In the last decade or so, B2B Networks have matured significantly in both their offerings and economic models. Emerging best in class solutions are increasingly focused on the huge value to be created from Business Payments. For a significant share of the over $100 trillion of Global Business Payments, suppliers are willing to accept a discount or fee in order to receive payment faster. B2B Networks have increasingly shifted away from supplier-pays “toll booth” models towards ones where they share in this value creation. As such, they are poised to play a key role in transforming the Commercial Payments space, in collaboration with both bank and non-bank financial players.
But a key “ecosystem” challenge remains: how to maximize supplier enrollment and acceptance of early payment, especially further out the “long tail”? Lower volumes with those mid- and lower-tier suppliers mean that buyers and networks have less leverage than with the top tier. But maximizing the total “early payments yield” from a given buyer’s supplier base will likely become increasingly central to competitive advantage in this space. This applies to B2B networks as they compete with one another. Such B2B networks also pose a major threat to banks’ legacy corporate and business payment offerings. A research paper from noted industry blog Spend Matters has referred to this as a “comet coming” for the existing bank trade financing ecosystem, warning incumbents to “be ready by 2016”. As banks wake up to this, they will look to partner with the emerging network leaders. There too, “early payments yield” will be one key criterion, alongside other factors.
Why is this an “ecosystem” challenge? Suppliers generally don’t like having to adopt new, exception processes and “solutions”, simply to do business with one other customer – even if early payment provides some incentive to do so. Sometimes, new network-centric cloud solutions may make it worthwhile for a supplier to switch away from their existing financial software and payments providers. But mostly not: to get mass supplier adoption, alignment and integration with their existing solutions will be essential. For these reasons, networks’ competitive advantage, and their ability to maximize “early payments yield” will increasingly depend on building an ecosystem of relationships with such providers. In the early stages, multiple networks may attempt to build such partner “micro-ecosystems”. Over time, however, one ecosystem platform is likely to become the clear winner – albeit tending to an open, “Internet of Payments” model.
However, despite the clear and overwhelming importance of building such an ecosystem, how to do so remains unclear. Network effects can be extremely powerful, especially over time. But in the early stages, delivering a compelling value proposition – here, to supplier solution providers in particular – can be challenging. Chicken-and-egg issues abound. Two factors may be key to success: early experimentation, and leverage of existing network ecosystems (much as Paypal leveraged eBay and card networks in the early days, for example).
What might be some elements of those value propositions that B2B Payment Networks could offer to solution providers, and what experiments could help validate them? Here are a couple of possibilities, and hypotheses as to how this might get started in the early stages:
- Win new customers. Supplier solution providers will, in general, be more motivated by scenarios that get them new customers than by (speculative) new revenue streams. Cloud-centric solutions, especially for SMBs, will likely be easier to adopt in such scenarios. With the profusion of new competitors in this space (and even cloud offerings from incumbents), some hungry and aggressive players will likely be motivated to experiment. The more networks can demonstrate demand they can generate for what such solution providers have to offer, the more likely those providers are to engage.
- Earn more payments revenue. The potential value created from early payments is very large, and can certainly be shared with supplier solution providers, to the extent they help drive enrollment and acceptance. But those new “payment rails” remain something of an exception process, from supplier solution providers’ perspective. The “lower hanging fruit”, as they see it, may be in tying early payment value propositions to their existing card payment solutions – an existing ecosystem that B2B Payment Networks can leverage. (See blog post on that topic here). Some SMB solution providers already earn transaction revenue from such own-branded payments solutions. Others may in future find the opportunity attractive. Payments from an enterprise via a B2B Payment Network will probably not, however, in most cases, be made via card. All the same, aligning these two ecoystems can help unblock the chicken-and-egg issues that otherwise arise.
Early experimentation is riskier, of course – for networks, and their potential ecosystem partners, whether supplier solution providers, or on the buy-side, such as banks. But so too are the potential rewards, as network ecosystem pioneers become the likely big winners from the “coming comet” in corporate payments and B2B networks.