While consumers keep making more of their daily finances digital—from online banking to Apple Pay—many U.S. companies remain wed to paper. The typical American pays 35 percent of her bills with checks, but most businesses complete more than half their transactions that way, according to researcher Crone Consulting. The federal government, banks, and the largest companies have invested in the servers, software, and staff needed to make transactions more efficient. Smaller businesses have held off, but there are signs that’s starting to change.
Between preparation, approvals, postage, and the costs of dealing with occasional fraud, a business has to spend $5 to $25 to issue a paper check, compared with $1 to $2 for the same payment made electronically, estimates Crone. In the past few years the European Union and governments in Latin America have begun to require or encourage businesses to switch to digital invoices. There’s been no such pressure in the U.S., which accounts for two-thirds of the 22 billion checks written each year, according to researcher Celent. “The U.S. is 20 to 30 years behind other countries in moving away from paper,” says Celent analyst Gareth Lodge.
The domestic market for business-focused digital payment software and services grew 10 percent in 2014 and will gain another 10 percent to reach $10 billion this year, Crone estimates. The growth is driven by a slew of Web-based programs designed to mesh with a business’s existing accounting systems without pricey servers or other gear.
There’s been a rush of acquisitions and new investment as well. “We see a huge opportunity in B2B payments because they are so far behind the times,” says Drew Hofler, senior director of financial solutions for SAP subsidiary Ariba. The company’s business-focused software AribaPay has processed $5 billion in payments since it launched a year ago.
In September printer maker and business services company Lexmark International bought online payment processor ReadSoft. In February, Bill. com doubled the $50 million in venture capital it had raised since its 2006 founding, while processor First Data led an $11 million round of investment in cloud rival MineralTree. So far no company has more than 5 percent of the market, says Henry Ijams, managing director at industry consultant PayStream Advisors. Bill.com Chief Executive Officer Rene Lacerte says his company may consider going public as early as 2017.
The companies have a wide range of business models. AvidXchange signs up individual businesses directly; ACI Worldwide, Basware, and Bill.com do the same, but also sell their processing services through client banks. Some charge fees per transaction, others based on monthly transaction volume. All the cloud programs are designed to link with clients’ accounting and business software, such as QuickBooks and NetSuite, and work electronically with a company’s suppliers, vendors, and banks. AvidXchange says its cloud setup works with about 100 kinds of software. Earlier electronic payment systems would force bookkeepers to record checks and invoices at least twice if the programs used by the company were incompatible.
Using cloud-based software, an accountant can send a QuickBooks entry to managers for digital approvals, record the transaction in all ledgers, and send payment out automatically for processing. The result: Fewer employees have to deal with payments. “We are probably now up to two, three accounts payable people that we saved,” says Jim Cook, chief finance officer at Mozilla, which uses Bill.com. “And we are saving our managers a ton of time, providing an audit trail and time stamps online.”
Electronic systems also provide a level of detail that a simple check doesn’t. Businesses often issue one check to cover 100 different invoices. Online transactions can itemize the charges. Some new programs can check for errors as well. AribaPay lets users establish dozens of rules on discounts based on order size and other factors and flags an invoice if a purchase order doesn’t match the final charge.
Some payment software makers offer extra features to distinguish their products from the competition. ACI Worldwide lets users supplement invoices with videos and personal messages embedded in their PDFs. Basware is expanding an online marketplace that lets companies sell their invoices to debt collectors. It will soon offer loans as well, says CEO Esa Tihilä. His company takes an undisclosed cut of each transaction.
Most cloud companies encrypt their data. Still, recent corporate hacking scandals will keep some companies away from online transactions for years if not forever, says John Barlow, who runs market research firm Barlow Research Associates. “You just look at the news, and there’s Target and Home Depot and JPMorgan,” he says. “That scares a lot of people. … They know how to protect themselves with a paper check.”
Hacking fears notwithstanding, competition among online payment processors isn’t likely to get any less fierce in the near future, because the industry’s profit margins reach as high as 50 percent, says Ijams, the consultant. Celent’s Lodge says the billions of U.S. transactions still done on paper every year are a powerful incentive for payment processors to deliver the hard sell, even if they’re angling to convert only 1 percent of check users. “There’s a huge untapped market out there,” he says.
The bottom line: The $10 billion market for digital corporate payment processing is getting more competitive as the money rolls in.