Tracking Opportunity and Growth in the Commercial Payments Market

Posted by Dean Nolan on May 16, 2024 11:17:00 AM

Tracking Opportunity & Growth in the Commercial Payments Market

The outlook for the commercial payments market is strong. Volumes are projected to grow at a 14% average annual rate over the next five years, offering a prime opportunity for financial institutions to drive margin and deepen corporate customer relationships amid an uncertain economic environment marked by margin pressures and increasing regulatory headwinds.

Innovative solutions are breathing new life into a sector where 80% of firms still pay other firms by paper check. Given the ongoing competition for deposits and growing concern over loan delinquencies and charge-offs, we see commercial payments as a rare bright spot inside the banking product set, with the potential to help offset shrinking margins in other offerings.

A Decade of Dramatic Change

One only needs to look back 10-15 years to find a very different US B2B payment landscape. Payment instruments were limited to cash, checks, ACH, purchasing cards, and wires. The list of alternatives has expanded dramatically to include virtual cards, same-day ACH, digital asset payments, and Original Credit Transaction (OCT) payments fueled by Visa Direct and Mastercard Send. Last July’s launch of FedNow’s real-time payment rails established a counterpart to The Clearing House’s large bank-owned RTP network, adding another decision point.

Each option offers enhanced value propositions that resonate with specific markets and use cases. The overall result is a more specialized and complex set of choices for commercial customers, opening greater opportunities for banking partners to provide subject matter expertise and serve as a trusted partner to improve clients’ operational efficiency. After all, few corporate customers need to understand the nuances of payment systems – they just need them (and expect them) to work.

Looking Inward

New solutions are also altering the way customers interact with payment providers. Digital and mobile banking channels are hardly new but are evolving to offer greater functionality and convenience. Many of the emerging underlying technologies, such as APIs and artificial intelligence, stand to drive efficiencies in internal operations as well. Automation of back-office processes is a particularly hot topic, given ongoing challenges in hiring and retaining employees.

As usual, these technologies introduce opportunity and risk for banks and credit unions. The tools make an array of new, needs-based solutions increasingly feasible. Models like open banking and embedded finance also make it easier for fintechs and adjacent providers to introduce such solutions should incumbent banks not seize the mantle.

This dynamic brings the age-old build/buy/partner debate back to the forefront, as well as the friend or foe question regarding fintechs. Depending on an institution’s strategy and appetite for internal innovation and development, partnerships with fintechs and payment providers can be an express ramp for bringing robust new solutions to the market. Others may pursue a Banking as a Service model, generating revenue from distinctive competencies in compliance and scale-oriented back-office processes often lacking at fintechs.

The Bottom Line

More than ever, banks need a blueprint for incorporating the next generation of commercial payments options into their product suite. The SRM Commercial Payments practice provides valuable insights, benchmarking, and actionable advice to clients across the globe. Look for more updates on the state of commercial payments in the months ahead, and feel free to contact us to discuss your institution’s needs.

Topics: FedNow, RTP, instant payments, Commercial Payments, B2B Payments

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