Checks and ACH are still the methods of choice for B2B. Credit cards trail, dogged by high costs — and, as the recent B2B Tipping Point Playbook found, account for only a mid-teen percentage rate of transactions, for both sending and receiving.
Part of that reticence toward adopting commercial card payments lies with the interchange fees on transactions, typically a few percentage points, paid by suppliers. It’s a fixed rate, a cost of doing business. Buyers, of course, can enjoy the benefits of rebates.
Somewhere, there exists a middle ground between buyers and suppliers willing to embrace cards and seeking to optimize cash flow, as Boost Payment Solutions Founder and CEO Dean M. Leavitt pointed out. To that end, Boost said this morning (Oct. 16) that it is unveiling Dynamic Boost — billed as the first payments platform to apply rules-based, dynamic interchange pricing to commercial card payments.
In an interview with PYMNTS’ Karen Webster, Leavitt said a dynamic pricing model is a departure from the credit card model that has been in place for decades, which has dictated the economics of card acceptance across the years.
It’s always been a consumer-centric model, and the economics have not been ideal for corporates in B2B commerce. That’s because the interchange rates had been established by contractual agreements between the card issuers, buyers and suppliers, and — as noted before — remain fixed no matter what is being bought or how long it takes to pay an outstanding invoice.
Giving Props To Prop Interchange Rates
Dynamic interchange rates, Leavitt said, should help expand card acceptance among suppliers, as proprietary (or prop) rates between those parties take shape. He said Dynamic Boost had been “in the works for quite a while” within the company and is being implemented with one of the firm’s major financial institution (FI) partners, which is yet unnamed.
The genesis of Dynamic Boost can be traced to the fact that, as Leavitt described, “we would hear from issuers — who would hear from some of their commercial cardholder customers — that some suppliers had opted out of card acceptance because, while they were originally promised to get paid sooner” if they agreed to take credit cards, that promise was honored only for the first couple of billing cycles. Then the payers went back to 40-day or 60-day terms.
Simply put, said Leavitt, “right now, a supplier has no idea how to budget what their cost of card acceptance is” if they do not have visibility on when they are getting paid. That lack of visibility comes on the heels of a model that is a bit rigid, he told Webster. When cards were invented 70 years ago, there was no anticipation that companies would wield them to make multimillion-dollar payments.
“It’s a model that has not changed in any meaningful way since the card rails were invented,” said Leavitt.
However, he added, by building on top of those rails with technology (and with an eye on flexibility), innovation can consider — and address — pricing and process inefficiencies that have, thus far, hindered card acceptance.
Taking A Page From Dynamic Discounting
The dynamic interchange rates platform borrows a page from dynamic discounting. In the latter scenario, suppliers offer rebates for timely payments. Cash flow visibility gets better, and buyers get a bit of a boost to operating cash flow.
In the dynamic interchange model, which Leavitt said exists as “kind of a cousin” to that discounting practice, if a supplier gets paid in a hypothetical 15-day window, they would pay the full interchange fee on a transaction worth X number of dollars. If they get paid within 15 to 45 days, that rate would drop. If beyond that further 45-day scope, the interchange rate paid would drop again.
“As time marches on,” said Leavitt, “the total cost of acceptance for that supplier would drop dramatically.”
Similarly, as the interchange revenue drops, it gets to the point where the cardholder is not getting any rebate. “So, the payer,” he continued, “is incentivized to pay sooner or disincentivized to pay late. The supplier does not get penalized if the customer continues to pay late with a credit card.”
He said Boost sought, and was granted, proprietary rates (agreed upon by issuers, buyers and suppliers), building the logic of the Boost platform around a series of rates. Thus, if a payment comes within a timeframe of, say, 15 days, it is processed at one rate — then at other rates, according to other time windows. The flexibility comes as Boost is able to facilitate 100 percent straight-through processing (STP) for push payments.
“So,” he said, “when a corporate pushes a payment to us, we get the invoice date. We know how to timestamp the beginning of that payment cycle. We know when to start and stop the meter ... we can adjudicate how to treat those transactions on the fly.”
Value-Based Applications, Too
Leavitt then turned to the applications that are not time-based, as described above, but can be used with values as parameters to dictate interchange rates. By way of example, a large corporate buyer on Boost’s platform cut a deal to pay a supplier base with cards, offering an “all-in price” that can be thought of as X dollars. However, that deal that was tailored to conform with the published interchange rates for commercial cards.
“We put together a customized program for that customer and their suppliers so that, by using prop rates, we were able to deliver the promise that the customer made to their supplier base,” Leavitt said.
The customizable model goes against the conventional wisdom that a prop rate is always lower, a premise that may make issuers fret over lower rates or cannibalization of their own revenues.
“One of the key messages we want to get out to the issuer community is that — generally, as a backdrop — the vast majority of volume that Boost brings onto the card rails is incremental,” he said. “It was previously check, wire or ACH, and we use prop rates to fit squares into circular holes ... it’s not just [about reducing] rates, and we use them to help simplify a process” as suppliers seek to budget their cost of acceptance. Thus, suppliers can hypothetically set up three rates, tiered and classified as “low, medium and high.” (Leavitt noted to Webster that the company does not get involved in the rate negotiations between commercial cardholders and issuers.)
The (Rebate) Elephant In The Room
Webster noted that suppliers have to grapple with the fact that credit card acceptance still costs more than other payment methods, and asked how to get increased “buy in” to that method. After all, the rebate is attractive to issuers and buyers, and unattractive to suppliers.
“This is truly the 800-pound elephant in the room,” Leavitt said, indicating the perception that card-based payments are so expensive to suppliers that they might, in some cases, be dismissed out of hand.
However, that need not be the case. He said, “A 2 percent early-pay discount is ubiquitous in B2B commerce. You are willing to give up 2 percent to get paid in 15 days, but the misperception of cards is what freaks them out. ... What we are doing is going to that buyer/supplier community and, for those suppliers that offer a 2 percent discount, we can replace that with card acceptance where their all-in cost is actually going to go down.”
The average, all-in cost for Boost suppliers of card acceptance is less than 2 percent, he added, “so they actually would be saving money.”
Dynamic Boost may lead to timely payments from buyers, Leavitt continued. If payers sense they get a rebate (from the issuers) or interchange revenue by using Dynamic Boost to pay, they are likely to be more diligent in getting invoices approved and paid earlier rather than later. This, he said, leads to optimized accounts payable (AP) spend.
Where AP Improvements Loom
“Certain verticals are notorious for being late payers,” he said, and a dynamic interchange model may streamline processes.
He noted big media firms, where days sales outstanding (DSOs) can be 115 days. There are institutional and higher-end payers, too, that lag when it comes to payments.
“It’s not for nefarious purposes,” he said of the stretched approval-to-payment process. “It just takes a while for the invoice to make it through the process to get approved.”
As for data that needs to be provided to suppliers (typically more detailed than other methods amid compliance mandates), he said that is addressed with the Boost Intercept solution. The fact that it is 100 percent STP makes it a completely passive experience for the supplier. For all the suppliers, concurrent with the delivery of the money over the card rails, Boost also provides the remittance support.
Picture, then, a $16 million payment with 4,200 invoices. The suppliers need to receive that remittance data in a way that can be ingested right into the their ERP platforms. Those processes, he said, are part and parcel of Boost Intercept and what the company does each and every day. Dynamic Boost, he said, exists as an adjunct to Intercept.
When asked about rollout, Leavitt said his firm is in continual conversations with many of its card-issuing partners, amid what he termed an ongoing educational process.
“What this is really about,” he said of Dynamic Boost, “is an adjustment and rightsizing of, partly, the pricing model (combined with the data), the automation and the security that are most important to suppliers today. This can be used to influence better payments behavior.”