Many small businesses have adopted electronic payments only for specific needs, leading Capital One and the fintech Melio to build a rail that attempts to cover all B2B transactions.
“A restaurant may support digital payments and use digital cards for its expenses, but when it needs to pay a small coffee bean supplier, that payment still has to be made with a check,” said Matan Bar, co-founder and CEO of Melio, which provides a B2B payments platform for small businesses.
Capital One Business has partnered with Melio, enabling small-business cardholders to pay vendors and suppliers with a credit card — even if the supplier does not accept credit cards. In such a case, the business pays the bill with a credit card, while Capital One sends a check or transfer to the vendor. The process echoes the early days of consumer online bill pay, when payment providers would mail paper checks to any recipient that hadn’t signed up to receive funds electronically.
The collaboration comes as banks and payment companies are struggling to make digital business payments ubiquitous, with trends suggesting a demand for more automation among small merchants despite their reluctance to switch away from paper-based transactions.
Banks and technology companies have spent years flooding the market with tools to automate payments, but a lot of B2B transactions are still conducted using older methods. About two-thirds of the $120 trillion in B2B payments globally were made via check and cash in 2021, according to YCombinator.
At the same time, a recent Capital One survey of 400 financial and technology decision makers at companies with yearly revenue of $20 million to $500 million found that the pandemic accelerated tech deployments.
Sixty-three percent of respondents plan to improve the customer experience, 60% hope to automate operations, 58% are looking to digitize payments and 56% hope to streamline supply chains and logistics, according to the survey.
The problem is the adoption of B2B payments is not widespread enough to create a proper network effect. Only some of the partners that a small business engages with are willing to embrace digital payments, according to Bar.
“There are companies that do a fantastic job of helping businesses get paid online by consumers, but there’s a lot of vendors that don’t take cards or digital pay,” Bar said.
To use the Capital One service, small businesses connect their Capital One cards and add information for vendor payees. The business then takes a photo of an invoice and uploads the file to Capital One, or connects the bank to Quickbooks.
The partnership expands on an earlier collaboration between Capital One and Melio to support access to accounts payable management tools for small businesses. Capital One Ventures is also an investor in Melio.
“It’s another step in a journey for small businesses toward digitizing payments that got started during the early part of the pandemic,” said Rebecca Silver, vice president of the small-business card group at Capital One.
Capital One hopes the collaboration will boost the use of cards in general, with an initial increase from the businesses that are already cardholders, since the product includes card perks, even though the payee is technically getting a check.
“The businesses can take advantage of the float, earn rewards and manage the billing cycle,” Silver said, adding Capital One has also integrated with SAP Software Solutions to automate expense reports, vendor invoices and payment records as part of a small-business bundle.
With high inflation and lingering supply-chain delays that have stemmed from the pandemic, there’s a need for flexibility in how and when small businesses both bill and make payments, Melio’s Bar said of anticipated demand. A client in the wine business recently had to increase prices by 25% because there is a shortage of wine bottles, Bar said.
One of the best ways to improve working capital effectiveness is to digitize financial operations, either in certain disciplines or across the organization, said Steve Murphy, director of enterprise payments at Mercator Advisory Group.
Small businesses have generally been mired in manual processes and can benefit from using better tools for payables and receivables, according to Murphy. In the case of Capital One and Melio, one of the flexible tools is allowing businesses to use their card as a credit source to pay a supplier that does not accept cards, with the “flipping” happening in the background and in a way that satisfies both parties, Murphy said.
The twin stresses of supply-chain backups and inflation are leading more financial companies to introduce products designed to increase payment automation among small businesses. Mastercard, for example, has introduced Mastercard Track Instant Pay, which uses machine learning to approve invoices, which can reduce payment cycle times from 30 days to a single day. That product stacks on top of the Mastercard Track Business Payment Service, which is designed to help relieve cash flow problems stemming from the supply-chain crisis.
Goldman Sachs Transaction Banking (TxB) recently started a partnership with the Interface Financial Group, a technology firm that supplies supply-chain financing, to make it easier for businesses to digitally pay multiple vendors simultaneously. Goldman Sachs is using an application programming interface to allow businesses to connect to suppliers without having to manually establish relationships with each supplier.
“Businesses are getting squeezed,” said Ben Ross, chief operating officer of Green Payments, which provides customer-facing and B2B payments for small businesses. “Everything has added costs now.”
Green Payments matches consumer payment data with inventory levels to inform when the business should place orders and send payments to vendors.
“Having a system like this in place helps avoid the issue where businesses run short of products and don’t have adequate supply to sell,” Ross said.