Never have customers had such control over how they pay, and never have suppliers had to deliver a payment experience as seamless and personalized as they do now.
There’s a clear precedent being set—customers see the payment experience as a key component in the overall commerce experience. Because of this, suppliers are investigating how offering a diverse suite of payment methods can provide their customers with a more streamlined and convenient payment experience.
In doing this, suppliers also realize that giving their customers more flexibility in how they pay, they’re able to achieve a competitive advantage by enabling lower processing costs, speeding up payment times, and better protecting sensitive customer data.
But where do you start? With so many possible payment methods for B2B transactions, each with their own implications for accounts receivable (AR) processes, it’s easy to get overwhelmed and choose to stick with tried-and-true—but dated—options like the check.
In order to provide payment experiences on par with those in the B2C realm (which customers increasingly expect), B2B businesses need to understand the different types of B2B payment methods in use, the differences between each one, and which methods are more advantageous—for both you and your customer—than others.
In this article, we’ll discuss the different types of payment methods commonly used for B2B transactions and the advantages digital and smart payments have over traditional payments. We’ll even offer a glimpse into what to expect for the future of B2B payments.
What types of payments are used in B2B?
In B2B buying experiences the supplier usually issues an invoice instead of collecting payment at the time of purchase. An invoice indicates the products and quantities sold or value of services provided to the buyer. In this case, payment terms—details of when payments are due—would be outlined on the invoice.
There are many ways suppliers and merchants collect payments from their customers. These payment methods can be grouped into three main categories: traditional payments, digital payments, and smart payments.
Checks – Checks are still a widely used payment method for B2B transactions, responsible for 42 percent of transactions in 2019. It is a written, dated, and signed document—prepared by the customer—that directs a bank to pay a specific amount of money to the supplier.
Money Order – Similar to the check, a money order is a paper form of payment. Where it differs from a check is that payment in this form is guaranteed, meaning a money order will not bounce. Money orders are purchased in advance using another guaranteed form of payment—cash or some equivalent—and then provided to a recipient. Money orders are typically limited to smaller dollar amounts—usually less than $1,000.
Cash – Cash is a legal tender that is used in exchange of goods, debt, or services. It’s most often recognizable in its physical form—banknotes and coins. For as long as goods and services have been traded, cash has been used. Note that cash may also refer to other forms of currency that are easily accessible and can be quickly turned into physical cash.
Payment-in-Kind – Payment-in-kind can be thought of as the modern-day equivalent of the barter system. It’s the use of goods or services as payment in place of cash. Heads up—taking advantage of bartering doesn’t make you exempt from taxes. Those who receive income through payment-in-kind still need to report it on their income tax returns.
Debit – A debit transaction occurs when your bank account is debited, most often with a debit card. Once the bank has been electronically notified of an online transaction using your debit card, it puts a hold on your account for the exact amount of the transaction. The merchant or supplier than sends the bank the transaction details, and once those have been reviewed, the bank then transfers the money in your account to the supplier.
Credit – A credit can generally be thought of as an agreement between a lender and a borrower. The borrower—often the customer—will receive a sum of money from a lender to pay for goods or services. That money must be repaid to the lender at a later date—often with interest. That’s the difference between credit and debit payments—payments made with a debit card, are deducted right away, whereas payments made with a credit card go on your line of credit, indicating that the funds will be paid later.
Prepaid Cards – A prepaid card functions like a gift card. It’s an alternative to cash that allows you to spend whatever monetary value is stored on the card—be it a physical or digital card. A prepaid card may be reloaded once its balance is used up. In many instances, the recipient of your prepaid card payment will be unaware that the card was prepaid.
Charge Cards – A charge card is very similar in structure and functionality to a credit card, however, there are some unique differences. The primary being that a charge card carries no interest but requires the user to pay its balance in its entirety when the statement is received. Charge cards are typically only issued for borrowers with excellent credit scores. It’s crucial that charge cards are paid in full each month as missed payments can significantly impact credit score.
Virtual Cards—As the name suggests, virtual cards are a virtual version of a credit card. No plastic, no chips, no PINs. Buyers enjoy them because they offer improved security, better control, and complete transaction details. Suppliers don’t tend to favor this payment method given that they must manually plug the card details into their point-of-sale (POS) system or virtual terminal. Thankfully, there are solutions that can provide straight-through-processing for virtual cards and integrate with suppliers’ Enterprise Resource Planning (ERP) systems to input remittance data automatically, making this payment method a more appealing option.
Electronic Funds Transfer (EFT) – An EFT is an electronic transfer of funds from one bank account to another. The transfer can either be performed within a single financial institution or can be made between multiple. EFTs are sent using computer-based systems, requiring no direct intervention from bank staff.
Automated Clearing House (ACH) – An ACH is an EFT system run by the National Automated Clearing House Association (NACHA) in the United States. An ACH payment moves funds electronically—from one bank to another—through the ACH network. This network connects every single US financial institution, giving them the ability to transfer money from one bank to another safely and quickly.
Direct Deposit – Using EFT systems, funds may be deposited electronically into a bank account rather than through physical means—like checks. The deposit itself takes place between banks, and because the transfer happens online, the recipient’s account is credited automatically and often instantaneously, meaning there is no waiting period for money to clear. Direct deposits are most frequently used as a means of depositing paychecks and tax refunds.
Digital Wallet – Digital wallets—also known as e-wallets—are software systems that securely store payment information for a variety of payment methods. Customers can leverage digital wallets to store funds, easily make purchases, and track payment history. The use of digital wallets on mobile systems means customers can make payments using their smartphones. Digital wallets essentially eliminate the need for physical wallets as all payment information is stored securely and compactly—no more bulky leather wallets.
Smart payments take the transaction process one step further than simply moving funds from the sender to the recipient by carrying critical business information alongside the payment itself. This is particularly helpful for AR teams as it gives them the data needed to easily reconcile incoming payments with their corresponding invoice.
According to PYMNTS.com, “In the smarter payments ecosystem, payments are more than simply moving funds from sender to recipient. These transactions are also about the transfer of data that can inform and improve the payments process.”
Smart payments can be made via one of the digital payment methods mentioned earlier, the difference is the environment where the payment is made. With payments made through an online portal powered by a SaaS solution or via an integrated payments solution connected to your ERP, supporting data can be captured at the same time as the payment, which can vastly simplify how B2B transactions are carried out.
What are the advantages of digital and smart payments over traditional payments?
Although writing checks is still ubiquitous with making payments, customers no longer find convenience in using them. They’re prolonged use is due to the fact that many businesses have not transformed their AR departments to be able to accept modern payment methods that are preferred by their customers. Despite checks remaining the dominant B2B payment method, the volume of businesses using them is rapidly decreasing. The same survey we referenced earlier also reported that financial professionals believe that by 2022, a majority of payments to suppliers will be made via electronic payments.
As checks and other traditional paper-based payment methods begin to disappear, it’s imperative that businesses make it easy for their customers to pay in the way that best suits their needs.
Everything is shifting online, and your customers have come to expect flexibility and control when doing business with you—two things that digital payments give them.
For companies looking to transform through digitization, smart payments eliminate one of the major challenges preventing suppliers from incentivizing customers’ use of digital payments—cash application.
For electronic payment methods like ACH, the payment must be matched with remittance data separately, creating a lot of manual work for AR staff. Smart payments remove much of the manual work linked with matching remittance data to electronic payments, ensuring an efficient experience for both customer and supplier.
What does the future hold for B2B payments?
What the last few years have shown us is that the B2B purchasing experience is on track to take place entirely online by the end of the decade. So, while it’s generally considered good business to offer customers multiple payment options, it’ll become necessary to do so sooner rather than later.
Now that you know which payment methods are typically used in B2B and why electronic payments are more advantageous than traditional payments, you can take steps improve the payment experience for both your customers and back-office.