ETA Expert Insights: Moving Away from Checks – ACH for B2B Payments
By Pirooz Abir, CEO, LiquidInvoice LLC; Member of the ETA Technology Committee.
The payments industry spends a lot of time thinking about how to improve the consumer payment experience, and these efforts have led to rapid and transformative innovation for consumers. But there is tremendous opportunity in the realm of business-to-business (B2B) payments – and one that remains largely untapped. Consider this: in 2016, consumer payment volume (the money consumers paid to businesses through electronic means) in the United States totaled about $5 trillion; business to business payment volume exceeded $18 trillion, over three times more. The ETA Technology Committee has created a series of articles on the widening range of options for merchant service providers that serve – or seek to serve – businesses that predominantly pay other businesses. Read the first one, an introduction to the world of B2B payments, here; and the second one, on purchasing cards, here.
While Automated Clearing House (ACH) transactions are considered by many as “legacy” electronic payment methods for consumers, the B2B market is dominated by paper checks. As such, ACH payments can help modernize and streamline business payment processes and are especially well suited to companies that rely primarily on checks. Data from the Association of Financial Professionals (AFP) shows that half (51%) of B2B payments in the United States are made by check, a 1% increase over 2013 rates. More worryingly, checks are the most commonly targeted payment method or rail when it comes to fraud (wire transfers came in second), with 71% of companies surveyed by AFP reporting that they experienced actual or attempted check fraud. There is a strong incentive to transition businesses away from using checks and toward a safer payment method. ACH payments can help bridge that gap.
An ACH (payment is a Bank-to-Bank payment transaction that is initiated when the customer authorizes an originating institution or business to debit directly from the customer’s bank account. As a consumer, you may recognize ACH payments from your electronic bill statements. The cost of an ACH transaction is calculated completely differently than the cost of a card payment. Because ACH transactions have a fixed transaction cost (rather than a percentage of the transaction amount), ACH can be more economic when it comes to accepting large payments. Because of this cost differential, businesses that use ACH payments tend to have more flexibility and control over their payment terms. LiquidInvoice, for instance, allows its ACH clients to offer incentives for early payment. By charging a flat fee per ACH transaction – rather than a percentage of the total transaction value – LiquidInvoice creates an incentive for companies to use its services for larger payments and transfers.
Two verticals in particular are well-suited to ACH payments and the benefits they offer: manufacturing and non-profits. Data from Deloitte shows that manufacturing is responsible for nearly 30% of B2B payments. Smaller manufacturers – with revenues between roughly $8 and $50 million – tend to deal with cumbersome legacy accounting systems that prevent them from getting invoices out on time and staying on top of their outstanding payments. With ACH payments, they can set the net terms and even provide incentives for early payment. Because ACH payments create an electronic record, it is much easier for such businesses to track their payments and send automatic reminders when payments are due. Businesses can also elect to pass the ACH processing costs onto their clients by including them as a fee on their invoices.
Non-profit organizations are more consumer-facing but they, too, benefit from the increased automation, control, and peace of mind that ACH payments offer. They can integrate their payments systems directly with their CRM (Salesforce, for instance), instead of having to manually enter and track check numbers. LiquidInvoice’s system uses artificial intelligence to detect donations versus service items, so the year end automated contribution receipts include tax deductible contributions only. And of course, the flat fee per transaction encourages higher donation amounts.
Many B2B businesses are opting to offer a financial incentive for their clients to pay with ACH rather than a card. This can be a lucrative option for many businesses, especially since a survey by the National Automated Clearing House Association (NACHA) and the Credit Research Foundation (CRF) found that about 50% of Accounts Receivable professionals have some customers that do not have ACH capability. Business customers tend to be the best possible advertisement for B2B payment platforms and services – by streamlining the process their clients use to pay them, business customers can showcase the benefits of the platform in action.
ACH isn’t the ideal solution for every single business, but it is well suited to several specific verticals. The rules associated with returns, chargebacks and disputes are completely different for card payments and ACH payments and therefore not all vertical markets make sense for ACH payments. Like so many other sectors of the payments industry, B2B acquiring is less about finding the perfect, one-size-fits-all solution to every single customer issue. Rather, thanks in part to the rapid pace of evolution in payments, B2B acquirers must act more like consultants and help their clients identify and customize a solution to their specifications – and the right solution will almost certainly vary from case to case. The main alternative is to compete primarily on price and lower your prices every time a cheaper competitor emerges. And that approach leaves most of your business’s success in the hands of somebody else.
The energy in this space will only increase as more ecosystem players pivot to offering B2B payments solutions. Accounts Receivable (AR) professionals surveyed predict that, by 2020, ACH payments will make up 45% (nearly half) of the payments they receive, while checks will only make up 34% (down from 50% today and 63% in 2014)[1]. According to Bloomberg, P2P payments platform Zelle is expanding its risk solutions to make it safer for people to pay small businesses[2]. Microsoft is partnering with Mastercard to create a payments platform that aims to reduce inefficiencies in global business transactions. Businesses of all sizes have a growing range of options to streamline their payments capabilities and add value for their customers. And the acquirers that seize this opportunity now are likely to see dividends in the future.