The Evolution of B2B Payment Methods
Why It’s Important to Look Back
Throughout history, individuals and businesses have participated in a myriad of transactions. By necessity, various norms and technologies governing those transactions have evolved over time as people seek to optimize transaction processes and features. Today, buyers and sellers have a multitude of options they can employ to shape their payment transactions. The following is a brief review of the history of transaction options and provides an assessment of some of the challenges and learnings for B2B sales.
Credit Cards and Charge Cards
Purchasing with “credit” is by no means a recent invention. With predecessors like charge plates, money orders, traveler’s cheques, and charge coins dating as far back as the 1800s, “credit cards” began gaining traction in the 1950s. Particular card advancements have included the evolution from the credit card imprinter, magnetic strips on cards, chip technology and to the “tap” functionality that we use today.
The challenge with this form of credit is that it has a fee charged to the seller when it is used by a customer, there is normally a cap on the amount available, and extraordinarily high interest rates for those who do not fully pay when payment is due.
Installment Payments or Layaway
As early as the 1920s, the idea of breaking down a purchase into installment payments was widely known. Stores would establish agreements with customers allowing them to pay over a specified time period. This structure provided an incentive for customers to make purchases despite not having the full amount “up front”.
This payment option continues to this day. At point of purchase, a buyer fills out an application to pay for a purchase over time. The seller assumes total responsibility for credit management. They must do their own checks and evaluations to verify the buyer’s credit worthiness. This process takes time, delays the sale and adds cost for the seller. In addition, despite due diligence by the seller, the buyer could still default on payments resulting in more cost for the seller as they try and go after the missing funds.
Gaining popularity in the 1960s, debit cards rely on much of the same technology as credit cards. The differentiating factor is that debit cards are directly connected to one’s bank.
The challenge for businesses considering this payment option is that the funds available for use is “capped” by the amount of money you have in the bank at that given moment. In addition, you are paying a lump sum upfront for the total value of the transaction. If a business has adequate cash flow, then debit payment could be a viable option. However, for most it is not an ideal option particularly for large purchases.
Electronic Funds Transfer (EFT)
Dating back to 1990, EFTs are Canada’s equivalent of Automated Clearing House (ACH) in the United States. Here we see the start of electronically transferring money from one bank account to another with a direct deposit. While this is a great step in terms of digital transactions, this doesn’t provide for any payment terms flexibility.
Not that many years ago, digital wallets, such as Apple Pay or Google Pay, would have seemed like pipe dreams. Rapid advancements in digital technology, in particular the Internet of Things, have normalized constant connectivity and helped digital wallets gain popularity in the 2010s. Not to be overlooked are the changing norms and the cultural habits associated with constantly having our mobile devices with us. We are always a few clicks or taps away from just about any online transaction. By capitalizing on digital habits, purchasing is even more efficient and convenient. However, while digital wallets are an additional transactional tool, it’s not a means for financing on its own.
Buy Now, Pay Later (BNPL)
BNPL is not actually a new invention. It can be described as taking the best parts of existing payment options and creating one. It combines not having to pay the full value upfront (such as with debit transactions), not having to max out credit or pay high interest rates (such as with credit cards), eliminating lengthy and laborious credit management, and finally the convenience of digital wallets. An integral option for e-commerce, BNPL gained substantial traction during the pandemic. BNPL provides an alternative to traditional credit with more flexibility and additional transparency.
What sets B2B and B2C BNPL apart is largely purchasing power and intent. While B2C BNPL has faced its own challenges and criticisms, in the B2B space these are established companies. Integrated at point-of-sale, this type of financing digitizes existing business installment financing and greatly speeds up the process by eliminating waits for approvals. In addition to offering buyers the flexibility to pay over time, sellers are able to get the full value of the sale within one business day.
Choice, Flexibility, and Digital
When it comes to B2B transactions, each payment transaction option has looked to improve what predated it whether through additional choice, flexibility, convenience, security, or digitization. Most e-commerce businesses accept multiple payment options with their own set of pros and cons. Different payment options do not have to be mutually exclusive. As one can see, the logic behind tabit and B2B BNPL is not actually new, but rather provides a modern and optimized solution, always looking ahead towards the future of B2B sales.