Everyone has felt the effects of the Consumer Fintech Revolution. For venture investors, the aim of the game was to get a piece of the next Stripe. For everyday consumers, we will never remember a time before instant payments with Venmo and Paypal. Anyone can buy or sell almost anything online, all thanks to Shopify — which we really ended up needing during the pandemic. The world will never be the same because of the innovations that occurred during this radical shift to financial technology to aid consumer transactions. Unfortunately, business-to-business (B2B) transactions have not benefited from the same modernization…yet.
Here at Ardent, we are excited by the opportunity that the B2B fintech market presents. Compared to the consumer, we expect global B2B payments to be 10x the size, given that businesses move far more dollars than individuals. To put this in perspective, B2B online payments is estimated to reach $25.65 trillion by 2028 vs. $5 trillion for B2C e-commerce. While businesses moved $218 trillion globally last year, 90% of those transactions occurred offline, and 60% used paper checks. B2B payments have remained primarily offline because they have thinner margins, making it challenging to leverage higher-cost, fast digital payment methods. We believe that the next generation of fintech companies focused on B2B will build with these unique challenges in mind and bring B2B finances to the digital age.
Speaking of challenges, businesses face more than the costliness of adopting new payment methods. Within their organizations, leaders also face friction when replacing custom, legacy software systems that are difficult to integrate with new ones. If they surmount that hurdle, they face their employees who begrudgingly need to learn how to use new technology. But with the introduction of new payment rails and the rise of Web3, it is suddenly more possible than ever to clear these obstacles.
So who will unlock the adoption of this movement?
Software Sold to Legacy Banks
Until recently, banks have exclusively owned financial services. As business needs evolve, they can no longer keep up the pace and meet expectations. Realizing the need to advance their offerings to retain their clients, many banks have taken on the endeavor of replacing their core software systems with newer, more adaptable software. As mentioned, this presents a host of barriers outside of the high expense in both dollars and time. Banks that replace their underlying systems also need to hire employees that know how to use them and re-train their existing teams. The change is slow and costly and, in the end, may not be enough to save their customers from switching over to better solutions in the meantime.
This is why many banks have chosen to purchase point solutions from third parties in order to continue meeting their customer’s needs. It is a win-win: the banks benefit from newly gained capabilities without the cost of replacing their entire tech stack, and the third-party vendors build on top of the core infrastructure and benefit from the bank’s existing customer base. With a faster time to implementation, the worry of client retention is lessened, and the third parties need not become banks themselves to reach end customers. As times change, we will continue to see the proliferation of point solutions for banks to serve their business clients. We are most excited about those that will allow banks to offer next-generation payment solutions (e.g. Account 2 Account, closed-loop rails, etc) and those that find a way to integrate crypto onto the traditional banking rails. Lastly, there is an area of opportunity for point solution providers targeting regional, community, and mid-sized banks, as these banks are the most vulnerable to being left behind.
Next-Generation, Challenger Banks
The pressure for B2B banks to evolve is coming from a new wave of digitally native neobanks who already offer the most sought-after digital solutions. These neobanks are faced with the challenge of size rather than adaptability: many offer one or two financial services rather than all of them. This leads to an “unbundling” of banks since a business, if they didn’t want to use a legacy bank, would need to have several relationships with neobanks to fulfill a full financial stack of needs. With time, we expect the best neobanks to expand their offerings in line with their aspirations to compete against incumbents that have a full breadth of products and services. Regardless of their limited capabilities currently, they offer sophisticated solutions in their respective sectors and force their more established competitors to update their systems to retain market share.
Software with Embedded Financial Services
There is also an unexpected entrant in the competition for business banking: vertical software platforms with embedded financial products and services. These SaaS platforms are already deeply entrenched in businesses with specific knowledge of their industry needs and access to unique customer data that can be leveraged to further improve the relevancy and adoption of embedded products. By offering financial solutions, their enterprise clients can do everything in one place without engaging directly with banks. We will discuss these companies in future posts as we see them as potential winners in this space.
Despite the stiff competition for B2B banking, the point remains that the opportunity to revolutionize financial services is largely unclaimed. The coming years will reveal that those taking advantage of the shift toward modernization will survive instead of those holding on to the status quo. If you are building for this upcoming shift or are currently working on a project that fits the above, we would love to hear from you!
