The scope for digitalisation for B2B payments is vast, but the journey is not without its obstacles for businesses and their banks to navigate. TMI’s Editor, Eleanor Hill, recently caught up with Bruno Mellado, Head of Payments & Receivables, BNP Paribas, to look at what’s new in this space and the possible implications for treasurers.
Eleanor Hill, TMI (EH): Payments innovations tend to focus on the B2C space, for obvious reasons. Why is it important that we give B2B flows similar prominence?
Bruno Mellado, BNP Paribas (BM): On the consumer side, around 70% of all purchases are made electronically from order to fulfilment. For businesses, only about 30% are treated digitally end to end from procurement to fulfilment but this will likely increase drastically in the coming years[1]. That means there’s plenty of room to digitalise how small businesses order and pay their suppliers – and also how they themselves get paid. Rather than processing this manually and checking emails to find out the status of payments, the entire workflow could easily be automated through a fully digital process.
In addition to the potential benefits of automation, there are new mandatory requirements to send B2B electronic invoices in the pipeline in Europe. This requirement already exists in other parts of the world, such as in Mexico with its local XML format CFDI, and Brazil, which has regulations for various electronic invoices, covering supplies of goods, services, freight and more.
The European Commission is progressing with its ‘VAT in the digital age’ legislative proposal, which includes obligations around VAT reporting and e-invoicing. Following a public consultation in the first half of 2022, Commission adoption is the next stage due. Sovereign European nations have been implementing their own e-invoicing formats in the meantime, all of which need to comply with the European standard for e-invoicing.
Many are looking at an invoice clearance model, where the national tax authority sees the invoice before it is issued to the recipient. This model requires authorisation from the EU to be implemented, something that Italy received back in 2019. Poland and France have also been granted authorisation and plan to roll out e-invoicing mandates in 2023 and 2024 respectively. Many other countries have also begun the legislative process that will lead to requesting authorisation.
Small businesses will have to comply and be able to receive fully electronic invoices. This means that it’s no longer possible to work with paper, but also with PDF invoices, for example. Instead, it will be more like a dematerialised invoice in XML format – think of it like an Excel spreadsheet with 130+ fields, one-third of which are mandatory.
EH: That’s quite a significant change, for small businesses in particular. Is it achievable? And is it placing too much of a burden on them?
BM: It is a very significant change. It means going from non-digital to being absolutely digital. It is being driven by governments that want more transparency over VAT fraud. The European Commission, for instance, estimates that around €4,000 a second is lost to fraud in this way[2]. That’s why they’re introducing this requirement. It will accelerate the need for small businesses to figure out their processes around payments and collections. That’s one element.
Another essential component when it comes to B2B payments is the high volume of invoice fraud risk. Knowing that your counterparty is the right one, that the invoice is for the right job, and that somebody in the company approved that invoice is an area ripe for the adoption of new technology to answer these questions. There are already a number of new companies in that space providing services for reducing that risk.
EH: And how is the rise in e-commerce impacting small businesses? Are they managing to keep up with the demands of emerging digital payment methods?
BM: We saw with the pandemic that consumers were comfortable buying everything online. While small businesses today are more open to buying online from other companies, their customer journey is not as easy as it is for a consumer. For example, if a business is purchasing widgets for €50,000, that would probably be too much to pay via credit card. The business would need to arrange a bank transfer. But if a bank transfer is used, the supplier must know they will get paid so that they can ship the goods. That is one example of where the B2B customer journey needs to be more integrated and the technology is available to do it.
Some fintech players have been trying to propose a customer journey that fits an e-commerce-style experience for small businesses. There’s also the notion of creating B2B marketplaces where small businesses can sell their products – this topic is certainly a trend right now and one to watch in 2023 as corporates revisit their marketing strategies.
EH: As discussed, small businesses can dramatically expand their geographical reach with a digital shopfront. What challenges does this create for them, and how are banks supporting this change in business model?
BM: It is all about how small and medium businesses can not only collect and pay from their home market but also achieve a higher reach – and have this functionality in other regions and countries. That is a change that’s happening right now, but it brings with it questions around currency management. For instance, how do they collect from countries that maybe aren’t too far away but aren’t critical for that business?
As an example, a small business might not want to deal with a few payments in RON [Romanian leu] if they don’t have an account in RON. The financial industry already has solutions that offer them transparent ways to get only euros in their account, even though they have sold their products in a foreign currency. That might only be small amounts, it doesn’t have to be huge volumes of cash, but the critical point is that it all has to be automated with solutions like dynamic hedging. This dramatically improves transparency, as the party buying sees the rate they’re buying at, while the party collecting knows how much they will get in their home currency, all from a platform model.
Our vision at BNP Paribas is to help small businesses in every country where we serve them. We need to ensure they can work from their bank account, which gives them rights for financing and additional services. They can use that as their treasury account, even if they are collecting from abroad or a platform, and they can easily link to new payment methods, such as wallets.
EH: Are there any other challenges around B2B payment flows that you’d highlight?
BM: B2B payment flows have to be cost-efficient in value. If a business collects many small amounts from faraway countries, it cannot have fees that are too high for the value they are collecting. One of the challenges is proposing the correct method through which to collect and pay. Businesses need something that adapts to the transaction’s value and their speed requirements, for example. Depending on the situation, this could be a wallet or a traditional international bank transfer. It is worth noting that the latter has improved in terms of speed. Think of the corridor between the US and Europe, for example. This is an effective corridor with fast and cost-efficient payments made in less than 30 minutes. Businesses must make sure they propose a suitable payment method to their clients.
Then if we come back to the earlier topic of e-invoicing, it will be a challenge, but it’s also an opportunity. If a small business can present an electronic invoice, it can also offer the preferred payment method and a link so that it doesn’t have to be manually reconciled. They can propose the payment method they want to use and eventually track it, to know where and when they are going to be paid. That’s a challenge for small businesses but there are also great potential benefits.
EH: How does everything we’ve spoken about here impact cash forecasting and working capital management? What do treasurers need to know?
BM: The objective for small businesses will be to keep that treasury account as efficient as possible. They should be able to manage their business from a single account. We have been integrating some third-party fintech solutions behind BNP Paribas to show small businesses the benefits of cash forecasting from their main treasury account, for example. We also help them to send and receive electronic invoices and to integrate the reporting that comes with it. This means that they can see the up-to-date situation of their cash flow. That’s a way to support SMEs as they adapt to electronic invoicing requirements.
For large corporates, it’s a bit different. The major challenge for them today is their relationship with small businesses, mainly where there’s a lot of work. Payments between two large corporates are already quite efficient, but large-corporate-to-small-business payments still require end-to-end automation. Each industry is different, of course. A big company with plenty of negotiating power with their small business suppliers can impose some ways of working that can save time. But if the large corporate cannot drive this kind of change, they will have to manage some of that complexity.
EH: Are there any other steps you think treasurers should take to help prepare for the future of payments, given the trends we’ve discussed?
BM: Yes – given all the changes in the payments landscape and other government requirements, treasurers need to consider how to use that as a catalyst to review the end-to-end paying out process with their procurement colleagues. Corporates also need to contemplate how to review their marketing processes, which tend to think about payments only as a result of a sale. The changes to the payments landscape that we’ve discussed are the perfect excuse to take a broader view within the organisation because, in the end, everything will be visible in the treasury account.