The future of B2B payments is real-time payments. Although progress on this front has been slower when compared to consumer payments, it is steadily picking up steam.Â
The increased demand for solutions, as well as a rather sluggish pace from governments and institutions, have only served to further highlight this glaring issue – one that will have to be solved if businesses are to evolve with the times. The Federal Reserve’s FedNow project, originally slated for release in 2020, has been delayed to 2023 or 2024.
So, we’re pretty certain as to where we’re headed. But how are we going to get there, exactly? Let’s take a look at the future of B2B payments.
Current Expectations
Even when it comes to business-to-business transactions, consumer expectations are king. It is impossible to separate business expectations from the day-to-day lives of consumers – and make no mistake, business owners, managers, and entrepreneurs are in no way immune to this.
And when it comes to consumer expectations, one sector rules supreme above all others – big tech, and perhaps more specifically, social media.
Social media presents the lens through which we, and most of the world, experience day-to-day life to quite a large degree. From news to communication, we’ve all been subconsciously conditioned to expect the same basic criteria – instantaneousness, reliability, and reactivity.
Think about most of your online interactions. They happen in the blink of an eye, and there’s no double-checking, no need to confirm anything, nothing – it just works.Â
And it isn’t just a few odd cases – each and every social media platform has adopted an identical set of features. Instantaneous delivery – check, read receipts – check, whether or not the other party is in the process of replying – check.
This is the framework that has and will continue to shape consumer demands: real-time updates.
But has the world of B2B payments kept up with these expectations? Not exactly – with data from Freshbooks suggesting that small businesses generally wait about 30 days to get paid.
That’s a far cry from what businesses want.
Real-time B2B Payments – Only a Matter of Time
The abovementioned consumer demands have already had an effect on expectations when it comes to B2B payments. And while large institutions and governments might be slow to respond, businesses are not.
The Fintech sector has been tackling these issues for several years now. We’ve seen the rise of stablecoins, P2P services like Venmo, and the advent of machine learning making significant inroads in the financial sector.
These are significant advances – but the real change to B2B payments will likely dramatically accelerate as banks and other large financial institutions move closer to this goal. And there’s good news on that front – the European Union’s TIPS platform, as well as The Clearing House’s RTP network, are poised to create the necessary infrastructure for further advancements.
The TCH RTP system will be a huge leap toward real-time B2B payments when compared to the traditional modus operandi of batch-processed ACH transfers. But the real secret toward real-time B2B payments lies in the world’s most valuable commodity – data.
Using the same channel for the actual transaction, along with the operating data regarding the payment opens up a lot of possibilities – particularly with machine learning. Once real-world data regarding this new infrastructure starts being collected and analyzed, the systems behind real-time B2B payments will only become more efficient – and more secure.
Fincrime – the Largest Obstacle to Real-time B2B Payments
Speaking of security, it is impossible to broach the topic of real-time B2B payments without addressing the issue of fraud.
As expected, achieving the goal of real-time B2B payments depends heavily on achieving a reliable security infrastructure. Time is of the essence when fraud is in question, so the needs of a real-time B2B system are twofold – minimizing the chances of fraud, and also reducing the occurrence of false positives.
Minimizing the chances of fraud is essential for the widespread adoption of a real-time system. Businesses will not shift to this new standard if the perception is that it is less safe. But ensuring that the system is well-protected against fraud is only half the battle.
The incidence of false positives when it comes to fincrime screening will also be a top priority. A transaction being flagged as fraudulent when it isn’t has a two-fold negative effect – it adds friction to the exchange of goods and services, and occupies resources that could be used to combat actual fincrime.
Both of these issues and the way that they will end up being handled will have a huge effect on the trust that businesses have in the system, as well as the operating costs of all actors involved.Â
But as we’ve mentioned, the recent advancements in machine learning might hold the key to solving both problems. With a large enough amount of data, identifying the standard payment practices of a business will become much easier – and so will identifying false-positives, as well as legitimately concerning transactions.
But that won’t be enough on its own. If we really want to come to a point where real-time B2B payments are commonplace, we’ll need a secure system that also operates on trust. And we won’t get there without firmly established digital identities.
Digital Identities, IoT, and a Possible Solution
The sheer scope of B2B payments being executed every day is hard to grasp. If we’re going to achieve true real-time payments, the system will inevitably have to be automated.Â
A real-time B2B payment system will sink or swim based on one thing alone- its straight-through-processing rate. To put that in simpler terms – how many transactions will be completed start-to-finish without any manual intervention.
True digital identities for businesses and the internet of things present the two cornerstones of a possible solution. With a system that allows businesses to identify themselves using a set of secure information, security becomes a much easier issue – if everything checks out, the transaction can occur without the need for review.
But that’s only one piece of the puzzle. When we get to a point that true digital identities allow businesses to operate and exchange goods and services with STP rates as close to 100% as possible, the next step toward true automation is the internet of things.
The Internet of things (IoT) will allow a system of interconnected devices belonging to a business to make payments on their own. Combined with true digital identities, this will dramatically increase efficiency across the board, if the payment systems have the infrastructure to back this up.
So, how would all of this work, for example? Let’s imagine a manufacturing business that relies on processing raw materials. Once a system identifies that another shipment is due, the order can be placed automatically and then executed automatically.
Or let’s say a production line identifies a need for repairs or new parts – the principle is the same. But the benefits of a real-time B2B payment system aren’t limited to manufacturing. Think of a small business that regularly outsources a certain amount of work, or depends on another business in the supply chain for successful operation. In fact, it’s hard to imagine any business that wouldn’t benefit from the ability to automatically and securely take care of payments.
This will, of course, require quite a bit of work. If the IoT and true digital identities are to take off, we’ll need a foolproof way of identifying devices, their ownership, location, as well as a chain of authority and revision that will allow for efficient delegation.
This, in turn, will dramatically increase the volume of transactions. It’s clear that a major overhaul of B2B payment systems is needed – but perhaps more than that, it is also becoming clear that it is necessary
