B2B Payments

Mixing B2B Payment Rails Can Overwhelm SMBs, Finds Mastercard

The B2B payments industry continues its push to break businesses’ habit of using paper checks, but players are divided on what payment rail should take their place. The honest answer is there isn’t a single payment method that can solve all issues for businesses or address all of their concerns. As such, companies typically turn to a multitude of solutions.

New research from payments processor Mastercard and software company Karmic Labs suggests small- and medium-sized businesses (SMBs) are embracing an array of payment rails, but managing them all means added complexity to the already challenging task of managing finances.

In Karmic Labs’ latest white paper, “Prepaid Expense Cards: Helping Small Businesses Solve Cash Flow Dilemmas,” researchers surveyed U.S.-based SMBs to understand how they’re juggling cash management in a market with dozens of payment solutions.

Cash management is undoubtedly one of the largest pain points for these SMBs, the report noted, with a lack of proper cash flow management sometimes proving “fatal.” Despite its importance, nearly half of small businesses surveyed said they manage cash flow concerns only once or twice a year, while nearly one-third (29 percent) said they do so “hardly ever.”

These concerns range from overestimating sales and revenues to not collecting receivables in a timely manner or having cash reserves in case of emergency. Many of these hurdles, researchers noted, can be attributed to the fact that SMBs use an array of payment methods, often complicating payment tracking and reconciliation.

The most common tool used by SMBs in the survey was the business credit card, cited by 69 percent of survey respondents (this statistic is not surprising, considering Mastercard co-sponsored the report). Paper checks remain commonplace, too, with 46 percent of respondents saying they use this rail for B2B payments, followed by business debit cards at 44 percent and business charge cards that need to be paid off each month at 32 percent.

Interestingly, use of personal credit cards and PayPal surpassed usage of ACH and other direct transfer methods, the report found.

“A difficulty that arises from using multiple payment mechanisms is the complexity of tracking these payments, especially non-electronic forms such as check and cash,” the report noted. “The use of personal payment products also suggests that some small businesses have not separated their business and personal household finances, making a transparent evaluation of cash flow even more difficult.”

The Case For Prepaid

While card rails were most popular on the list, only 9 percent said they use prepaid cards for staff rebates and incentives, while 10 percent said they use prepaid cards for customer rebates and incentives. But Mastercard and Karmic Labs said prepaid cards could help businesses embrace electronic payments and obtain the benefits of cards, without incurring debt as they would with other card products.

“Although credit cards for small businesses are relatively easy to acquire in the current economic environment, small businesses are wary of using credit cards, which may lead to debt they would rather not have,” the report noted. “Most small businesses are very careful, understanding the risk of accruing too much credit card debt, and they are using credit cards more as a convenient way to make purchases than as a way to finance purchases.”

Prepaid expense cards may also help address friction associated with requiring employees to front funds for business expenses for reimbursement later on, the report noted. That includes delayed expense report filings, which is a challenge for 45 percent of small businesses, according to a separate survey conducted in 2016 by expense management firm Certify. Half of SMBs surveyed at the time said their employees lose paper receipts.

These tools, according to Mastercard and Karmic Labs, enable businesses to gain the convenience of paying with a card without incurring debt, while also gaining control over how much employees spend. But, as researchers noted, awareness of prepaid cards for expense management remains low.

“Although prepaid cards for business expenses offer several benefits and have been available for some time, many small businesses are unaware that such cards are available in the market,” the report concluded. “Enterprises already serving the small business market are well positioned to heighten awareness for small business customers and, through prepaid expense card products, to help solve expense management and related cash flow issues for their small business clients.”

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