B2B payments is all too often a waiting game, one that can be damaging to the survival of a small business (SMB). With checks still so heavily in play, small businesses must not only wait to receive a check, but banks often enact a holding period that forces a company to wait even longer to see the funds they've been paid.
The check system creates a financial environment in which a small business has money, but can't use it. FinTech firms have taken a few approaches to this issue, either by working to replace paper checks with different payment rails or trying to work with checks by addressing their particular pain points.
CONEXT is looking to do a bit of both. This week, the company announced the launch of its B2B payments network, which allows a small business to turn a check payment into usable funds via prepaid card.
The solution works like this: A small business owner can take a picture of a check and upload it to their CONEXT account. Funds of that check are placed onto their CONEXT prepaid card within a few minutes, and that company can then make payments with that card or transfer funds from their CONEXT prepaid card to another — whether it be in the hands of an employee or a vendor across the country.
Addressing the friction of paper checks in B2B payments is certainly a key target for the company, according to CONEXT Founder Michael Casalini.
"There are a number of hurdles along the way for small businesses to get paid — first of which is the entire check system," he recently told PYMNTS in an interview. "The check system truly hasn't evolved since [its] inception."
It's the starting point for CONEXT, which first introduced services for small businesses to more quickly cash their checks, rather than wait during the bank's holding period. The problem with this approach, Casalini said, was that SMBs were receiving cash, making it difficult for them to actually use those funds.
The launch of the firm's B2B payments network allows small businesses to load the funds received via check into a digital payments network, then make payments via prepaid card. Vendors that are also on the CONEXT network aren't charged when funds are transferred to their prepaid card, addressing another key point of friction for commercial card adoption: the cost of supplier acceptance.
Casalini acknowledged that this type of solution is not new, and likened the network to Venmo or Zelle — with higher transaction limits and functionality designed for a business user. The bigger picture, he said, is that the tool is a reflection of much bigger changes in the broader B2B payments ecosystem, not only in the payment rails that facilitate B2B payments, but in the way small businesses interact with the money they're paid.
"What our businesses are telling us is that they wait so long for the checks to get issued, and then they have to wait for [them] to clear, that the funds don't sit in the bank as a deposit," he explained. "The biggest misconception of our customer base is they need to deposit money."
Digital payment networks for consumers and businesses alike often come with the option to transfer funds currently held in the network into a bank account. However, small businesses need the money paid via check as quickly as possible — not so they can deposit it, but so they can turn it around and make their own payments.
The inability of SMBs to access liquidity has contributed to the rising issue of late payments in the U.S., which Casalini considered to be at the heart of the biggest problems for small businesses today. Since the 2008 financial crisis, B2B vendors have essentially morphed into financiers for their own customers, lending out goods and services as they wait months to be paid. What this means for small business banking is a shift away from what Casalini called "deposit banking," and more toward an "access" model to financial management.
"There is access banking, but you're going to be loading funds onto cards to get access to your money and use it — not to let it sit in the account long enough to be a deposit," he said.
The effects of these changes ripple even further into the small business finance scape.
When it comes to small business lending, a shift away from making deposits would effect the way financiers mitigate risk and underwrite potential SMB borrowers. Today, issues of delayed and late payments, and the inability to quickly use funds paid to them by check, has small businesses seeking working capital loans, especially firms without large deposits in their bank accounts. Small businesses that focus on maintaining their finances as liquid in an electronic payments network will force changes onto how lenders assess creditworthiness — not in how much money they have in their bank accounts, but in how they do business.
"We could provide really good insight to companies looking to lend to our small businesses that don't have enough banking deposits," said Casalini, adding that financiers can instead look at factors like the quality of business partners, the number of bounced checks and the payments they're making. "It's almost going to provide a new form of underwriting available to the creative lender out there," he added.
No one can predict the exact path that small business financial services will take as it continues to innovate and evolve. What is certain, however, is that the industry is changing, and these shifts are not happening in a vacuum. Instead, the evolution of B2B payments is tightly interconnected with banking, lending, and overall corporate and small business financial management.