If there was any remaining doubt going into 2020 that the payments industry was heading towards end-to-end digitalization, COVID-19 put an end to it. The pandemic not only underscored the need but dramatically accelerated the transition, similar to the way the grounding of flights after 9/11 spurred the Check 21 Act. “Business as usual” was literally impossible, and advanced technology made streamlined processes the new normal.
Within just the first few months of the onset of COVID-19, digital payment volumes soared, generating as much as 10 years’ growth (Off-site). It was a trend led by P2B for everyday transactions from buying groceries to making donations, and P2P for activities like sending birthday gifts to loved ones, with B2B players catching on. Unlike some aspects of pre-pandemic life, going back on payments digitalization is unlikely. Demand is not decreasing, nor is the importance of continuity planning. For all kinds of businesses, embracing payments modernization will support future success.
People have adapted to pandemic-related changes in daily life. Organizations that have been part of that adaptation are seeing opportunities to set themselves up for future success. The B2B sector, however, has lagged in its adoption of digital payments and payments processes. Take the invoicing side of B2B payments: 75% of the more than 25 billion invoices exchanged annually still require manual processing (PDF), costing businesses approximately $200 billion every year.
Moving Past Paper
So, why does paper persist in B2B payments? First and foremost, a lack of coordinated efforts across the industry means there are no agreed-upon standards for exchanging critical information supporting B2B payments. Second, actual delivery of payment currently crosses manual and disparate systems, contributing to overall fragmentation. While some organizations have addressed their own or their clients’ unique needs, an industry solution that can be universally adopted is imperative for achieving an all-digital future.
Another challenge with B2B payments modernization is awareness: many people involved in managing these transactions don’t realize how much more efficient they could be and likely have more pressing business matters on their minds. In the U.S. market, a transaction life cycle can take over 30 days, during which time payers and payees need to exchange information about the purchase and payment before, during, and after the actual exchange of money. The complexities are real: what is being purchased, how much of it, and for what price? Who are the payer and payee? What is the payee’s routing number, account number, and other electronic payment information? Which invoices are being paid, and is it for the full amount or a percentage?
B2B payments overlap and emerge at different stages of the cycle, making it challenging to track, process, and reconcile each payment. On the remittance side of the equation is the complexity of tying information to payments coming in through different payment channels, each of which has different formats and data standards. Add to that the differing needs across organizations based on their size, volume of invoices and transactions, and even type of business, and the need for a common approach to digital solutions becomes apparent. While it’s easy to see how corporations could benefit from preparing for full digitalization of the process, it’s equally crucial for smaller businesses to remain competitive.
Transformation Means Benefits Across the Board
While businesses benefit from electronic payment adoption alone, there are materially greater rewards in lower costs, cash management, error reduction, risk mitigation, and increased transparency when they make their entire process electronic. With digitization comes richer data and more data insights, leading to improved automation for business processes. Specific analytics on how, when, and what customers are paying for, and which initiatives and incentives they respond to, allow businesses to adjust in ways that improve their strategies. Businesses can take advantage of working capital improvements like early payment discount programs. They can also reduce late payment fees and reallocate human resources to areas where they’re more needed.
Continuing “business as usual” practices leaves key opportunities on the table including cost savings, time, and efficiency gains. Operator error can be higher and overall payment data quality is poor. In light of all this, the benefits of advancing business payments efficiency far outweigh the investment, saving anywhere from $4 to $8 per invoice ($266 million annually for the federal government alone), with $75 billion to $150 billion in annual savings in the United States (PDF).
The Fed’s Commitment to Modernizing the Market
To determine which B2B efficiency efforts show the greatest potential benefit and highest likelihood of success, the Federal Reserve initiated industry research with support from Kearney and Glenbrook Partners. Insights and feedback from 60 businesses and more than 100 experts was analyzed, and the results were clear: the time to invest in electronic payment information exchange and improved process automation is now.
The Federal Reserve remains committed to helping modernize systems across the payment industry and the continual development of the Strategies for Improving the U.S. Payment System (PDF). Coordinating efforts across different segments and stakeholders for an integrated approach has its challenges, but we’ve seen from research and previous efforts that collaboration is key. To date, collaborative efforts have provided the groundwork for a strategy addressing the improvements required for an end-to-end solution for B2B payments. Through our work with the Business Payments Coalition (BPC), a volunteer-based industry group of 650 payments professionals, and organizations like The Accredited Standards Committee (X9), we continue to help facilitate industry adoption of B2B payments modernization.
So, Where Does the Future Begin?
E-invoicing (Off-site) is the first step to achieving straight-through processing for B2B payment transactions. Using common standards and protocols will mean interoperability–a scalable ecosystem that simplifies and reduces the cost of exchanging e-invoices among different systems, enabling broader connectivity. By using common exchange standards and protocols in a federated network of access points (Off-site), service providers from large financial institutions to services like QuickBooks could take advantage of invoice information formatted for automated processing, even with legacy systems. Even better, this work is already underway.
The BPC has built the foundations for this modernization through work on two critical building blocks. First, they have designed and completed a proof of concept for a federated registry service that would create an open network to support exchange of invoices in a common format, not unlike the way we are able to exchange emails seamlessly across disparate systems today. This work addresses the “how” of electronic invoice exchange. The second critical component is an organizing model, or the “who.” An organization or industry body will be needed to manage the standards and registry.
To address this need, the BPC has convened the e-Invoice Standards Oversight Assessment Work Group to define requirements and recommendations for a standards oversight approach. Combined, these efforts comprise the e-Invoice Exchange Framework needed to achieve ubiquitous invoice electronification in the United States. The work will be further advanced later this year with development of an e-invoice open-source toolkit and an in-market pilot.
Electronic Remittance: The Final Piece of the B2B Puzzle
Automating the posting of electronic payments as they’re received is key to completing the B2B digital payments puzzle, as retrieving remittance information (Off-site) until now has been a largely manual process. Though matching payments received to remittance information has layered challenges, momentum to solve them is building. Here is where service providers, payment networks, industry organizations and financial institutions can amplify that momentum by getting involved in new initiatives aimed at replicating the collaboration on e-invoicing to design industry solutions for e-remittance information.
E-Remittance work launched in 2021 includes efforts by multiple groups. The X9 ISO 20022 Market Best Practices Work Group, for example, will research and document best practice recommendations for preparing for ISO 20022 usage in the United States. The result will be a U.S. ISO 20022 market guide for implementing remittance information using the ISO 20022 standard (Off-site). In addition, a Remittance Delivery Work Group will be established this year to assess the e-Invoice Exchange Framework architecture to understand if it can enable electronic delivery of remittance information that supports all payment types, broadening the capacity for different businesses to exchange e-remittance information.
Action now means success ahead. As the broader industry transitions to real-time payments processing, B2B payments have the opportunity to evolve alongside it, keeping pace with this backroom overhaul. What’s on the horizon now will very soon be the “new normal,” and those who prepare will be the ones who define success in the financial and business landscape.
The next milestone on the path toward business payments efficiency requires service providers–including banks, credit unions, industry associations, software vendors, and payment, invoicing, and AP/AR providers–to help design these new solutions and build strategies for supporting businesses through these industry developments. Your involvement and progress will be pivotal to the outcome and success of the U.S. embracing business payments modernization.
There are many ways to stay informed and get involved. Continue to visit FedPayments Improvement and the Business Payments Coalition (Off-site) – where you can learn about the work groups and how to take part in the additional initiatives planned this year. Be sure to follow our LinkedIn (Off-site) and Twitter (Off-site) channels to learn how you’re already poised to be part of (and benefit from) this groundbreaking work.