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Mitigating B2B Payment Risk Through SMB Verification

Mitigating B2B Payment Risk Through SMB Verification

June 18, 2021 at 01:00PM
by PYMNTS

The supply chain disruptions resulting from the coronavirus crisis led to some nightmare scenarios for small businesses. SMB failures spiked, with some estimates predicting the closure of millions of mom-and-pop shops in the U.S. alone.

But small businesses forced to shut their doors weren’t the only SMB casualties of the crisis, as those closures set off chain reactions with their business partners, customers and vendors. Some organizations relying on small firms to supply key goods and services were left high and dry when those vendors failed, sometimes after invoices had already been paid.

Keeping an eye on the financial health of business partners and suppliers has always been important, but organizations weary of shaky economics could demand more robust solutions to boost the transparency of their supply chains.

As it turns out, however, the process of verifying suppliers is a lengthy — and often expensive — one. Emerging onto the market to tackle that pain point is Markaaz, which recently announced a collaboration with Equifax to further build out its solution that enables small businesses to mitigate risk through verification of their own businesses, and of their suppliers.

Speaking with PYMNTS, Markaaz founder and CEO Hany Fam explained why small business verification remains such a massive pain point for firms and their partners, and how the development of an ecosystem to combat that friction can optimize B2B payments.

A Fragmented Verification System

The friction of business verification does not discriminate. Everyone from small businesses to big banks can struggle to obtain the data necessary to assess the financial health and other operational risks of their partners, customers and service providers, leading to an expensive waste of time for many professionals.

“A small business spends an average of two to four hours doing Google searches to figure out if the party they want to do business with, or that new supplier, is legitimate, what other people have said about them, etc.,” said Fam. “Truthfully, through that exercise they end up with next-to-no insights about the likelihood of that party to fail, the efficacy of their service, or their financial integrity.”

Financial institutions looking to on-board small businesses, factoring firms exploring a financing arrangement or small businesses exploring the stability of a new supplier today must all wade through troves of data sources, some public and some not, and assess that information to determine risk.

Markaaz aims to mitigate the need for such manual, ad hoc workflows with its Directory, which has pre-verified what Fam says is all U.S. small businesses, and what will be all small businesses around the globe. Businesses must claim their verification, and can invite their partners to do the same, allowing those collaborators to enter into voluntary arrangements to share additional private data like cash flow. Eventually, through partnerships with the likes of Equifax and others, Fam said the company is looking to develop a new scoring model for SMBs that goes beyond the traditional business credit scores of today.

Bringing B2B Payments Into The Picture

Mitigating operational risk through third party verification can have a variety of applications, but as Fam explained, B2B payments are a focal point of the Markaaz solution. Through his previous work at Mastercard supporting the development of Mastercard Track, a B2B payments service, Fam said he recognized not only just how challenging business verification can be, but the consequences those challenges have on the act of paying suppliers.

The potential consequences of failing to adequately vet other small businesses can be immensely damaging. Organizations can pay a business that doesn’t actually exist, or pay a vendor that is too financial unstable to be able to complete an order.

“The more dramatic and nefarious issue that we’ve seen really spike during COVID is suppliers who want to be paid upfront for products and services with no intention of ever being able to fulfill those orders,” said Fam.

But the potential applications of a business verification solution on B2B payments go further. Fam noted that the solution can be used by lenders, factoring companies and other financiers to facilitate trade financing, or for the businesses themselves to underwrite trade credit.

The technology can also support the mitigation against other forms of B2B payments fraud, like Business Email Compromise scams. In addition to mitigating B2B payments risks, Markaaz is also able to embed payments functionality that can reduce the costs of payments as a result of lowered risk, Fam explained, adding that the platform also consolidates small businesses’ sources of value — including personal cards, airmiles, cryptocurrency, business credit cards, bank accounts and more — to determine the most efficient, affordable way to pay — and to match that payment method up with suppliers’ payment preferences.

Whether it’s a small business exploring a new vendor partnership, or a Big Box retailer or bank servicing an SMB, company verification is essential due diligence. Lowering the barriers to affordable, efficient and even real-time verification can mean more stable supply chains, efficient B2B payments, and healthy cash flow at a time when economic uncertainty continues to plague the SMB community.