All B2B startups are in the payments business

Whether they know it or not

The COVID-19 pandemic has forced businesses to rethink how they accept and make payments. Paper invoices, checks and point-of-sale payments have given way to “corona-free payments” through mobile apps, electronic invoicing and ACH. Although significant, this is the sideshow to a more significant reshuffling of the payments industry.

Nearly $150 trillion in worldwide B2B and B2C transactions take place every year, but only a tiny portion are digital. A lot of technology companies want their piece of that massive pie. Until recently, though, only payment facilitators (aka, “payfacs”), gateways, banks and credit card companies had access to it.

That’s changing. Whether they know it yet or not, B2B tech platforms are becoming payments companies. Payfacs are competing to integrate their technology into these platforms, which drive an ever-growing number of transactions. Revenue-sharing deals are on the table, and payfacs are pushing the competitive advantages they can offer to the clients of these B2B platforms. Capabilities like cross-border payments, seamless customer onboarding, fraud protection, marketplace payments and B2B invoicing influence, which payfacs win in “integrated payments” (the jargon for this space) and which don’t.

B2B companies that use to leave the choice of gateway to their clients need to become savvy in payment technology, both to control the user experience and to tap this new business. There’s a massive amount of revenue on the table, and it’s just too easy to blow this opportunity and alienate clients in the process.

How we arrived here

A decade ago, the revolution in cloud computing led to a wave of B2B tech platforms promising to “disrupt” every industry. Gyms got gym management platforms. Hospitals got clinic management platforms. Retailers got commerce management platforms. Media companies got subscription management platforms. Many of these fill-in-the-blank management platforms — all independent software vendors (ISVs) — helped clients manage their operations and interactions with consumers or other businesses.

But ISVs didn’t get involved in payments, which was odd, given how complementary payments were to their platforms and how much money was at stake. Mastercard says there is about $120 trillion annually in B2B payments worldwide, and paper checks still dominate about half of the U.S.’s $25 trillion payment volume. Meanwhile, retail e-commerce sales account for $4.2 trillion out of $26 trillion in total retail, or about 16.1%, according to eMarketer. Less than 8% of global commerce is thought to occur online.

You’d think B2B software companies would find a way to generate revenue on some of that $146 trillion in transactions, but most did not. Payment processing is its own, messy, complicated niche. Payfacs go through a grueling underwriting process to provision a merchant account, which includes know-your-customer (KYC) and anti-money laundering (AML) checks. If a merchant defaults, the payfac is next in line to make good on the transactions.

When you run a venture-backed B2B platform, you have enough to worry about already.

So, B2B platforms stayed clear. They formed integrations with a basket of payfacs (Stripe, PayPal, Square, my company BlueSnap, etc.) and then let their clients choose which one to use. That’s a lot of integrations to maintain.