paying in the millions of dollars of year, they certainly have that position. What they’re asking for isn’t unreasonable.
KW: So in looking ahead, as we look out at the remainder of 2015, what do you think will play out in the B2B space?
EM: I think there will just be significant additional innovation. People recognize the challenges with all forms of payments, whether they’re vCards or ACH or wire or check, and the immense amount of friction in the space leads to opportunity to drive improvements and make a business.
CEO, Store Financial
Eric is the CEO of Store Financial, bringing eleven years of experience in the payments industry. His initial experience in the industry was the management of more than ten acquisitions of prepaid, card processing and money transfer companies in Europe and the Americas for Euronet Worldwide. He then subsequently served as Managing Director of epay Americas and Asia, a division of Euronet Worldwide. His previous job experience also includes International Tax, Financial Planning and Treasurer roles for companies including Arthur Andersen, Sprint and Euronet. He received his undergraduate degree in Accounting from the University of Iowa and his MBA from Thunderbird School of Global Management.
To listen to the full podcast, click here.