B2B payment processing is when both the merchant and the seller are businesses—so the seller is charging a fellow business for their products and/or services. It is also known as Level 2 and Level 3 processing because it’s categorized in one of two ways, Level 2 or Level 3, and generally happens for card-not-present transactions that require additional customer data as these types of transactions are more likely to be fraudulent.
The main differences between Level 2 and Level 3 processing boil down to data verification and processing rates. Level 2 requires fewer data from the customer but comes with slightly higher rates as a result, while Level 3 collects more customer information but generally provides merchants with lower credit card processing fees. Collecting additional customer data makes the transaction more secure and reduces the risk of fraud or chargebacks. This reduced risk also allows for lower processing fees.
B2B vs B2C Payments: What’s the difference?
B2B (business-to-business) is a unique business model that offers an opportunity for growth and for high transaction values. It also requires different technology than the average B2C (business-to-consumer) merchant, including B2B payments. While the actual process itself is the same, there are a few key differences between B2B and B2C payment processing, such as preferred payment methods, rates, and even order minimums.
B2B | B2C |
|---|---|
Sell products to other businesses | Sell products to consumers |
Bulk purchase transactions with volume discounts | Small, retail purchases |
Seller website includes an account dashboard | Seller website is focused on marketing products |
Payment is made through invoicing after goods are received | Payments are made at the point of sale |
Post-sale is handled by an account manager | Post-sale is handled by customer service |
B2B payments are often higher in value, and they’re increasing. If you think about it this way: a consumer likely has a smaller personal budget than a business budget for a company. As such, B2B payments typically process higher amounts. Therefore, payment processing rates affect B2B and B2C businesses differently and should be a consideration when shopping around for your payment processor.
Globally, about $120 trillion is processed in B2B payments each year, with $25 trillion in the U.S. alone. Below, we’ll look at B2B payment processing and how to set it up for your business.
How B2B Payments Work
Advancement in payment technology has allowed electronic payment processing to cater to B2B transactions. This development has made B2B sales faster and more convenient and streamlined, thereby minimizing the cost of both successful and unsuccessful payments. So how does it work?
Step 1. Clients submit their payment for your goods or services online.
Step 2. Your payment gateway sends the information to your bank.
Step 3. Your bank requests the funds from your client’s issuing bank.
Step 4. The client’s bank assesses whether your client has sufficient funds and this information is then sent back to your bank.
Step 5. Your bank then relays this information to your payment gateway and processes the transaction.
Essentially, the credit card processing for B2B and B2C transactions is the same. Your bank, which provided you with a merchant account (acquiring bank), communicates with your client’s bank (issuing bank) via the card network.
You will need an efficient payment processor to handle your B2B transactions. Look for a provider that’s reliable, with the right features and integration, and offers the most competitive rates. Read our picks for the best B2B payment solutions for small businesses.
Types of B2B Payments: How Do Businesses Pay Each Other?
Businesses pay other businesses in a number of ways, with paying by check being the most popular. It’s important to note that checks are decreasing in popularity—more than 30% of businesses expect to use fewer checks, with 37% planning to use more e-payment options with virtual cards.
Why You Need to Evaluate Your B2B Payment Processing
The B2B payments industry has a lot of room for improvement. Per Deloitte, 35% of businesses consider processing fees a major challenge, costing them nearly $8 to process a single supplier payment.
You might be setting up B2B payments for the first time, or you might already have a system set up. Regardless of your situation, the cost is just one of a few reasons to evaluate your B2B payments processing setup.
According to The B2B Payments Tipping Point, there are a number of key benefits from choosing an innovative B2B payment processor, including fewer errors and fraud, better efficiency, reduced costs, and improved cash management.
Reviewing your B2B payment processing will also help you.
Ensure Timely Payment
Most small businesses are familiar with chasing payments. It’s an unfortunate reality of business. In fact, one analysis found that as many as one in 10 invoices are paid late. And when it comes to B2B payments, that number jumps to nearly half. What’s more, 30% of businesses say processing time is a major challenge, taking about 30 days to complete payment.
When you optimize your current B2B payment processing, you can make it easier and simpler for both you and your customers to complete the transaction.
Mitigate Risk
More than three-quarters of businesses suffered from fraud (or an attempted fraud) in 2020, and it’s a challenge that’s on the rise. Unfortunately, many payment platforms don’t offer the security needed to protect your data and your customers’ data. Upgrading to a more secure B2B payment processor will help mitigate the likelihood of falling victim to fraud.
Efficiently Manage Data
Technology has made data available to businesses of all sizes, which can be both a blessing and a curse. On the one hand, you have more information than ever before on which to base important business decisions. On the other hand, it can become unwieldy and difficult to manage. Not to mention missing data can put you back when it comes to reconciling your accounts. In fact, missing data costs $3.3 trillion in a single year.
Bottom Line
While the COVID-19 pandemic has made a long but temporary impact on B2B payments, projections are optimistic, as digital payment technology catches up and picks up the slump from the worldwide decrease of cash usage. If you cater to other businesses as your main customer, it’s worth looking at ways to safeguard your business, build trust in your customers, and eliminate hassle when it comes to managing B2B payments.
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