The large market opportunity and lack of digitization in B2B payments create significant growth opportunities for digital disruptors.

In our last two posts, we examined why Integrated Payments and Payment Security are well-positioned for growth, and why LLR is actively investing in both FinTech sectors. Business-to-Business (B2B) payments is a similarly attractive FinTech sector where the large market opportunity and relatively limited adoption of digital payments in the B2B environment creates significant growth opportunities for digital disruptors.

It is estimated that B2B payments volume totals approximately $120 trillion per year globally and roughly $25 trillion per year domestically. Compared to Business-to-Consumer (B2C), electronic B2B payments has significantly lagged in adoption across industries, with approximately one-third of total B2B global expenditures processed electronically, versus two-thirds of B2C global expenditures.

This delay can be attributed to several reasons, including a lack of investment in the IT infrastructure required to facilitate electronic payments, a lack of interoperability between payment applications and ERP or accounting systems, and a general reluctance by suppliers to fund virtual card payments. While digital penetration has lagged to date, the market is ripe for disruption, and investment in the B2B space is increasing.

Clear Value Proposition Accelerates Digital Adoption and Investment

There is an imminent shift within the B2B ecosystem as constituents realize the value proposition of digital adoption is beneficial to all participants. For businesses, digitization of accounts payable and accounts receivable functions enables significant workflow automation, reduces labor costs and human error associated with manually processing payments, and increases productivity.

Card networks (Visa, Mastercard, AmEx, Discover) also stand to benefit from an increase in B2B payment volume and have remained active in the space. Mastercard formed its B2B payments hub in 2017 and Visa debuted its B2B Connect in 2016 and this spring rolled out across 30 countries. The card networks’ accelerating adoption of B2B payments functionality is likely a leading indicator and should continue to drive an increase in buyer and supplier acceptance.

Another leading indicator of the adoption of B2B payments is the increasing investment by venture capital and private equity funds in the space. During 2018, venture capital and private equity funds invested in over 80 B2B payments businesses, representing a CAGR of 9% since 2013. Invested capital in the space grew at a 7% CAGR over the same period. As investment in new, technology-focused solutions increases and makes digital adoption easier and less expensive, digital penetration should continue to accelerate.

Case in point: In 2008, LLR invested in Fleet One, a provider of fuel charge cards, fleet-related B2B payment solutions and management information services to over 32,000 fleets, utilizing products accepted at over 60,000 locations across the country.  In 2012, Fleet One was sold to Wright Express (NYSE: WEX) for $369 million, combining two of the leading providers of B2B fuel card providers.

During 2018, VC and PE funds invested in over 80 B2B payments businesses, representing a CAGR of 9% since 2013.

 

Our thoughts on B2B payments follows our posts earlier this year on merchant processing and payment security. Next we dive into two other prominent sectors within the broader FinTech landscape, wealth management and lending technology.

 

Learn more about LLR’s fintech team, portfolio companies and investment focus.