Pay-By-Invoice Tech and the Future of B2B Payments
Pay-by-invoice is still the most preferred payment method in business-to-business (B2B) transactions, despite the introduction of advanced payment solutions, new trends in the payment industry, and the digital transformation in banking.
What exactly is payment by invoice? How would its future look based on the current trends in digital B2B transactions? Are there reliable pay-by-invoice tech solutions for businesses to use in B2B invoice management? This article aims to provide answers to these questions and many more.
What is Pay By Invoice in B2B?
In B2B transactions, payment by invoice, which is also called "pay-by-invoice," is a purchase arrangement in which the buyer receives the product or service of the seller before making payment at a later date. It is similar to Buy Now, Pay Later (BNPL) in business-to-consumer (B2C) transactions.
Pay by invoice is a highly flexible settlement method for B2B payments. The term typically ranges from 14 to 90 days to provide the business client with a high level of flexibility. This is more attractive and convenient than the usual "pay-in-four" or "pay-in-30" days that are offered by the likes of Clearpay and Klarna in the B2C sector.
The number of clients B2B and B2C companies transact with is not the same. In comparison to B2C vendors, most B2B businesses serve fewer clients. Hence, B2B sellers are largely dependent on prompt payment because they receive fewer orders. Also, the payment amounts are so much bigger for B2B than for B2C; therefore, there is typically more risk for the supplier in this sector.
Interest invoice in B2B BNPL Payments
An interest invoice is a fee a seller or vendor asks a business customer to pay for an overdue invoice. In essence, it helps them manage timely payments. Charging interest on an invoice is legal in many countries.
With respect to the amount to charge as interest on an invoice, the normal rate is between 1% and 2%. But since there is hardly any regulation for interest on an invoice, the seller has the right to set whatever rate they prefer.
Some business owners choose to impose a one-time flat fee instead of the more typical late fees, which are administered as a monthly percentage of the amount of the outstanding invoice.
What are the Benefits of Pay-by-Invoice for B2B Sellers and Buyers?
Pay-by-invoice technology offers benefits to both sellers and buyers in B2B payments. Hence, whichever side you belong to, there is something to gain from using it. Below are the advantages of transacting under a pay-by-invoice arrangement.
Advantages for B2B Sellers
Firstly, B2B sellers can use the pay-by-invoice method to encourage and increase conversion rates since it does not require an instant deposit. Besides, using this payment system, you can get up to 60% higher sales and as much as 40% conversion.
Secondly, customer satisfaction and loyalty can be increased through the acceptance of payment by invoice. It provides a convenient and seamless payment experience for buyers, who frequently prefer to pay for their purchases in full or in instalments.
Advantages for B2B Buyers
The first obvious benefit a buyer can expect to receive from using the pay-by-invoice method is continuous sales. This is possible because the buyer can place an order for goods and receive them without having made any payment. The invoice will be sent by mail or electronically, and payment can be made within the stipulated term. In that way, proper inventory is maintained, and the proceeds from sales can be used to make payment for the goods later.
Secondly, making payment by invoice allows buyers to look forward to quality assurance on the part of the vendor. Items supplied that are below the expectations of the buyer can be sent back to the seller free of charge, and in most cases, a timely replacement is made.
Risks of Pay-By-Invoice Method in B2B Payments
Using the pay-by-invoice payment method comes with its own risks, which B2B transaction participants need to be aware of. They are most notably late payments, missed payments, and fraud.
In a sales invoice, the terms of the transaction usually specify the cost of the items supplied, the quantity delivered, the acceptable method of payment, and the due date for making the payment. However, if for some reason the buyer is not able to make the payment in time, a delay is said to have occurred. Even though the seller can charge interest, the delay could cause several problems for the company, such as a lack of cash flow for immediate expenses, reduced productivity, and lower employee morale following delayed salaries.
Delays in making invoice payments can get to a point of default, which is when the buyer fails to pay for the goods delivered or service rendered. Depending on the terms of the invoice, the seller might be able to either offer additional time by extending the deadline for payment or sue the buyer. Again, this is usually not a pleasant experience.
B2B e-commerce has seen increased fraud in recent years, which evidences one of the risks of accepting pay-by-invoice systems for transactions. With modern technology, it is possible to make payments with someone else’s information without their permission. This makes fraud related to the use of pay-by-invoice technology riskier than traditional credit card scams or wire fraud.
Can Pay-By-Invoice Tech Solutions Help?
Invoicing can be challenging in B2B payments, especially when the method used is traditional rather than digital. Nevertheless, with the right strategy and automated pay-by-invoice systems in place, you will get payments much faster and more efficiently while maintaining a healthy cash flow.
B2B Payment Trends to Look For in 2023 and Beyond
In spite of the COVID-19 pandemic's increased digitization of the financial services industry, B2B payment solutions have lagged behind B2C in terms of adaptation. Nevertheless, based on the current trend, in at least the next five years, the B2B payment industry is expected to have evolved as follows:
1. Reduced use of cheques
The use of cheques became a remarkable practice probably during the time of ancient Roman banking, which was in the second and third centuries BCE. Fast forward to 2023 AD, and this method of payment is still in use in B2C and B2B transactions.
Cheques are losing favour as more convenient and faster technologically enabled payment methods become more popular. Moreover, the idea of writing cheques was discouraged by lockdowns and social distancing orders during the COVID-19 pandemic.
Notable examples of trending modern payment methods in the B2B sector include prepaid cards, credit cards, debit cards, virtual cards, crypto cards, digital wallets, electronic money services, wire transfers, QR codes, and links. The use of these methods is expected to grow, while checks are expected to become increasingly obsolete in the coming years.
2. More automated accounts payable and accounts receivable in invoicing
The COVID-19 pandemic accelerated the transition to automation in the management of accounts payable and accounts receivable in B2B operations. Automated payments have reduced the need for manually intensive processes and ensured little or no errors, thereby allowing accountants and managers to focus more on core business functions. They are able to achieve so much more through solutions that are based on machine learning (ML) and artificial intelligence (AI).
Your accounting department can perform more efficiently and reliably when you provide adequate support for the use of modern automated solutions for invoicing, thanks to the rise in digital transformation and the birth of pay-by-invoice technology. It is gradually becoming unnecessary and riskier to issue a paper invoice compared to having it done electronically.
Leveraging pay-by-invoice technology for B2B payments is the best way to take full control of your cash flow. Using an automated invoicing system allows you to easily manage payment requests from vendors and suppliers.
The best examples of pay-by-invoice tech solutions to use for your business include, but are not limited to, the following:
Pleo (Excellent for managing accounts payable)
Stripe (Best for automating accounts receivable and accepting many payment methods)
Xero (Great for multiple online invoicing and cloud-based accounting)
Tide (The ideal choice for free invoice templates)
Square (Efficient for sending unlimited digital invoices across the globe)
GoCardless (A top choice for automated recurring payments)
3. Increasing application of embedded finance in B2B payments
In 2022, Bain and Company predicted that embedded finance would account for about US$2.6 trillion worth of payments in the B2B sector by 2026, generating revenue of up to US$6.7 billion. Similar to automation, the need to integrate and streamline processes is becoming more urgent than ever before for businesses.
Embedded finance is the use of BaaS in the integration of financial products and tools into non-financial platforms so that customers can make payments as if they were dealing with a bank or financial institution.
Through embedded payments, transactions can be initiated and completed by simply clicking buttons on a retailer’s website or app, instead of writing and signing papers such as checks or visiting the branch of a traditional bank.
4. A rise of BNPL apps for B2B payments
Experts anticipate that BNPL solutions, which have already made waves in B2C finance, will favourably disrupt B2B payments in the coming years. It is anticipated that B2B BNPL alternatives would provide SMEs with access to working capital and more financial flexibility, easing cash flow problems and allowing them to take advantage of opportunities more swiftly.
Business buyers can acquire the necessary payment terms thanks to BNPL's instant access to online credit terms, which makes it simpler for SMEs to work with foreign suppliers. In a sense, it is capable of making the payment process more frictionless.
5. More support for digital currencies and crypto payments
In the coming years, we expect to see more support for the use of digital currencies. The usage of cryptocurrency is growing rapidly across several industries, and cryptocurrency popularity and blockchain technology are on the rise. Meanwhile, the digital asset revolution is well underway, as seen by the testing of Central Bank Digital Currencies (CBDCs) in the Eurozone, Canada, Sweden, China, Brazil, the US, and the UK.
Cryptocurrencies provide lower transaction costs than traditional cross-border money transfer methods when it comes to B2B transactions and cross-border payments since they avoid middlemen and clearing institutions. This is due to the decentralised nature of cryptocurrencies since the blockchain enables user transactions without the involvement of a middleman, such as a correspondent bank.
Blockchain technology and cryptocurrencies can increase transparency while assisting firms in managing cash flow and meeting regulatory requirements. The blockchain keeps a record of every transaction, making it auditable and unchangeable.
In B2B transactions, the most common e-payment method is mobile money transfers, but this is gradually shifting to pay-by-invoice technology and modern BNPL services.
B2B payments are often made using traditional methods. It usually entails the exchange of paper invoices and checks between two businesses for goods delivered or received. Wholesalers and retailers are the major players in the B2B sector.
There is a low chance that electronic payments will completely replace cash. The reason is that many small businesses and consumers are still heavily involved in the use of cash compared to other digital payment methods like cards and links.
Besides, there is not enough infrastructure to support cashless payments in many countries yet, even though the likes of Sweden and Norway have taken the lead towards achieving that.
The global B2B payments market is very big. In 2021, it was valued at US$903.50 billion, with a projection to reach US$1,618.15 billion at a CAGR of 10.20% by 2028.
There are several factors behind the failure of payment banks. They include those on the consumer side and those in the banking business environment. High interest rates, rising inflation, and high transaction charges are discouraging consumers from banking and saving money, while limited revenue streams, outdated business models, and small margins are making it challenging for the banks to survive.
If the B2C e-commerce sector has taught us anything about payments, it is that flexible and digital payment solutions are the way of the future. In the past ten years, the B2C sector has seen the emergence of new digital payment solutions. Leading examples are mobile wallets and BNPL, which are now among the most widely used methods for making safe, dependable, and quick online payments.
However, digital payments are still in their infancy in the B2B market. It may take some time for electronic payments to make significant progress since legacy procedures like the usage of paper for invoices and checks are entrenched in the business, but there is no denying that this is the direction they are going. Additionally, this change is speeding up because of the lessons learned during the COVID-19 pandemic.