“Consumer payments are like a tweet — 140 characters — but B2B payment are akin to passing a bill through Congress, with accounts receivable and payables as the parties,” Resolve Co-founder and CEO Chris Tsai remarked to Karen Webster.
Therein lies the comparative complexity that is B2B payments, a gap that has been thrown into stark relief as the coronavirus has brought smokestack firms online. The old ways of trading on credit, dominated by paper processes in which large buyers dictated terms to smaller suppliers — sometimes to the detriment of the latter group’s cash flows — were in need of a digital update, and still are.
Traditionally, the seller has acted as a bank of sorts for buyers, as they’ve offered short-term credit to customers. Trade credit has been around for eons — since the dawn of money — as suppliers have incentivized sales by offering easy credit to buyers.
By stretching out repayment terms, buyers are given a bit of time to get products on shelves, sell to their own customers, and eventually get the cash in the bank, so to speak, to pay those suppliers back.
On both the accounts receivable (AR) and accounts payable (AP) sides of the equation, it’s a delicate balancing act to manage cash flow to keep operations humming.
But as Tsai told Webster, the frictions inherent in the hybrid model of eCommerce and sales transactions that have become the hallmark of B2B interactions are causing massive bottlenecks in business payments.
The bottleneck is reflected in the more than $3 trillion in outstanding receivables that PYMNTS found only two years ago sloshing around in the B2B payments landscape. And that was before the pandemic. The problem has only gotten worse in the 18 months since the study was conducted.
Offering Smart Credit
The conversation with Tsai came against a backdrop in which Resolve, spun out from Affirm two years ago, said late last month that it had received $60 million in funding to grow its embedded billing and payments platform geared to B2B companies.
Demand has been especially high for buy now, pay later (BNPL) options as buyers seek to defer payments in an effort to conserve cash, Tsai said. Suppliers want the ability to offer net terms to their buyers as is the standard practice, but at the same time, accelerate payment for those purchases.
To optimize the efficiency of the net terms economy, Resolve conducts credit checks, provides invoice financing and underwrites the receivable, while paying merchants within a day of them submitting an invoice (less Resolve’s fees), while collecting repayment within the terms specified.
“It’s almost white label; I would say it’s more ‘gray’ label,” he said of the platform. “We power the payments, and we power the notifications for a delinquent or a slow payment, for example. Buyers are still paying the vendors, but it all happens to be flowing over Resolve’s rails.”
The company’s Smart Credit Engine syncs with a merchant’s real-time data and past payment histories to help enable immediate credit line decision-making. Risk scoring boils down to a “pretty simple” credit dynamic. Tsai said that Resolve has access to underlying data that helps to score and determine the risk profile of the different types of purchases.
If firms are known by the credit bureaus or through the data gleaned by Resolve (through tradeline history or paying utility bills or other financial products) to be on-time buyers, then they are likely to continue to pay on time “and not be a classic ‘slow payor’ or ‘no payor’ in the worst case,” he said.
Risk for fraud or nonpayment seems to be apparent right from the first transaction and can be shut down. Fraudsters are just trying to take advantage of an unsuspecting vendor, as the bad actors are trying to “pull a fast one,” he said.
In the meantime, suppliers are able to build their own credit histories. Buyers pay zero percent interest if accounts are repaid within the agreed-upon terms.
The Net Terms Substitution Effect
Tsai noted that buyers, particularly larger buyers, will often want to buy from relatively established suppliers.
Resolve’s focus to date has been on up-and-coming suppliers — the smaller players who have traditionally been more constrained in extending the net terms considered favorable by their buyers. Smaller suppliers may not have the “credit sophistication” of their larger brethren or their buyers, he said. The Resolve platform works as their de facto credit and AR staff.
Tsai that that suppliers on the Resolve platform see a revenue lift which can be as much as 30 percent to 50 percent.
It also provides both buyers and suppliers another business payments alternative. Although the embedded, automated net terms model may not replace virtual cards by factoring receivables or giving discounts for paying faster, Tsai said there is at least some substitutionary effect. The old-world manual process of picking up the phone and asking for more time to pay is being replaced by software payment portals. If a buyer wants an extension on terms and is willing to pay for it, that can be done through the automated platform.
Tsai noted that the model is gaining traction as fees, which are tied only to the amount of invoice “floated” through the Resolve system, are cheaper than the roughly 2.9 percent (or higher) transaction fee that is charged on card payments, particularly for the smaller suppliers that may lack the volume to negotiate more favorable fees.
“If [the suppliers] can process checks or ACH payments and get faster cash flow, [they’ll] always opt for doing it through us,” he said.
‘Old School’ Meets Digital Age
Tsai said at a high level, the principal difference between consumer and B2B purchasing is that the former can be thought of as (particularly within eCommerce and via online shopping carts) transactional, whereas B2B purchasing is more relational in nature and is dominated by phone calls, in person visits and paper invoices.
But in a nod to the eCommerce mindset of automated approvals, Resolve’s focus is on helping firms offer and manage net terms on a 30-, 60- or 90-day basis. Through its platform, billing and buying activities between firms (and their AR/AP departments) is automated.
Tsai noted that even “old-school” industries have had to make the shift toward automated billing and collections and have moved to embrace eCommerce models that replace in-person transactions.
The platform itself, he contended, fosters the positive ripple effect of bringing buyers and suppliers together, improving the relational dynamic in a way that “leaves a bit on the table for the other side, which helps everyone in the long run … we’re taking what was analog [in trade credit] and making it digital.”