Open Banking Make-or-Break for EU Merchants Seeking Working Capital Innovations

Innovating the management of business-to-business (B2B) payments and receivables for small businesses is not a new concept, considering prominent startups like Israeli FinTech firm Melio and U.S.-based company Routable that have been exploring the space for years.

But when it comes to Europe, Philipp Adrian Pohlmann, co-founder of Berlin-based payments processor startup Denario, says that the region has some catching up to do because compared to the United States, for example, it lacks a strong accounts payable, accounts receivable (APAR) management solution for small and medium-sized businesses (SMBs).

Pohlmann explained that in Europe, the space is not very attractive, which is why the concept has not been widely adopted by more startups — despite some spend-management solutions like France-based Spendesk or Germany’s Moss [Germany] trying to increasingly innovate AP processes.

The challenge with most of these European FinTechs, he noted, is that they started off with a very profitable value proposition that could be easily monetizable with debit or credit cards alone if people pay with cards and are charged a subscription fee in addition to the interchange fees merchants incur.

But for AP or invoice management for suppliers as a value proposition on their own, he said there are fewer monetization angles — it’s more difficult to create a business model that works.

To solve this, Denario has created a network effect strategy which takes into account both sides of the transactions so that the payee and the receiver can benefit from using the platform, something Pohlmann said is not widely offered in Europe.

The young firm, launched only last year, also looked beyond offering a basic APAR software solution to focus more on the automation space.

“We essentially thought about how the business payments experience differs from the consumer payments experience and how a business owner or someone who has limited experience in finance or accounting would do a transaction,” Pohlmann told PYMNTS in an interview.

With that analysis, they concluded that to add value, any new software had to automate the multiple steps common in business payments, steps which do not exist in consumer payments.

“There are just many more steps involved [for businesses], from receiving, paying, processing, reconciling, and reporting the payment to reclaiming some of the VAT [value added tax],” he said. “The full cycle for a [business] transaction is just much longer than when you pay for a product as a consumer.

Uneven Open Banking Playing Field

Pohlmann said taking a legacy banking product used by many existing institutions and turning it into a modern software product that automates most of these B2B payments steps can be challenging due to the difficulty involved in importing payment documents, invoices and receipts from different sources — and the need to keep adding integrations to facilitate the process.

In Europe, he said, open banking technology has been helpful to navigate some of these challenges, but it remains unevenly applied across countries.

In the U.K. for example, it is widely enforced and enables users to carry out quick and easy account-to-account transactions via Denario.

In other countries like Germany, however, it’s more complex due to the legacy systems that banks run on. While these banks are PSD2 compliant and manage to offer an interface for Denario to connect via open banking, Pohlmann noted that “the coverage is quite bad.”

Moreover, most mechanisms like scheduling a payment or making a split payment cannot be done via those banks, he added.

“That’s why we are extending our scope and trying to bridge that gap by working with a banking-as-a-service partner to use an actual account in the middle to then basically take a transaction and then move it with a payment method [of our choice]. It’s a complicated process, but we are working on that,” he said.

Solution for Merchant Financing

To further its mission of automating the B2B payments experience for SMBs and startups, the startup announced this month that it had raised 1.3 million euros ($1.5 million) in venture funding.

Related news: German Payments Startup Denario Raises $1.5M to Automate B2B Payments for SMBs

That cash injection will likely help Denario bring to life another solution they’re currently working on, which is access to cheap credit and liquidity for merchants. It’s a need that was heightened at the onset of the pandemic, Pohlmann said, when many small business owners ran out of cash despite benefitting from several funding programs set up by the European Union.

He added that they’ve consulted with underwriters and financing partners on the possibilities of offering liquidity via invoice financing, for example, to finance transactions.

“We will probably be looking at a revenue-based financing [RBS] solution – trying to understand how to connect bank accounts to other finance tools and by looking at past transactions and invoices to [better] understand baseline revenues,” he explained.

From that, they will be able to create a risk model that gives the underwriter a better indication about the customer, which can then lead to better terms instead of “the very unfavorable terms that some might be used to from subprime lending, for example,” he explained.

Offering this solution could potentially be the next step the startup tackles after it manages to increase the volume on the platform and execute a successful beta launch, he said.