In recent months, more than a few companies have generated headlines by taking initiatives in the P2P payments space. Most major U.S. banks jointly launched Zelle, a P2P payment platform that directly links customers to their accounts at participating banks or credit unions. Alphabet announced Android users could now send money through Gmail. Apple is finally enabling Apple Pay to be used for P2P payments. PayPal, the pioneer of P2P payments, stated it is going to match the instant money transfer capabilities of Zelle for its users for a flat $0.25 fee.
But while all this attention has been paid to the P2P payments arena, Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) have turned their collective attention to a much larger and potentially more lucrative payment space, one that has undoubtedly been neglected by the financial industry for too long: business-to-business (B2B) payments.
Mastercard CFO Martina Hund-Mejean recently estimated the global B2B payments arena to be about $124 trillion, of which "only" $20 trillion is negotiated at a point-of-sale. The rest is negotiated via ACH, check, or cash. Earlier this month, both Mastercard and Visa announced new B2B platforms which they believe will allow their payment networks to capture more market share in this huge opportunity.
Mastercard launches B2B Hub
Mastercard was the first to announce such a platform, calling it the Mastercard B2B Hub. Mastercard's business payment solution was made possible by partnering with (and taking a minority stake in) AvidExchange, a company specializing in automating invoicing and payment procedures. AvidExchange has 5,500 customers across North America.
Earlier this month, CFO Hund-Mejean spoke at the William Blair 2017 Growth Stock Conference and described the vision the company has for the B2B Hub and how it's supposed to work:
"We put actually something together that allows all of those smaller and on the lower end of the medium-sized companies to digitally take an invoice and pay it through various means. So this is not just card payments. This can be check. This can be ACH. This can be card. It really depends on what kind of pain points the customer has and what they're trying to do ... If somebody really only takes checks, one of their suppliers, then that can be routed by check. If they want to do it via ACH because they really want the cheapest option and they don't have any cash flow issues, they can do ACH. And by the way, if they want to have more data, they can do ACHplus, right? So that's where the data comes in. And that optimal solution we are rolling out via our banks."
One of the reasons Mastercard might not have ventured too much into this space before is because of its recent acquisition of VocaLink, which essentially gave Mastercard access to its own set of ACH payment rails. ACH is an electronic payments network that can probably best be described as writing an electronic check and which is commonly used for applications like direct deposits and payroll. In the world's fifty most economically developed countries, Hund-Mejean says, ACH represents about 50% of all payment volume.
While ACH payments have traditionally taken up to several days to process, VocaLink can process these types of payments much faster with what is called "Fast ACH." Fast ACH processes payments within minutes, not days. It is largely because Mastercard possesses VocaLink's Fast ACH capabilities in its arsenal that Hund-Mejean concluded, "I don't believe that you really find a similar solution right now in the market."
Visa looks to accelerate innovation in B2B space
Mere days after the Mastercard B2B Hub was announced, Visa unveiled its own B2B program, the Visa Ready Program for Business Solutions. The platform is designed to partner with other fintech and payments companies to allow for a streamlined process in bringing innovative B2B solutions to Visa's clients. According to the press release, some of the areas the program is designed to help innovate include "enhanced data, virtual card integration, payables automation and payment controls." Several partners have already been approved for inclusion in the platform.
Like Mastercard, Visa management sees the B2B space as a huge opportunity. At the company's annual Analyst-Investor Day, Visa President Ryan McInerney called the B2B segment a "significant expansion opportunity" where more than half of the payment volume is still negotiated using checks and ACH payments. Taken from the S&P Capital IQ transcripts, McInerney highlighted two of the biggest opportunities Visa sees in the space:
"The first example is the corporate travel space. Dealing with travel payments for airlines, hotels and other services, especially compliance and reconciliation, inside of a big company is a mess. It's a pain. We developed tokenized, single-use virtual cards that enable companies to issue onetime cards that can be used at authorized vendors for authorized purchases. And all the payments are integrated and easily reconciled across the company's entire spending.
"The second opportunity you see up here is accounts payable. It's an even bigger opportunity. Here, we've developed a full suite of capabilities to automate payments based on electronic invoices, then we run payments to suppliers over our network. We typically partner with third parties ... and what we've done is we've integrated our invoice-to-payment capabilities directly into their platforms."
Unlike Mastercard, however, Visa does not believe it's handicapped by its lack of access to ACH payment rails because of its Visa Direct product. Visa Direct uses the exact same network as all of Visa's payments but essentially reverses the direction of the payment. When card holders normally use their Visa card at a point-of-sale, the retailer "pulls" a payment from the card holder's account into the merchant's bank account. Visa Direct allows a party to "push" funds to an account holder's card.
While still only a fraction of the payment volume across ACH networks, McInerney boasted that Visa Direct facilitated more than $12 billion in payment volume during Visa's most recently reported quarter, a 65% year-over-year increase.
The Foolish takeaway
On the surface, it is hard to know whether Visa Direct is a suitable or, even, a superior replacement for Fast ACH. At the least, Visa probably has a bit of an uphill battle educating its clients and selling them a different type of payment product when ACH is used so widely around the world today. Mastercard can approach prospective clients and immediately sell them on the idea that they can support any type of payment, including credit, debit, or ACH. It should also be noted Mastercard Send is an identical product to Visa Direct, armed with the same "push" payment capability.
However, investors shouldn't miss the forest for trees. Regardless of which payment network has the edge in its product and service offerings, it's readily apparent that a massive opportunity lies ahead for both companies in the B2B space. With trillions of dollars in this space being negotiated via checks and ACH payments, Mastercard and Visa both stand to massively benefit if they capture even a small percentage of this market.