What do banks’ latest B2B commercial payments results mean for fintechs? David Gustin - May 12, 2020 6:00 AM |Categories: Payables Finance, Trade Financing | Tags: B2B Payments A number of top-tier banks recently announced first quarter financial results, and if you glean the comments, the commercial payment news in the coronavirus era was not good, and will most likely get worse:Citigroup had a 19% revenue reduction in its B2B commercial card activity in March.U.S. Bancorp, a large corporate and freight-payment-business vendor (and who partnered with Visa to launch Syncada), also disclosed in its earnings call that the bank is facing a decline of 30%-40% in its corporate payments business.Bank of America disclosed in its first quarter 10-Q with the Securities and Exchange Commission that interchange income, taking into account rewards and partner payments, fell by 12% from a year earlier, to $792 million.JPMorgan Chase’s Merchant Services business showed a decline in merchant processing activity, although the decline was 4% YoY to $1.4 billion.American Express said that cross-border transactions have taken a big hit and may continue to until the time when the pandemic settles down.As you can tell, it is impossible to do any real apples-to-apples comparison because banks don’t break down their figures that way. It is unclear how much interchange revenue that banks have lost so far because most do not report that information in their quarterly earnings reports.But the data above shows that no one involved in B2B payments is immune. While painful, these top-tier banks are able to withstand the lost interchange and foreign exchange (FX) revenue.The frightful thing is that the worst is yet to come in the form of bankruptcies, Chapter 11 filings and slowing global trade. The rapid number of business bankruptcies happening, from Neiman Marcus to J. Crew to Gold’s Gym and many more industries, such as travel-related firms, retailers and restaurant chains, will significantly, and negatively, impact B2B payment volumes.Additionally, global trade volumes are falling, which also impacts B2B payment volumes. The World Trade Organization expects trade to fall by 13%-32% in 2020 (this wide margin shows just how hard it is to do any accurate forecasting as economies attempt to “open”).The one bright spot has been e-commerce. But even the digital economy is not immune, as firms like Facebook and Google rely heavily on ad revenue from mainstream America. As that revenue declines for them, their employment of gig workers and independent contractors declines.Question for B2B fintech business modelsHow will B2B fintechs that built their business models on interchange and FX revenue hold up during this time period?Many companies built their business models on B2B payment volumes and revenue from FX and card payments. With volumes set to decline further for many sectors, how will that impact monthly recurring revenue, cash flow and the ability to meet run rate? How will that impact some vendors’ ability to access capital and credit with financial institutions? Or draw on private equity funding tied to meeting certain milestones? We know there have been massive layoffs in fintech already. Layoff Tracker has been a key site for anyone monitoring this space.While certain verticals may hold up reasonably well, such as healthcare and food distribution, most fintech providers face at least one of three problems with a rapid reduction in payment volumes:1. Reduction in FX and interchange due to volume drops. 2. Increase in insolvencies and bankruptcies, resulting in exposures on any early-pay finance initiatives. 3. Increase in chargebacks, creating fund recovery issues specifically tied to payment companies in the merchant acquirer business.It will be tough sledding for many B2B fintechs that rely on growing revenue through payments. The silver lining in all of this is that there is no longer any disagreement about digitizing AP and payments. Companies that have many disparate manual processes will be looking to automate the entire invoice-to-pay process. This will bode well for the future, but until then, many companies will be in survival mode, especially small start-ups with limited access to new capital.David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at) globalbanking.com. Share on Procurious Discuss this: Cancel replyYour email address will not be published. Required fields are marked *CommentName * Email * Website Notify me of new posts by email. This site uses Akismet to reduce spam. Learn how your comment data is processed.