COVID-19 cemented e-commerce into everyone’s daily habits in 2020, and as we look ahead, B2B e-commerce is quickly becoming the next frontier for founders and investors. The pandemic pushed businesses online, and the emergence of B2B marketplaces and e-commerce infrastructure is fueling a new wave of growth that’s estimated to reach $3.6 trillion in annual GMV by 2024.
But one major component remains missing from the stack: checkout, which has the opportunity to be the ultimate enabler for B2B e-commerce more broadly.
Historically, B2B e-commerce has been held back by deeply entrenched behaviors and a lack of cloud-based infrastructure.
The challenge of B2B e-commerce
Historically, B2B e-commerce has been held back by deeply entrenched behaviors and a lack of cloud-based infrastructure. While the market is quickly evolving, there are nuances to B2B purchases that make the path to purchase more complex than in consumer e-commerce. Broadly speaking, these constraints fall into three buckets:
Payments: PayPal unlocked the early days of consumer e-commerce, and Stripe’s ease of integrating card payments has powered the last decade. But in B2B, the challenge has always been that sellers don’t want to pay a 3% surcharge — so much so that they’d rather suffer through the pain of physical checks and accounts payable. In 2018, 60% of B2B payment flows were conducted via checks, and the persistence of nondigital payments has been a major bottleneck to e-commerce.
Permissions: Most B2B transactions go through contracting and procurement, which requires multiple parties to sign off on each transaction. This creates friction in the path to purchase, as the seller can’t tell if the buyer is authorized. Rather than being able to hit buy, buyers often need to fill out a form so a salesperson can get in touch. This can slow the transaction from seconds to weeks.
Credit: The majority of B2B transactions are completed on some form of credit, be it working capital loans, factoring, or in the form of days payable. Credit applications are typically completed on paper forms (or at best hosted PDFs) that armies of people at internal credit departments review. For context, there are over 1,000 employees at John Deere with “credit” in their job descriptions. This costs a lot and results in sensitive information being shared on paper documents, which further slows the transaction.
The net result of these constraints is the inability to make instant online purchases, like we’re used to as consumers. It’s a combination of fintech problems that require a platform rather than a series of point solutions.
Why is checkout the answer?
While the term “checkout” may not seem particularly novel, modern checkout is a distinctly new category in fintech combining digital payments, identity, fraud, credit and much more. It creates a powerful network, the type that can not only build trust but enable one-click transactions at scale.
Importantly, it’s a potentially lucrative category that drives value for the checkout provider, the seller and the buyer. Businesses won’t pay 3% for digital payments in B2B when they have high AOVs, but they will pay for conversion. What is a 5% take rate if you can now access global markets through an entire new sales channel, dramatically increase conversion and reduce the costs of the accounts payable, accounts receivable and credit departments?
Checkout is a platform play, not a payments play, and now is the time to build the category in B2B. The inertia in business buyer behavior is breaking, but importantly, the stars are aligning from a fintech infrastructure perspective.
Let’s look at a few examples:
Non-card digital payment rails
Up until very recently, the digital alternative to checks was connecting to the ACH network, or interbank clearing payments system. Typically, ACH takes two to three days, which won’t cut it for e-commerce. But the ACH governing bodies have been making strides on faster payment systems. Real-time payments (RTP) have been growing rapidly and same day ACH grew over 133% from Q1 2020 to Q1 2021.
A recent push in March of this year to reduce fraud by account validation has increased the dollar limit on RTP transactions further, opening up digital payments at very low cost for businesses. Tech players like Orum and Dwolla are making it easier than ever to access these rails via API.
The same trend applies around the world as open-banking frameworks and faster payments take hold across Europe and Asia, making it easier for B2B checkout platforms to serve multiple jurisdictions. These advancements provide major tailwinds for B2B checkout, as they can offer cost effective payment options across the globe.
Growth in B2B card payments
Card payments were the driving force in consumer e-commerce over the past decade, but historically, B2B card access and payment volumes have been limited, making up less than 10% of B2B spend in 2018. Credit cards are a powerful tool for extending days payable, though incumbent banks and providers like Wex and Fleetcor have neglected SMBs and high-growth companies.
However, a new batch of startups are dramatically improving (and expanding) the market with superior digital platforms. These companies span the full spectrum, from B2B neobanks like Novo and Mercury to credit-led products like Ramp and Rho. In each case, these startups are laying the digital foundations for business payments and in doing so provide major tailwinds for B2B checkout and e-commerce more broadly.
Digital identity
Solving the permission problem is key to unlocking business e-commerce, and checkout is the natural aggregation point for business identity. One-click transactions can be unlocked by connecting data from first- and third-party data sources into a single digital profile. Today, buyer and seller data is often siloed and inaccessible in ERP or procurement systems. This problem becomes even more complex at the individual buyer level: What is this person allowed to buy; what are their purchase limits; who requires sign off?
But a new batch of API infrastructure coupled with advancements in machine learning are breaking this paradigm. Platforms like Codat and Railz offer Plaid-like connectivity to accounting and ERP systems, unlocking trapped business logic and crucial underwriting data. Modern verification APIs like Middesk and Alloy are helping automate business verifications and reduce risk.
Moreover, platforms like Ocrolus are helping eliminate paper forms in credit applications. The net effect is faster checkout, more accurate credit decision-making, and the opportunity to build a powerful network of business buyers and sellers.
B2B buy now, pay later (BNPL)
As consumers we’ve seen the explosion of BNPL with companies like Affirm and Klarna embedding lending products at the point of sale. Given the mismatch in days payable between large and small businesses in B2B transactions, B2B BNPL will likely become a major growth category as e-commerce in business scales with companies like Resolve, CreditKey and Tillit leading the charge.
Checkout is a natural distribution partner for B2B BNPL platforms, as it aggregates data across merchants and has the potential to securely store buyers’ digital identities.
International payments
B2B commerce is inherently global, resulting in a need for international payments infrastructure. Historically, FX payments have been notoriously difficult and expensive and were getting progressively worse as the correspondent banking network shrank around the world.
However, a new batch of API-based international payments infrastructure companies like Rapyd and Airwallex make it simpler to get global payments up and running quickly, and offer lower fees through multicurrency accounts and load balancing. This makes it easier for B2B checkout platforms to spin up international trade corridors quickly and facilitate global payments before choosing where they want to build deeper integrations and control more of the economics.
Building the future of e-commerce
Building the category of B2B checkout will be no small feat. It requires deep integrations, multidiscipline fintech expertise, and patience. But a clear window of opportunity exists to build a true platform and to make checkout the home of every business’ e-commerce journey — from tracking shipments (think Shop Pay for B2B) to the adoption of smart contracts and crypto-based settlement in the future.
Given the strong network effects that exist in checkout, the founders capable of achieving scale in B2B checkout will unlock enormous value. Now is the time to build.
Disclaimer: Activant Capital is an investor in Bolt, which offers checkout services to e-commerce providers.