The revolution in payment methods is lagging in one key area: business-to-business payments. In fact, so-called B2B payments are largely a lose-lose scenario for businesses and their suppliers stuck with 20th-century inefficiencies. But that offers a $1 trillion opportunity for hot payment stocks like Visa (V), Mastercard (MA), Square (SQ) and PayPal (PYPL).
XMany businesses are so focused on their growth that they miss out on the huge savings possible from more-efficient payment methods, says Rania Succar, who leads QuickBooks Payments and Capital at Intuit (INTU).
"It's largely inertia. If you are in a small business, you want to be in the business of building your business," she said in an interview. "You got into it because you had an idea for a unique product you could build or a service you could offer. And doing research to find out all the best point-to-point solutions is time-consuming."
To appreciate the potential in this space, consider the disparity in payment methods between consumer-to-business transactions and B2B payments. Even at your local flea market, you can use a credit card to electronically pay for goods in just seconds.
In contrast, B2B payments average 45 days to process. Small businesses making purchases often have to draft checks, obtain signatures and mail them to suppliers. Comparably sized suppliers have to wait for checks, manually process them, wait for them to clear and finally receive their money.
Old Payment Methods Add Heavy Burden
Businesses spend $2.7 trillion on accounts payable alone. Small and medium-size businesses are responsible for 80% of total spending on labor and processing.
For most B2B payments, the payment method of choice is still paper-based. The average small business devotes five people to process accounts payable transactions. For a medium-size enterprise, the number mushrooms to 11.
That's where payment stocks like Visa, Mastercard, Square and PayPal come in. They enable accounts payable automation and digital payment methods, so clients can ditch checks and wire transfers, and also trim staff.
Today, small and medium-size businesses pay $16-$22 to manually process an invoice. Goldman Sachs estimates they can slash that to just $6-$7 by automating accounts payable. Larger companies spend $9 but can cut it to $4 via automation.
Goldman Sachs sees B2B payments as a $950 billion annualized opportunity for payment stocks. North America, which lags Europe in the adoption of new payment methods, will make up $186 billion.
Wedbush Securities analyst Moshe Katri believes B2B payments are just beginning to catch fire.
"The investor base has been fully aware of B2B as another opportunity related to payments," he said. "But the technology and the appetite for that is just beginning to emerge, especially from the end users, the enterprises."
Looking For The Best Stocks To Buy And Watch? Start Here
How New Payment Methods Work
For smaller businesses, improving B2B payments can be as simple as using a corporate credit card — physical or virtual — to cut down on checks.
Some 60% of all B2B payments come in the form of paper checks. That share jumps to 80% for small and medium-size business. It costs suppliers $7-$10 to process each check.
"Paper checks are wildly unsophisticated in that they can't be traced or tracked easily," said Kevin Phalen, Visa's global head of commercial business. "And they take inordinate amounts of time to create, to process and to settle."
For other small businesses, a solution may be an online platform to make or receive payments.
Bigger businesses that deal with higher volumes of B2B payments can also take advantage of automation, which includes elements of artificial intelligence.
Rather than having staff manually process every payment, automated systems can handle routine ones, while humans handle problematic transactions.
Payment stocks like FleetCor (FLT) even offer some clients rebates when they sign up for virtual credit cards used in accounts payable.
"So you can turn your cost center almost into a revenue play, depending on your size of customer," Charles Freund, FleetCor's executive VP of strategy, told IBD.
He compares it to when consumers get incentives like cashback and reward points by using certain credit cards.
Track Stock Market Data On The S&P 500, Nasdaq, Dow Jones And SPDR ETFs
Payment Stocks That Are Cashing In
Household names in payment methods as well as hot fintech and mobile payment stocks operate in B2B payments. In addition to Visa, Mastercard, Intuit, FleetCor, PayPal and Square, there's American Express (AXP), Worldpay (WP) and Coupa (COUP).
Privately held companies also are fighting for share. AvidXChange, Billtrust and MineralTree target invoicing and payment processing. Payoneer facilitates cross-border B2B payments, while Tradeshift is a force in supply-chain payments.
Goldman Sachs sees Mastercard as the leader, citing its broad portfolio of services. Mastercard offers end-to-end automated services, as well as cross-border payment options and a global trade platform created with Microsoft (MSFT).
Visa points out that among its services it also uses blockchain technology to provide added security, which is especially important for cross-border B2B payments. American Express notes it is a card issuer and a merchant acquirer. That means it helps clients implement new payment methods while also bringing in B2B suppliers for them.
Wedbush's Katri says payment networks Visa and Mastercard, which could eventually generate billions in B2B payments revenue, have an edge as both service providers and payment facilitators.
"The rails for this will be getting done via the networks," he said. "So the networks will continue to benefit from this trend."
Best Growth Stocks To Buy And Watch: See Updates To IBD Stock Lists
Payment Methods Case Study: Small Biz
Before Go-Scope CEO Kyle Scarola started using Intuit's QuickBooks, his North Carolina-based camera accessories company took cash and checks for orders.
At trade shows, long lines formed outside Go-Scope's booth as customers had to wait to place an order or even buy a sample product.
Now with QuickBooks, he can process credit card payments with card readers and Apple (AAPL) iPads loaded with Intuit software.
"It's making a huge difference in time," Scarola told IBD. "When somebody comes up and wants to place an order, we're ready to take payment immediately."
He added that Intuit's B2B payments service has helped with accounting costs. QuickBooks automatically logs all invoices and payments, cutting down on hourly fees paid to accountants.
"At the heart of solving B2B payments is electronic invoicing," Intuit's Succar said. "If you want to get out of paper you have to send the invoice electronically to the other business."
Stocks To Buy And Watch: Top IPOs, Big And Small Caps, Growth Stocks
Payment Methods Case Study: Large Biz
After IBM (IBM) sold its PC business to Lenovo (LNVGY) in 2005, the Chinese company couldn't use IBM's payment methods and had to update its own legacy B2B system.
So Lenovo outsourced the work to Worldpay's Paymetric software, says Dennis Culin, director of strategic projects at Lenovo.
"I want automatic authorization," he said. "I want the orders automatically released. And frankly, I want the collections to be automatic as well."
Culin estimates that 97% of Lenovo transactions that go through Worldpay's Paymetric system are processed automatically. Paying an annual fee to Worldpay is also cheaper than Lenovo building its own system, he adds.
Still, ignorance of the upside from optimizing B2B payment methods has slowed adoption across businesses of all sizes, says Jason Rupert, Worldpay's B2B general manager.
"A lot of companies, even large enterprise companies, don't really understand their B2B space," he told IBD.
Mergers Ahead For Payment Stocks?
For now, the sheer volume of B2B payments globally provides enough room for the payment stocks jumping into the space.
But analysts believe this will change over time. Ultimately, there will be industry consolidation as the true winners emerge.
"Payments is a tricky business," Wedbush's Katri said. "You'll see a lot of players with different business models and ultimately a lot of those players will get acquired because having a business model or having a disruptive technology does not necessarily mean you can build a scalable model and stay independent."
YOU MIGHT ALSO LIKE:
Payments IPO Soars Toward Buy Point On Earnings
You, Too, Can Be A Savvy Stock Picker — Square Helps Show How
Visa Teams Up With Gig Economy Giant For Instant Pay
PayPal Exec Shares Secrets To Its Success On Its Path To A More Than 100% Stock Gain
