B2C (consumer payments) are often frequent and small purchase amounts transacted through credit cards. The most common purchases are retail items. In contrast, business-to-business payments are much larger and not as frequent. Like consumer purchases, most B2B business purchases are also digital.
Because of their size, B2B payments are more complex than consumer payments. Smaller B2B payments are able to transact in real-time. Larger payments can present a problem, as any fraud detection must be run and there are fewer channels available for real-time processing of larger payments.
Detecting fraud is a main concern with B2B payments. An AFP 2020 Payments Fraud and Control Survey found that 78% of businesses experienced attempted payment fraud. To help reduce B2B payment fraud, merchants require a lot of information about the company making payments. The more info the merchant has, the more they are able to reduce potential fraud.
In this section, we’ll go over three common B2B payment options. Checks are still very popular as a form of payment for B2B transactions. Compared to the digital solutions we’ll discuss below, checks aren’t digital, take longer to process, and have the potential for fraud.
The B2B payment solutions below are all digital, process fast, and have fraud protection built-in.
ACH (automated clearing house) is a bank-to-bank transfer method. Processing rates are also low. In fact, they are lower than credit card or wire transfers. However, depending on the type of ACH processing used, it is not as fast as credit card and wire transfers. Three days is common for ACH processing.
ACH requires a lot of paperwork, which is why it isn’t the best method for one-off payments. Those are better handled by check and credit cards. Completely digital ACH services are available to help speed up the initial paperwork. Some ACH services require small deposits to be made before any processing can begin. These extra steps can add a couple of days or more to the total processing time.
Credit card payments are common as a form of B2B payment. They are quick and come with built-in fraud detection. Processing credit card transactions means that merchants will incur processing fees charged by credit card companies but these fees are reasonable. Given the convenience and preference for B2B customers to use credit cards, most merchants will benefit from accepting them. B2B cards are also called corporate cards, purchasing cards, and business credit cards.
Credit card use benefits B2B customers since it helps them build their business credit. Better business credit can help B2B customers get different types of credit such as loans and lines of credit, allowing them to grow their business.
Like ACH, wire transfers are a bank account to bank account transfer of funds. However, they process on the same day in most cases. Wire transfers have high fees but they are flat rather than a percentage of the transferred amount. Relative to larger transfers, the fees aren’t that high.
Virtually all banks have wire transfer services. Like ACH transfers, there is paperwork to fill out. Wire transfers can be completed digitally though, avoiding the need to go into a bank branch.
There are three data levels of B2B payments. As you move from level I to II and III, fees decrease and fraud protection increases. B2B merchants should try to reach level II or III since they afford lower rates and higher fraud protections. This is especially important for small businesses who’s cash flow can be more impacted by fees.
Fees charged by credit card processors are called interchange rates. Some refer to these fees simply as processing fees. They consist of a percentage of the transaction plus a fixed amount. For example, 2.5% + 0.10.
This first level is basically consumer credit card processing. This level has the highest fees. It is small transactions and customer information is gathered only available from the credit card. Level I processing is B2C or consumer credit card processing. The following information is required by Visa:
- Card number
- Dates data
- CVV2 code
- Additional information that may be required includes:
- Zip code
- Merchant name
- Transaction amount
- Amount needed
As we move into levels II and III, more information is required. The more data required, the more that fraud protection can be applied. The use of additional data is likely a significant factor in lower interchange fees. Levels II and III are referred to by Visa as enhanced data.
The following level II and III information is directly from Visa’s Enhanced Data.
- Level I data elements
- Sales tax amount
- Sales tax indicator
- Customer code
- Purchase ID
- Purchase ID format
- Level I and II data elements plus
- Ship to/from ZIP code
- Destination country code
- VAT invoice reference number
- VAT tax amount/rate
- Discount amount
- Freight/shipping amount
- Duty amount
- Order date
- Level I and II data elements plus
- Item description
- Item quantity
- Item unit of measure
- Item total
- Item commodity code
- Item product code
- Item unit cost
- Item VAT tax amount/rate
In this section, we’ll look at three methods for processing credit payments, which means mainly issuing invoices. Processing invoices by hand is very laborious. We’re going to see how that process can be improved.
Developing an in-house payment processing department requires significant resources. An experienced team dedicated to the task is needed. This department will need to:
- Issue invoices
- Track outstanding invoices
- Process payments
- Collect on late payments
- Establish and update credit policies
- Extend new credit
While the above list is not exhaustive, it covers the major task within accounts receivable. Choosing to bring these tasks in-house works better for larger companies that have a more complex operation and likely need a fairly customized solution.
Smaller companies that do not have accounts receivable as a primary focus will be more burdened with an in-house solution. For them, outsourcing is a more practical alternative.
Outsourcing a task such as accounts receivable (AR) means paying an outside company to handle all accounts receivable tasks. This kind of company specializes in AR. They have the expertise and staff to ensure your AR operation is always up and running. By outsourcing AR, you don’t have to worry about someone calling in sick or hiring new AR people.
Additionally, many companies find that by outsourcing AR, they are able to better focus on their business’ core competency. Additionally, they are able to reduce cost as in-house AR is often a much higher cost.
In general, it is usually better to outsource tasks and departments that aren’t core competencies.
Similar to outsourcing, an automated solution can reduce B2B payment processing cost while increasing efficiency. For companies that want to keep their payment processing in-house, automated payment processing is a great way to offset the cost of an in-house department. The software offloads many of the manual tasks that a team must deal with. This allows the team to focus on tasks that the software may not cover and reduces overall errors due to human involvement.
We touched on automated payment software in the previous section. We’re going to look a little more closely at a few of its benefits for B2B payments.
There are a number of efficiencies to consider with the use of automated payment software. Reduction in errors is a major gain through automation. Because an automated process doesn’t make mistakes, error rates will immediately drop. Another area of efficiency is better insight into overall payment processing effectiveness through reporting. All automated software produces reports that allow gleaning insights into outstanding invoices, on-time payments, various trends in payments, and more. These insights can be used to improve payment collections.
Digital payments process much faster than offline forms of payment such as cash and paper checks. Additionally, electronic payments clear bank accounts faster. Digital payments also provide better fraud detection than offline payments. Much of the information needed for fraud detection can be gathered from digital payments, which is unlike offline payments that require additional paperwork.
Digital payments also go hand-and-hand with mobile payments and ecommerce payment processing solutions.
We’ve mentioned how laborious accounts receivable can be. Automation removes much of the human element, which better streamlines the process. Depending on how big the company is, more people will be needed to keep up with the payment processing workload. Unlike labor, software doesn’t require any additional resources as the workload scales up.