The stickiness of cards for B2B payments (or why card companies get 10X valuations)

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I have had a few conversations and email exchanges with various card veterans and companies on why any supplier would accept cards on payment terms, say 30- or 45-day terms.

I truly get that accepting electronic payment eliminates the risk of mail delay with checks and all the follow up questions of where’s my money. I even understand some suppliers may be able to upload to their AR system to reconcile outstanding invoice(s). But wait 45 days and pay 2.9% on top of that? You finance the receivable for 45 days, which has a cost, plus the card cost of 2.9%. I have a client I worked with on an early pay program that paid over 8,000 invoices totaling almost $50 million on payment terms with a virtual card for their fiscal year.

Virtual card payment growth is booming and many source-to-pay companies are partnering with banks to develop them (see here) or investing in capabilities (Corcentric buys Vendorin) or built a company on the value proposition of converting cheques to cards (see AvidXchange and AvidPay).

But why would any supplier take a card on payment terms? One industry card veteran said this is a classic example of financing the receivable and then allowing a card payment, a lose/lose proposition.

Here are some reasons I came up with — besides it’s the way we’ve always done business:

  1. From the buyer’s perspective, the card is used by Shared Services centers because you can avoid lengthy supplier onboarding. For the seller, it eases doing business in a world where bringing a new supplier onboard can be as time consuming and paper intensive as filing a legal brief. One company told me, “We are revamping entire S2P, AP and the worst challenge is the supplier onboarding. We are slow, controlling, we say ‘Don’t shoot the messenger’ and the business wants a supplier in today — so we pay by card and move on.”
  2. For both buyer and seller, it is simple to understand Mastercard/Visa compared to some of the propositions out there like dynamic discounting, supply chain finance, and invoice auctions which each have their own techniques, operational nuisances, compliance issues, etc.
  3. A seller, if they do business via apps, e-commerce or stores, is already accepting cards, so is familiar with the process.
  4. Regardless if there is a payment term, when you pay by card you typically get paid within 48 hours. That is not true by check (need to wait for payment runs).
  5. Perhaps the most important of all could be that suppliers are not sophisticated enough to understand the cost implications of both providing credit to the buyer plus eating a chunk of their margin to accept electronic payment.

Ultimately, companies need to have credit policies with their customers and as virtual cards become more prevalent, need to factor in the terms + interchange cost. If they are willing to accept cards, perhaps it is only if the buyer will pay upon invoice approval rather than on day 30 or 45. This policy gives them cash acceleration, potential e-payment efficiency (if their systems are set up to take virtual card payments and reconcile) and lastly a tax write-off for the interchange cost.

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