by Carlo Liotti, Partner of Excellence Payments, and Chiara Resmini, Senior Consultant of Excellence Consulting

The potential relevance of “commercial” payments on the revenues of institutions combined with the challenge of innovation launched by new players is outlining a new gaming scenario for traditional banks. After a period in which the focus was mainly on retail payments, the landscape is changing: the time has come to make room for the B2B payments ecosystem.

WHICH HORIZON FOR COMMERCIAL PAYMENTS
After a long period where the main focus was placed on retail payments, in recent times the B2B payments ecosystem has also gained centrality and ground in the discussion around innovation.

The growing importance of commercial payments – transactions between businesses and between businesses and government – can be attributed to three main factors drawing attention to the sector and promoting its growth. Firstly, the volumes and related revenue opportunities are extraordinary, with the global ecosystem having reached volumes of 500 trillion dollars and, in the European market, presents revenues linked to interchange fees up to 6 times higher than transactions retail. Secondly, the macroeconomic aspect plays a significant role, especially in a post-pandemic market characterized by the fastest rate growth ever seen and the adaptation of traditional financing instruments, where B2B payment solutions emerge as a natural response and rapid to working capital needs. Last but not least, there is the increase in expectations from companies and their representatives who, even with the entry of new generations into the job market, increasingly require efficient, fast and digitalized payment processes in B2B, equal to or even superior to what they are used to as end consumers.

It is not just a question of volumes at stake, economic needs and expectations: commercial payments are crucial for the business system as they represent a leading role in digitalisation also for other critical processes, to name a few:

Innovation in purchasing processes (procure to pay, supply chain finance) Innovation in warehouse management (inventory financing) Innovation in commercial policy (dynamic discounting) Access to innovation, therefore, must be the motto and objective to be pursued for players who intend to seize the growing opportunities of this market. An opportunity that today is mainly intercepted by new comers who offer businesses digital and flexible solutions that respond to the needs of businesses to have simple experiences for the automation and efficiency of all payment-related processes.

The main players in the scheme based payment system already play a crucial role in ensuring operational efficiency, transparency in behavior and significant savings for the business system through the evolution of existing B2B protocols and the adaptation of consumer ones . However, there appears to be a lack of significant effort on the last mile of the value chain as far as the Italian market is concerned. In a context in which demand is not the problem and supply is characterized by ever new solutions supported by the most disparate technologies, the meeting between the parties can and should be guided by Banks and Financial Institutions that already offer payment solutions to its customers. We are therefore faced with a challenge in terms of innovation, an area in which incumbents – as happens in other areas of the financial offering – do not always play a leading role.

PARTNERSHIP AND CONTAMINATION AS WINNING STRATEGIES
In fact, it increasingly happens that change is activated by challengers resulting from new entrepreneurial initiatives which, combining digital innovation capabilities and a good dose of resilience in managing to overcome a complex and complex regulatory framework, bring to the ground solutions whose undoubted effectiveness calls into question the choices made so far by companies to use dated solutions and until then considered to be the exclusive domain of the traditional financial offer.
It is interesting to note how after an initial period in which – necessarily – fintech initiatives focused their entire value proposition on the ability to provide new solutions to old problems through the massive use of technology, a model of financial institution is emerging in the commercial market that combines the use of technology, and in particular the potential of Artificial Intelligence, with a renewed model of “relationship management”.
An example is the English neobank Allica Bank which in its payoff states its disruptive positioning “No-nonsense banking for established businesses” and when it talks about its banking model it defines its purpose as follows: “Small and medium-sized enterprises (SMEs) ), with 10-250 employees they are the driving force of the British economy, but have been left behind by the big banks, who have stripped them of their relationship managers and bespoke support. Allica Bank was built specifically to serve established businesses like these. We combine modern tools and technologies with having our feet on the ground in our local communities. We believe in using human relationships and tailored skills to provide entrepreneurs with the tools they need to succeed.”
It is therefore natural to expect, after years in which the new passed almost exclusively through independent fintech initiatives, a convergence at least on some areas in which to combine the typical agility of the world of technology applied to finance with the solid infrastructures and multiple relationships that are core for a well-established commercial bank.

THE NECESSARY ADAPTATION OF CURRENT ARCHITECTURES TO THE NEW PLAYING FIELD The solutions, as we have already said, exist: innovations brought by new players, evolution of tools already present – such as integrations into company management systems for virtual cards -, capital management tools in circulation that suggest to companies which tools to use and how much, platforms for reconciliation, etc. Relevant in this panorama is the data reported by recent research which estimates that approximately 96% of Italian companies do not adopt any innovative payment solution, effectively not exploiting the benefits that such solutions would bring, starting from a better purchasing experience up to the efficiency of all activities linked to this experience, such as the reconciliation or valorisation of connected data.
Focusing here on those that until now have not expressed their full potential in our market such as payment cards, it is worth pointing out that these are tools that have among their characteristics and functionality attributes that are well suited to a largely decentralized infrastructure: millions of customer/supplier relationships already exist and anchored to solid tracks for the routing of even complex transactions; systems and protocols that monitor the security of transactions and are able to certify the success of exchanges in real time; platforms that already communicate with other architectures capable of managing complex workflows. In short, it is within the reach of the forces in the field to make current architectures functional on a relatively new playing field, and win the game.

A 3 HALF MATCH THAT COMBINES TACTICAL ACTIVITIES WITH MORE STRATEGIC INITIATIVES
What can the Banks do to win the game? Among the main activities, a “three-step” approach is highlighted below which involves increasing complexity and involves a mix of “quick win” tactical actions and medium-term strategic actions:

• Retargeting: a first tactic that banks can start to implement consists of a retargeting action on “prosumer” customers, i.e. commercial customers who use retail solutions. These customers, due to the lack of attention paid to them by the players, use payment cards designed for personal consumption also for business expenses, failing to make the most of the benefits offered by commercial payment instruments and also generating lack of profit opportunities for banks. Few institutions have focused attention on this segment, thus missing out on additional revenue opportunities. Our experience says that in every consumer payment card portfolio there is between 5% and 10% of professional customers who, in addition to the performance risks of the “wrong” product, add up to a dry loss of revenue for the inability to apply the correct Interchange Fee. A first step, therefore, is to know how to offer the right product to the right customer, enhancing its benefits: virtual cards dedicated to specific expenses, integrations with company management systems that allow easy reconciliation of expenses, etc.
  
• Evolution of the value proposition and positioning of the Card tool in corporate payments: moving on to more strategic initiatives, it is important to recognize that, when we talk about commercial customers, we are talking about a company part of a supply chain with Supply Chain needs Financing which, although they can be intercepted by payment instruments such as cards, to date these still play a marginal role (<3%). Cards, by their nature, integrate well with other solutions for optimizing business activity. For example, platforms that facilitate the purchase of travel tickets by facilitating the reconciliation activity. Furthermore, in an economic context in which the search for financing and the optimization of working capital are crucial, they represent the natural response for businesses. Market operators must enable companies to understand and exploit these opportunities. It is therefore important that banks invest in network training and communication to “educate” businesses about the potential and benefits of this tool in a win-win logic: greater volumes for the bank, benefits and efficiency gains for businesses.
  
• Embedded payment as a territory of co-creation: it is a wide-ranging theme that is linked to the opening of tables in which to address the opportunities that, on paper, the theme of embedded finance poses. It is about starting projects in the area of embedded payments and starting a close collaboration, perhaps a real co-creation process, with entrepreneurial realities that imagine the best only in terms of efficiency (mainly reduction of process costs).