P2P Payments Now an SMB Lifeblood

While loan approvals remain a frustration, there is far more common—and harrowing—pain point for small to midsized businesses (SMBs): Not getting paid on time.

The joke of “the bigger the client, the slower the payment” may be tired but it’s still true. To stay afloat, many SMBs rely on faster payments from consumers and other small businesses. Conversely, they’re often cognizant about paying their own suppliers and vendors quickly.

You would think banks, many of which fit the definition of an SMB themselves, would be more mindful of this struggle. But even online bill pay and ACH—the crown jewels of “business banking”—take 2-3 business days (or more) to post. Throw in the weekend and a banking holiday and it can take a lifetime for a SMB to get the cash it needs for inventory or payroll or, yes, even loan payments.

Staggering P2P Adoption

Here’s the thing: The FIS 2017 Performance Against Customer Expectations (PACE) Report found that SMBs are adopting digital payments at more than three times the rate of everyday consumers—and they’re using them as a way to quickly pay vendors and most likely take payment.

In fact, according to PACE, 40% of SMBs reported using person-to-person (P2P) payments to pay a vendor or supplier in the past 30 days. Compare that to just 12% of U.S. consumers who reported making P2P payments. Even more interesting is that the usage rate climbs to well over 50% for businesses with more $25 million in annual revenue.

What is clear from the PACE data is that there is a fierce battle brewing between primary banks and outside services like Square Cash, Venmo and PayPal for P2P loyalty. To date, banks are ahead by a hair with 40% of SMBs saying they used their bank’s P2P capabilities in the past 30 days to pay a vendor versus 37% that used an outside P2P service during the same period.

However, with this battle at a near draw, that essentially means that banks are losing out on half of their potential fee income.

Security as a Wedge, Bank Solutions as the Glue

On the consumer side, PACE data shows that bank customers would prefer to make P2P payments via their primary banks due to concerns about security. These same concerns are undoubtedly present in the SMB market, which ranked security as their second-most important concern in the PACE Report.

Bank-owned solutions, while often in their infancy, may prove to be a formidable response to third-party solutions. Bank-owned solutions build on existing bank payment networks and allow any U.S. account holder at a participating bank to send or receive near-instant payments from other account holders in the network using a phone number or email. It offers a compelling combination of convenience, familiarity, and the security users say they want.

As bank-owned solutions expand and more banks and consumers join the network, we may see them displace the patchwork of P2P services used by SMBs as well. But that may be wishful thinking at best.