In recent years, business-to-business (B2B) payment vehicles have transformed from primarily being conduits for transferring funds to solidifying their place in the supply chain as robust delivery channels of information. Payments provide myriad transaction-related information, not just to those making the payment but to the party accepting it as well. This information can include customer names, account numbers, invoices paid, purchase orders, payees, payers, banks, notes, comments and almost any other related element of the order-to-settlement process.
This information is extremely valuable in helping organisations reduce costs stemming from paper-laden and manually intensive invoicing, reconciling and posting processes. By automating these processes and accelerating the posting of payments, payment information empowers supply chain partners to maximise the use of their working capital. As a result, this transformation – from funds transfer instruments to information conduits – has caused payments, and payment-related issues, to become front-of-mind to those who use, accept and provide these services.
The Financial Supply Chain and Mutual Value
A key element of supply chain partnerships involves a trade-off in which the buyer and supplier both receive mutual value from a transaction. An example of this occurs when a supplier needs cash quickly: suppliers often offer buyers a discount to make a payment sooner. The supplier receives the needed cash, the buyer pays less for the goods, and both parties are happy.
This mutual value is also found in the structure of payment vehicles. With most forms of payment, relatively equal costs are incurred on both sides of the transaction, so transaction costs are of less significance. Because of this, other factors such as cheque float, accelerated payment via an automated clearing house (ACH), and the immediate finality of wire transfers create opportunities to provide mutual value.
B2B Cards and the Breakdown of Mutual Value
B2B cards are entirely different from other payment vehicles in terms of their role in the financial supply chain. At least four drivers distinguish B2B cards from other B2B payment types:
- Costs paid.
- Percentage-based pricing.
- Card network rules.
- Revenue sharing.
Costs paid
In B2B card transactions, the entire financial cost is placed on the supplier. This results in a starting-off point for suppliers in which the mutual value provided by the payment vehicle throws the supply chain off balance.
Percentage-based pricing
All other B2B payment vehicles are priced with a per-item fixed fee. B2B card costs are structured differently and are usually made up of a combination of fixed fees and a percentage of the transaction amount. As the size of the transaction increases, so does the cost to the supplier. This creates a tension among suppliers in which B2B cards are enjoyed and perceived as valuable for low-dollar items, as they are priced relatively in line with other payment vehicles. This relative parity changes dramatically when the transaction size increases. While the percentage-based fee is lower for those transactions valued above US$5,000, the actual amount paid increases along with transaction size as the fee is still percentage-based.
Card network rules
B2B cards are governed by the card network rules, which creates two challenges. First, the network rules prohibit card-accepting merchants from discriminating in their acceptance of cards. This creates a situation among suppliers where they are faced with making a decision as to whether or not to accept card payments. As there is no difference in the rules between accepting B2B-cards versus other credit cards, suppliers have to determine whether to accept all cards or no cards. For many industries in which retail consumers or small businesses make up a sizable chunk of revenue, this can be a very tough decision as these buyer segments demand card acceptance.
The second aspect of card rules affecting suppliers is that suppliers are not allowed to discriminate against cards by pricing card transactions differently than other payment vehicles. For example, a supplier is not allowed to charge 1% more for payments received via a card than for those received by cheque, ACH or wire, despite the fact that the cost of acceptance may be 1% or more. The resulting situation finds suppliers relatively stuck between a rock and a hard place when it comes to accepting B2B card payments.
Revenue sharing (rebate)
B2B cards further create a breakdown in mutual value between supply chain partners through revenue sharing programmes. Buyers using a B2B card in the purchasing process receive a sizable portion of the supplier’s costs of acceptance in the form of a rebate paid to them by the card issuer. Buyer rebates are commonly seen as high as 125 basis points for items that do not qualify for large-ticket treatment (which receive lower interchange fees), and 30 to 40 basis points for those that do. For a supplier to accept the card effectively gives the cardholder an additional discount from any pre-existing agreements with the supplier, paid for by the supplier.
Restoring Mutual Value?
To date, most of the attempts to increase supplier acceptance of B2B cards have been made by the actual cardholders. Card issuers and networks have provided many tools to assist cardholders in identifying the appropriate suppliers to target, but most of the reaching out is still done by the cardholders themselves.
Armed with these tools, card users are able to present suppliers with reasons to accept B2B cards. The reasons range from soft-dollar benefits, such as providing level-three data to the hard-dollar benefit of accelerating payment. Accelerated payment terms are typically the most successful way to convince suppliers to accept B2B cards, as they provide suppliers with a trade-off to help cover the cost of acceptance. For cash-strapped suppliers, the allure of accelerated payment can be quite attractive, especially if a large number of the supplier’s clients are consistently paying 90 days or more after making an order. For others with clients that regularly pay 45 days out, the value is less attractive.
Supplier Options
Suppliers are limited in their options, but that doesn’t mean they don’t have any. The following section is comprised of ideas and options that have been put forward by various suppliers Aite Group has spoken with concerning the challenges B2B cards present to them. Not all are viable for each company, or actually being done, but they do provide insight into the importance suppliers are placing on this issue.
Don’t accept cards
This is viable for some suppliers that do not have many retail or small-business customers demanding to use cards. For many suppliers, however, their business model would not allow for the rejection of all cards, as it could be damaging to their relationships with those segments that demand to use cards.
Include payment method in contracts
A more feasible option for many suppliers is to include the method of payment in negotiated contracts as part of the terms of agreement. By including the payment vehicle in the contract, the vehicle is part of the terms of the agreement and not in violation of network rules. More and more suppliers are beginning to do this, and buyers are beginning to accept it as part of the process. This option does not account for all purchases, but for many of the biggest ones, it does. Since the large-dollar purchases are the ones that cost the most to accept, suppliers including payment methods in negotiated contracts are able to avoid excessive casts of card acceptance.
Work together for change
Another option is that of a group of suppliers working together to influence card network rules, whether by industry, size or even broadly across the market. This will be difficult, but there have been a few successful examples of special pricing, most notably for grocery stores, in which special pricing was granted to an industry based on the slim margins of its business.
Being discussed by various suppliers are joint efforts to influence network rules to allow suppliers to distinguish between consumer and B2B cards, transaction size or even fixed-fee pricing for large-ticket items. For this to happen, the most critical element to success is numbers. If only a few suppliers speak up about the issues, card networks are guaranteed to do nothing. If, however, suppliers from a large industry, or even an association like the Association for Financial Professionals (AFP), were to get behind the issue, the odds of effecting change greatly increase.
Build strong relationships
Establishing strong relationships, both internally and externally, is essential to assisting suppliers in better managing acceptance costs. A gap often exists between those agreeing to payments (often relationship managers) and those dealing with rising costs of acceptance (treasury, accounting, finance, etc). Reaching out to educate and partner with sales and other customer-facing functions about the challenges of accepting cards has proven valuable to many. Additionally, bringing the customer-facing groups into the picture allows them to share the challenges of B2B card acceptance with their strategic buyer relationships. In at least one such situation, a buyer wanting to use a purchasing card shared a portion of the rebate it received with its strategic suppliers.
Conclusion
B2B payments and their ability to provide mutual value between buyers and suppliers are central to the financial supply chain. B2B card payments, however, are unique, as they break down the principle of mutual value and place an unbalanced burden on suppliers accepting them as payment.
With roughly three out of four B2B payments currently being made by cheque, card acceptance costs today are likely to be only a small portion of what they will be when all the cheques are gone. Since B2B card payments continue to increase market share as cheque use declines, suppliers need to act sooner, rather than later.