Why Smart B2B Marketplaces and Portals Should Never Become Fintech Payment Companies
B2B marketplaces, portals, and apps are exploring embedded finance for a variety of reasons. Including payment methods in platforms increases stickiness and increases volume for more sales. There’s also a mismatch between buyer and supplier payment expectations: buyers want the 30, 60, or 90 day payment terms they’re used to while sellers want to get paid immediately. (Unlike B2C transactions, most B2B companies don’t use credit cards for their purchases and B2B suppliers generally don’t take card payments.) Consequently, many marketplaces, portals, and apps have been making quick supplier payments while extending credit to buyers, taking on the risk themselves. So, many of these organizations have been weighing the decision of whether to build their own embedded finance solution to factor invoices or work with fintech payment companies.
As a quick reminder, invoice factoring is where a business owner sells invoices to a factoring company. The business owner receives cash for the invoice amount, usually less fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms. It’s a tool used by large enterprises and small businesses alike to increase cash flow in real time.
Some leaders running these marketplaces, portals, and apps, end up changing their minds about building their own solution, despite the idea that all companies are becoming fintech companies. Some of their reasons run parallel with the thoughts in the popular TechCrunch article, “Embedded Finance Won’t Make Every Firm Into a FinTech Company.” The reasons we’re discussing are more specific to why these organizations aren’t building their own embedded payments solution around invoice financing.
1. They don’t want their capital tied up
One of the biggest concerns marketplaces and other platforms have about building their own online payments solution is that their cash would be stuck in accounts receivable for long stretches of time on a regular basis. This goes back to the mismatched payment expectations between buyers and suppliers and how marketplaces, portals, and apps are sending money to sellers fast while extending buyers credit. While they wait 30, 60, 90 or more days to accept payments from buyers, their cash flow is impacted.
This is especially a problem for organizations that are trying to grow. Even though having their own solution might make sense for them at a more mature stage, new marketplaces need to make payroll and hire more staff, market themselves, and pay other day-to-day expenses. While many large, established organizations have access to quick, inexpensive cash through digital banking, it’s often still faster and easier to use the cash of a partner. This ensures cash is always readily available.
2. Emerging marketplaces, portals, and apps need to get to market fast
A few factors are coming together all at once to drive the growing popularity of making B2B purchases online:
- Increased demand for online payments and mobile payments that can be done anywhere in the world in the wake of the COVID-19 pandemic
- 73 percent of B2B buyers are now Millennials, who prefer a digital purchase experience and payments process
- Organizations’ need for data to make informed strategic decisions
If you’re curious about more factors causing this shift in the B2B landscape, take a look at the article we wrote about the trends driving embedded B2B payments.
The boom we’re seeing in the number of B2B marketplaces, portals, and apps is undeniable. Platforms for just about every B2B embedded finance use case are launching constantly, and Amazon Business has surpassed $25 billion in sales with no end in sight.
Whether it’s a distributor launching their own portal so customers can buy online or a start-up creating a marketplace tailored to solve the distribution challenges facing a particular industry, becoming a leader means getting to market fast – and having cloud based payment services will be an expected part of the experience. Many of these organizations are realizing they might not have time to build their own embedded finance solution.
3. They might not have all the expertise they need in-house
As expressed in the TechCrunch article referenced earlier, a lack of deep expertise in a variety of areas – like the underlying technology required, regulatory issues, and finance itself – is one major reason why not all companies are choosing to be fintechs with their own payment platforms.
Building a solution in-house might take marketplaces, portals, and apps away from their core missions and strategies during a critical time in their development when their focus is on getting buyers interested in using the platforms. To quote the famous adage, “there’s no need to reinvent the wheel.”
4. Fintech payment companies already have data and workflows in place
One reason embedded finance is so valuable for marketplaces, portals, and apps is because of the data generated. When the payment process is part of the platform experience, leaders have access to raw information about who is buying from which sellers, the size of the transactions, seasonality, the most popular products, and more. (These examples are only scratching the surface!)
This data is crucial for making strategic decisions about maximizing success generally, such as defining target markets, segmenting users, and enhancing the product. But it’s also important at the individual level; this data can be used to boost sales by replicating Amazon’s practice of making personalized purchase recommendations based on previously purchased or viewed items.
Many fintech startups and established fintech payment companies alike already have data that can help, as well as the means to get an embedded finance solution up and running faster, which means platform-specific data will be generated faster. Also to note, is that these fintechs have already figured out the workflows for the payment experience so that it will both serve buyers and generate data effectively.