The Roil Over B2B Payments Rails

B2B payments innovators and Warren Buffet have something in common: They are both obsessed with rails.

Warren Buffet made rails sexy again when he bought a railroad in 2009.

That was the year Buffett took a 77 percent stake in Burlington Northern — in what he described as a “bet on America” and its resilience in the aftermath of the Great Recession.

Omaha, Nebraska — Buffet’s birthplace — was the home of the First Transcontinental Railroad, which made railroads an important part of the Omaha economy. Buffet’s expertise in the economics of railroads grew out of his childhood fascination-turned lifelong interest in them.

Travel by train was a mode of transportation perceived by many as outdated as the horse-drawn carriages that first pulled rail cars on them, but Buffet observed the role that railroads played in driving economic growth because of the efficient, low-cost and reliable way they moved goods across the country. He began investing in them long before he bought one.

Rails and railroads, Buffet wrote in Berkshire’s 2016 Annual Letter, are four times as fuel efficient as trucks, requiring only a single gallon of diesel fuel to move a ton of freight 500 miles. That efficiency reduces the cost of transport and truck congestion on the road, which reduces highway gridlock and carbon emissions produced by those trucks.

Largely immune to external threats like weather, driver fatigue and driver shortages, railroads can also mitigate delivery delays and uncertainty.

In 2014, the last time data was publicly reported, U.S. railroads were responsible for $274 billion in economic activity and employed 1.5 million workers. More than 42 percent of the freight that traveled across the 140,000 miles of track in the U.S. were related in some way to international trade.

The economic impact of railroads isn’t felt only in the U.S. and isn’t favored only by one of the world’s richest men who happens to buy and invest in them.

A recently released MIT study reports that the 40,000 miles of railroad tracks built in India between 1870 and 1930 increased the incomes of farmers there by 16 percent. Railroads that could move goods 400 miles a day opened trade opportunities that were once a 20-mile-a-day trek using animals and improved those trade opportunities there and in other countries that — according to the report’s author, David Donaldson (the winner of the prestigious John Bates Clark Medal in economics) — other technological advances since then have not.

Making B2B Payments Rails Hot

Today, a host of innovators are making B2B payments rails sexy again too.

Many believe reducing the friction in B2B payments isn’t about riding existing rails à la Buffett, but by building new ones. Why ride the existing rails when the B2B payments equivalent of the Hyperloop can make the trip more modern, faster and cooler, even if it costs more and only connects a few places?

Others want to make the trains that ride the existing rails slicker. They like the existing tracks because they connect all the relevant endpoints, are tried and tested and can be enhanced to do new things, including run in reverse. Rather than rip and replace, they’d like to use software to modernize the payments experience over those rails.

This payments debate — old rails/new rails — is not new.

It may have started in 2007 when the U.K. launched its Faster Payments scheme, after the regulator said the banks had to comply, but has amped up ever since, as regulators in a few other countries have followed in the U.K.’s footsteps.

Here in the U.S., the debate has gained its own head of steam over the last five years — ever since the Fed formed its Faster Payments Task Force and convened 300 companies and 500 people to devise a framework to make payments faster in the U.S. And that was after several years of talk and studies and consultants and published working papers.

Last Thursday in New York, we had that debate, live, as part of the closed-door B2B Payments Summit hosted by PYMNTS.

Over the course of an hour, six panelists debated several topics that are at the core of this B2B payments rails/innovation debate.

It was a lively discussion, and it, like the conversations over the course of that day, was held under Chatham House Rules. You had to be there to experience the rather spirted exchange of insights.

But the energy around the debate inspired me to add my own two cents to those topics, presented below as they were by the debate moderator to the panelists.

The responses are my own thoughts, and all center around whether you think B2B payments’ biggest pain point is the payment itself.

Topic One: B2B Payments — yeah, it’s not perfect, but, all-in-all, it works pretty well — even across borders.

It’s a bit hard to argue that point given the volume of B2B payments made between trading partners annually — some $120 to $127 trillion depending on the source you believe most. Those payments are made largely over rails that have been in place for decades: the bank, ACH and wire rails and via a payment method that has existed for centuries — the good, old-fashioned paper check.

All that is to say that B2B payments today work well in the same sense that landline phones worked well in the 1970s — everyone is connected by a process and via networks that have been built up over time. Those networks are used to make a payment to a supplier anywhere that supplier happens to be. The network is valuable because it connects all the end points to which those payments must be made and complies with the regulations that assure the secure movement of those funds.

Could that process be more efficient? Yes, it could.

Does it work? Yes, it does.

Could it be better when moving money across borders? For sure.

But today, that process of moving the actual money is a very small, but obviously very important piece of the B2B payments process — but a pain point that is less acute than others. It’s everything that happens before and after the payment is made that causes the B2B payments pain.

And where corporates really want our help.

Topic Two: Banks — sure, they’re boring as all get out, but they are innovating. No, maybe they can be part of the dumb pipes that us real innovators can rely on; no, they are useless, and we can just forget about them in time.

This debate rests largely on the expectations we have for banks as “innovators” — the role we want them to play in enabling the safe and secure movement of money within the B2B payments ecosystem and the payments problems we expect them to solve.

Banks have earned the trust of people and businesses because they keep the money stored within them safe and keep the integrity of our financial system intact. They do that very well. We like our banks conservative, and we sleep well knowing that they are bound by regulations that keep that balance in check. We have all seen the horrors of what happens when banks deviate from that playbook and people are scammed into setting up accounts without their knowledge, are denied access to their funds or, worse yet, lose them.

So, it’s hard to complain about banks not being innovative when we don’t want them — and therefore shouldn’t expect them — to be on the bleeding-edge of delivering the next new thing. If our banks started talking about the creating the SpaceX of payments, most of us would immediately move our money to someplace boring.

That said, we do expect banks to leverage their assets and their reputation for trust and security to innovate in ways that speak to the value proposition we value the most: keeping the funds there secure, and access to them secure, yet friction-free.

That’s also where we’ve seen banks innovate.

Banks use deposits kept there as a key platform asset upon which other value is created to keep customers sticky and those deposits in their vaults. On the retail payments side, online and mobile banking have transformed how accountholders access and action their money while keeping that access and those actions secure — and that accountholder relationship sticky. P2P has made it possible for accountholders to transfer money using only their mobile phone number to do so — and do it safely.

So, to say that banks don’t have a role to play in enabling B2B payments is saying that businesses — and people — don’t want to keep their money there, and that seems highly unlikely for many, many years to come.

That, then (by default), makes banks a central player in the B2B payments innovation ecosystem — but playing a different role. Rather than being innovation’s tip of the spear, banks are an important enabler and distributor of innovations that FinTechs have developed to address the pain points for the corporates with which they do business.

What will make banks the dumb pipes of B2B payments is their inability to monetize the role they play in allowing access to those relationships and to enabling that innovation.

Or being too late to recognize the opportunity and take action before their inaction becomes a huge threat.

Topic Three: Existing rails aren’t so bad, and it costs a fortune to replace them: best strategy is to work with the rails and build better trains — that is, apps and other solutions that can use what’s there already.

Just like the railroads that haul freight across the country, the economics of the existing payments rails make using them attractive. They are low-cost, efficient, tested and regulated. From a B2B payments perspective, they connect everyone who needs to be connected.

The economics of the freight railway system allows railroad operators to divert money into modernizing rail cars and partnering with innovators who can add features and functionality to the cars that ride their rails. Freight railways also leverage their size and scale to add new routes that extend the journey to new endpoints where there is demand and operate hubs that make it easier for those connections to be efficiently routed.

That’s what’s happening today inside the B2B payments arena. The regulated and compliant rails that have been in existence for decades move money globally between trading partners. Corporates even have options for the rails they might want to use depending on how fast they need the money to move and where it needs to travel.

The rules of the existing rails have been modernized too.

ACH rails now settle same-day, three times a day. NACHA is examining additional windows for weekends and has increased the limits for how much money can be sent over those same-day ACH rails. Card rails that run in reverse can push payments from corporates to consumers instantly and are being used to push loan proceeds from alternative lenders and sales from acquirers to SMBs in real time too. Limits have also been raised for those payments.

The payments piece of B2B payments is getting done, but it isn’t the real source of corporate pain.

Instead, it’s a lack of certainty that good funds are on the way — and when they’re expected to arrive. Without that certainty and visibility, it’s impossible for corporates to manage and optimize their cash flow.

Without a single view of those payments flows, it’s impossible to identify and correct payment inefficiencies.

Without moving the right data with the payment, it’s impossible to reconcile payments with outstanding invoices efficiently.

Without a simple way and a compelling value proposition to onboard suppliers and get, vet and keep their payments details secure, it’s hard to convince those suppliers to accept a new way of being paid.

Without the ability to manage the currency risk of international payments, it’s hard to avoid the margin-eroding hits caused by that volatility.

These uncertainties that surround the movement of payments have driven innovators to leverage the existing rails and the connections they make between trading partners to devise solutions that address the real B2B payments problems between them.

They’ve done that by offloading many of these B2B payments frictions from corporates onto themselves, developing the software and middleware that makes the first and last mile of that payments journey less onerous.

Therein, of course, lies the dilemma.

Better isn’t free, and the rails that exist today globally enable the cost-efficient innovation that adds value to corporates for payments that ride securely on top of those rails.

It’s tough to convince anyone to invest in new rails when corporates aren’t screaming for the biggest value proposition that they offer – speed. And, in the case of cross border payments, haven’t convinced them that we have addressed fully the global messaging failures that compromise the secure movement of those funds.

Topic Four: Existing rails are like taking the stagecoach on dirt roads when you fly — blockchain and crypto are the future; no, speaking of flying, crypto rails will never fly with corporate treasurers, FIs or regulators; and blockchain is mostly talk, little action.

The innovators who are convinced that crypto is the future haven’t talked to enough corporates and FIs and regulators to know that it’s really, really not.

And, thinking that the banks — those trusted custodians of money — will embrace crypto and open crypto rails as the catalyst for innovating B2B payments is like thinking they’d be okay with putting Jesse James in charge of payments worldwide.

Not hardly.

Crypto exists to sidestep most — if not all — that is regulated about how money moves and to whom it moves, and that simply won’t fly. Yes, I know the VC-funded cryptos will say, “What? That’s not us.”

But c’mon, there’s so much funny business going on with these rails that it is, well, not funny. End of that story.

That said, digitizing assets issued by central banks and governments and clearing and settling those digital assets across private networks is what the card networks and other regulated private networks like Western Union have been doing for decades — safely, securely and in compliance with regulations worldwide. Leveraging those networks to enable bank account to bank account payments clearing and settlement is being piloted today to support cross-border payments efficiencies. But even that is a slow-moving train today and will take time to scale.

As for blockchain, I think you know how I feel about that topic.

Banks and corporates are investing small sums of money into pilots to learn, but based on our research, no one is betting the farm or their future payments success on it — at least not now.

Blockchain is a protocol, like any other middleware, that its fans say gives companies more visibility into transactions.  Maybe it’s the only way; maybe it’s the best way; maybe it’s one of the better ways by which B2B payments’ frictions can be solved.

Then again, maybe something else has or will emerge to do the job that the hype says blockchain does today. But who’s to really know?

It’s essentially impossible to wade through the smoke and mirrors, with all the hype playing in the background, to figure out what’s hype and what’s not.

What we do know is that, like anything else in payments, for it to work, it must operate at scale. And that seems a long way away.

Topic Five: Real-time — businesses don’t care much. It’s about certainty, security and taking out more of the frictions in payments. Well, no, real-time is the foundation for a great new world of payments, and, like many innovations, people can’t envision how great it’s going to be.

Let’s first define what we mean when we say real-time. In this context, real-time is the real-time clearing and settlement of payments transactions.

It’s hard to convince most corporates that they need it.

That’s, in part, because their ERP systems are batch. Having thousands of bank accounts with thousands of transactions authorize, clear and settle in real time requires much more than a new set of FI rails to power it — it requires big process and tech changes on the corporate side to support it.

It’s also, in part, because it doesn’t solve their real, real-time problem.

What corporates want more than real-time settlement is real-time access to data at their fingertips about the inflows and outflows of funds — and, in particular, the real-time authorization of good funds, along with the transparency associated with knowing when those funds will arrive.

When funds settle isn’t much of a friction, since, with that information in hand, decisions about cash and working capital can be made. Neither are issues related to liquidity, which becomes a problem only when corporates are left guessing about whether what’s on the way is good funds.

All of that makes real-time a real hard sell to corporates, and therefore a real hard sell to every single one of the FIs in the U.S. who today already have access to an ubiquitous faster payments scheme called same-day ACH.

Same-day ACH is being used by corporates and mostly as a utility when emergency payments must be made. Same-day ACH use cases haven’t (yet) replaced volumes of paper check transactions but have replaced regular ACH — a nod to its value when a payment needs to be faster.

Same-day ACH also has a business model underneath it, which was critical to getting the scheme up and running and approved by every single bank in the U.S.

That makes any other faster/real-time payments scheme only as good as its ability to be ubiquitous across all the banks in the country too, along with a business model to support their investment.

That’s why the Fed stepped in last week to request comments from across the payments ecosystem about their role in accelerating the development of real-time clearing and settlement rails — perhaps even laying the groundwork for regulation that must happen, just like it has happened everywhere else in the world where real-time payments have launched or are in motion.

Some inside the big banks that have already invested in the Faster Payments scheme promulgated by the Fed may think regulation is the only way real-time gets done in the U.S. — perhaps because they think it’s one way to be sure their investments in that scheme can pay off.

But it’s hard to fathom why it’s better that regulators and not innovators call the shots, especially since it’s hard for anyone to identify the game-changing payments innovations that have emerged as a result of regulated faster payments schemes.

Perhaps the greatest irony of the real time debate is that real time payments does nothing to accelerate the payments terms that ultimately determine when businesses get paid anyway, which is where corporates feel the pain. And the ability for buyers to pay suppliers sooner is independent of having new rails to do it.

Ironically, as I was writing this, I came across a news story about the Hyperloop — one that showed a picture of the new Hyperloop passenger car that is capable of traveling at a speed of 750 mph and making the trip between L.A. and San Francisco in 36 minutes.

It’s pretty cool.

But these capsules carry only 30 to 40 passengers; it would require more than 100 of them to operate with enough capacity to move a critical mass of people between those two endpoints leaving every 45 seconds. These capsules have to be built, and the tunnel itself has to be dug and tested. Stations have to be built for passengers to embark and depart.

Regulators have to be convinced that it’s safe.

Passengers have to be comfortable with the idea that they are going to be smushed into a pneumatic tube that barrels its way inside of a tunnel under the earth for 36 minutes.

And be satisfied that it only goes from LA to San Francisco and paying whatever it costs to take that ride.

None of this diminishes the innovation and the creativity that is the Hyperloop. And one day, it may be the way that we all will get from point A to point B. But that day is a long way off, and a lot has to happen in order for the Hyperloop to scale and connect to all the many combinations of end points travelers find valuable.

In the meantime, people have places to go and viable options for how to get there.

It’s a bit like the vision for modernizing the movement of money between businesses. We’d never build our payments and banking infrastructure today the way it was built decades ago. But lots and lots of internal FI and corporate systems are connected to it, so we need to make what we have today work as we design something that works better and transition to it.

Someone last week said that the reason that checks persist isn’t because people necessarily like them, but because they’re simple to use. Without knowing anything but a person’s name and their mailing address, money can be transferred to them.

It’s an insight that puts important perspective on the debate that rages over payment rails today.

Innovators are using software and technology to solve for the frictions that today get in the way of creating the funds certainty that corporates crave. They are also developing solutions that simplify the management of payables and receivables that improve how they do business with their buyers and suppliers. Conversations about the plumbing that can settle funds in real time are just interesting conversations about a problem that corporates say over and over again they really don’t have today.

Until the nirvana of B2B payments gets decided and built out, businesses have people to pay and places they need to pay them — and want solutions at scale, today, that they can use to do that.