By Will Hodgson and Owen Jackson
What are B2B payments?
B2B payments is an acronym that refers to any money exchanged within a business transaction between entities. Many businesses may opt to utilise their own method for transactions involving B2B payments.
As technology evolves, many businesses still rely on more traditional methods of transaction: purchase order, trade credit, cash on delivery, and paper cheques. Conversely, with the recent emergence of cryptocurrency as a fast and effective payment solution, some businesses have chosen to move away from the more traditional methods to digital payment platforms.
Current problems
While the familiarity of traditional methods and ease of understanding between clients make them a preferred strategy in many businesses, there are some large drawbacks that inhibit businesses using these methods to their true growth potential.
Traditional transactions generally take substantially longer and will likely cost the business much more than modern payment solutions. A purchase order, while easy to execute and understand, relies on human labour which can lead many businesses to be late on payments; affecting the seller’s cashflow. Furthermore, using trade credit can put a huge strain on the seller's resources as they will typically require an individual dedicated to managing the trade credit process.
Credit cards are a more convenient traditional B2B payment solution as they do not require the business to track their credit accounts with buyers. However many credit card companies will charge the seller a substantial surcharge of 1-2%, which can place a large burden on their operating profitability. Additionally, on the buyer's side, credit card companies will charge very high interest rates ~18-23%. This can deter many buyers from using them in sales of high volume/value.
How does Fintech Help?
Blockchain, the underlying technology behind cryptocurrency, is built on distributed ledger technology. What this means, is that everyone receives and verifies the records of transactions that occur, and no transactions can be deleted. Rather than relying on centralised institutions to verify transactions, all stakeholders are responsible for this collectively.
There is great potential in Blockchain based payment systems exactly because of this decentralisation. In particular, faster settlement times can be achieved, because Blockchain is a 24/7 network. Also, it has the potential to reduce fees, as there are no longer institutions intent on collecting profits for providing their services. Even a small percentage reduction in payment fees can save businesses a significant amount of money.
Furthermore, with the use of smart contracts - a piece of code which executes when pre-specified conditions are met - there is potential to eliminate or reduce the need for people to manage the credit process. This mitigates counterparty risk to some extent.
Conclusion
Despite these strong use cases, there haven’t been too many real world examples of effective Blockchain-Based payment systems, until possibly last week. Tassat - a start-up company offering blockchain solutions for commercial banks - recently launched TassatPay. TassatPay allows customers of registered banks (3 so far) to engage in B2B transactions. In its first weekend, it recorded $800 million in transactions.
What is quite interesting about this story, is that it does exactly the opposite of what the founders of Blockchain intended to do - it gives central institutions more firepower. Attempts to create decentralised systems have often been met with lots of resistance and challenges, particularly relating to security concerns. Therefore, looking to the future, it seems most likely that Blockchain technology will be adopted and absorbed by central institutions, rather than become something that eliminates them altogether.
On a side note, if you’re interested in learning more about Blockchain then have a look at this course by MIT on Blockchain and Money: https://ocw.mit.edu/courses/15-s12-blockchain-and-money-fall-2018/video_galleries/video-lectures/. It looks at the history of money, the fundamentals of Blockchain and its use cases. Highly recommended for anyone interested in Fintech.
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References and Further Reading