The 'Verticalization' of B2B Payments
Karen Webster, CEO PYMNTS.
COM Thanks for joining me today as part of our month-long series on Modernizing and Digitizing B2B Payments as we prepare for 2021.
There is so much to talk about.
We devoted an entire month to the topic, a month that I'll add that has also 31 days.
So that extra day of conversation is going to come in handy.
Ken Gavrity, EVP, Head of Enterprise Payments & Analytics, KeyBank An excellent choice.
Karen Webster So thank you, Ken, for making the time.
I'd like to start our conversation with a throwback to a concept that I used last week to kick off this series, and that's the notion of jobs to be done and how the pandemic may have changed the B2B payments' ecosystems perspective on the jobs to be done with respect to B2B payments.
Jobs, to be done, of course, is a reference to the late Harvard Business School professor Clayton Christensen and his thesis that people in businesses don't buy products, they buy outcomes.
So with that as a back drop, how has the pandemic, the last six to seven months, changed KeyBank’s and your personal perspective on the jobs to be done in helping buyers and sellers make and receive payments? Ken Gavrity Okay, well, great.
Well, thanks Karen, for having me.
I'd say on that question, it's a great one.
And I think first and foremost, companies need to be able to operate in a remote environment today.
And so that's just fundamentally changed the workflows of those companies.
There's nobody in the office, and so when you think about all the basic things that we take for granted, the invoicing, approvals, the payments that need to be made, you had to rethink those.
And that's existential, right? It is, if I don't do that, I'm not going to be in business.
I think that's bucket number one.
I think bucket number two is working capital has never been more important.
So the revenue and the cost equations for these companies have been shocked in a lot of ways, and that really [inaudible 00:01:52] industry by industry.
Certainly, there are some net winners and losers, but I think how they think about those line items is fundamentally different.
And when we look at any of the economists out there today that say, "What does this environment look like 18 to 24 months from today?" Certainly, it looks better.
There's a ramp back, but it's not pretty.
Unemployment forecasts as late as 2023 are still in a really elevated level.
So knowing what working capital is being more precise in cash flows, knowing what your liquidity needs are, are really top of mind.
And then I think probably bucket three would be just security overall.
We know that historically that in times like this, in down economies, it's where you see more bad actors.
And so when you couple that with we're in a downturn and we're trying to digitize workflows, and as you digitize I think we all know that potentially provides more access points for those bad actors, so more than ever both educating those companies on how they need to change their own control environment, and at the same time, what solutions can we help them put in place? I think those are the three buckets of things that we're trying to attack.
Karen Webster So, Ken, when you think about the existential nature of the shock, and I think a shock that we all thought was going to be a much shorter duration than what it has become, and what it looks like it will be 18 to 24 months, I mean, that's a two year ramp back.
And then you think about the need for internal controls as businesses are trying to reassemble their process in a distributed environment, has that forced the old inertia barriers to fall and for trading partners to be more accommodating of making and receiving change? Ken Gavrity Sure.
I think the fun example that we all see in our daily lives is it took a matter of weeks for grocery stores to be able to solve daily delivery.
And when you think about what that means, you have somebody all the way from the beginning of that supply chain and online ordering platforms, integrated payments, end to end, we've been able to solve that problem, and a lot of us benefit from that in our personal lives.
So I think that's a place where it's very visible, but I think we see it across all the industries that we serve.
We've seen a dramatic increase in the number of customers that are now accepting card, that are accepting ACH that weren't previously.
I think you see it in the real estate industry, certainly that's consumer oriented.
But it's also how they deal with their commercial customers and their suppliers as well.
So I do think there has been a fundamental shift.
I think to your question, maybe initially it was considered temporary, but as we look at the world that we're in now and a lot of these digital roadmaps being accelerated forward, I think there's no longer a view that this is going to be a temporary shock but rather a new way of doing business.
Karen Webster So it sounds like there are a lot of internal barriers inside of companies that have fallen.
What about at KeyBank? Ken Gavrity I think overall, I don't know that I would specify it to Key.
What I would say is we know that there's been a bid ask spread from the cost equation of what it means to take card.
And at the same time, while it's maybe not as costly, ACH had its own barriers in that the reconciliation and the data that goes along with it sometimes was very difficult for people to receive accounts receivable that way.
So we knew there was a friction in place.
And I think when we look at that now, and you see banks and large tech providers allocating much more investment toward these digital solutions, particularly in this environment, I think all of us were thinking about pulling those roadmaps forward regardless, but we've had to rethink that to say, if we need to help customers with the three problems I talked about initially, that means we need to pull a lot more of this forward.
So I think it's an exciting time, and I think the other piece that I would add to it is it's not just being able to optimize the cost equation there, but it's also, can we add value added services as we start to move people toward these platforms? But I think there's just a lot more energy around that.
It's bold on the banking side and it's on the FinTech side, frankly.
Karen Webster One of the consistent themes in the conversations that I've had to date has been, the reason I ask about silos is, AP and AR inside of companies are always two separate things.
They've invested to optimize each particular process that has its own process, and the friction has been bringing them together.
Have you seen more of an appetite for bringing AP and AR together and your opportunity to help companies do that? Ken Gavrity Absolutely.
I think it differs by industry.
I think in the small business space, I think those are more integrated workflows and I think we've seen over the last couple of years much more software delivery in that space.
And frankly, it's because you've got a CEO or an owner operator that doesn't have the time to be the CFO, the treasurer, the assistant treasurer.
So we need really simple solutions that connect those workflows.
I think as you get out into the middle market space and into institutional customers, those are very complex workflows.
And so while I do see some of that coming together, I see much more effort around, how do we make those processes as they exist today more digitized, more value added services, more data delivery, and more analytics that make it a more efficient process and help them run their businesses better.
Karen Webster Are there any use cases where you see some of the inertia or the friction begin to fall away, particularly when you're talking about these more complex workflows? Ken Gavrity Well, look, I think in general, if you look at the middle market, one of the problems in that space is that it's a very fragmented ERP market.
As we all know, the ERP really is the hub for these businesses to be able to do AP and AR.
And so what I'm starting to see now is more momentum around open architecture, whether it's from the banks and our ability to create APIs to integrate our services into those platforms, whether it's the ERP themselves, or whether it's the FinTech starting to provide in-between lighters.
So what I think you're seeing is you're seeing the three different providers in the ecosystem all moving toward each other to try to solve that problem.
Karen Webster So let's play a little lightning round.
I think these are always fun.
I'll throw out a word, you tell me what comes to mind, and then we'll maybe iterate on that a little bit.
So you mentioned something, FinTechs.
Ken Gavrity Partners.
What I would say is, at KeyBank, we've been really looking at this automation game for the last six to seven years.
We knew it was something that you can't just sell value transfer for customers.
We knew it had to be wider than that.
It had to be around workflow.
And so this is a space where we interacted with a bunch of different FinTechs.
In fact, some of the folks that you have speaking this month.
So Flint Lane over at Billtrust, Drew [Edwards] over at Ingo [Money], and a couple of other companies, bill.
All good partners of ours, and we are solving these problems together.
So certainly I think partners first.
Karen Webster Real time payments.
Ken Gavrity Hockey stick.
What I would say is it's probably a slower ramp than a number of folks expected at the outset.
But I still believe that the benefits are clear of having real time payment delivery and information traveling with it.
So I expect that gradual increase to start to really exponentially ramp over time.
Karen Webster So you mentioned something else, real time data.
Information is important.
Real time data.
Ken Gavrity Yeah.
Look, it goes back to my answer on what it takes to solve some of these frictions, and it's not just the transfer of value back and forth but the ability for these companies to be able to reconcile AP and AR in a much more seamless and automated way.
That's how you take cost out of the equation.
That's how you start to provide more real time information for how to run their business.
So if we don't have real time data traveling with a payment, I think you're not going to be able to solve the problem the way we want to.
Karen Webster Absolutely.
Ken Gavrity Opportunity.
There are so many ways to get money to people faster, and I think in the current situation we're in, we see it on unemployment benefits, getting the customers.
We look at insurance companies trying to make disbursements for folks around claims in this virtual environment.
There's so much opportunity for us to understand that consumers want choice and be able to deliver it in a much more integrated way.
Karen Webster The paper check.
Ken Gavrity Stubborn.
It has stuck around way longer than most of us expected.
We know it still has a really long tail.
We knew it has a lot of fraud and that's where we see it hurt so many of our customers.
And it's up to us in this automation effort for us to be able to really whittle that down to a much smaller part of overall payment flows, Karen Webster Final, final thought.
Ken Gavrity Someday.
I think it's a technology looking for a problem.
I'm not the first one to say that.
But what I do think has been an extraordinary benefit of blockchain is that it has stirred the minds of a number of different people who maybe didn't always think about payments as an industry and what were the frictions related to it.
So I think Bitcoin being the most visible use case initially drew a lot of people into the payments industry.
And so I think there's been a lot of great innovation that's coming out as a result.
Karen Webster Someday.
I want to go back to something that you said, which is how you think about your strategic planning, your roadmap.
And one could argue that 2020, come about March, has been one continuous season of strategic planning, iterating on plans, and making adjustments almost in real time.
But when you think about in earnest the 2021 roadmap, how different is it from what you set in stone in 2019? Is it the same stuff faster or is it different stuff but also faster? Ken Gavrity This'll sound like I'm playing Monday morning quarterback, but what I would say is, because as an organization at Key, we decided automation was going to be so incredibly important, as I said, six or seven years ago, this was a path we were already headed down.
So when I think about 2021 for us, it was this exciting not, how do we change the roadmap, we had the right roadmap and now it's, can we do more faster? So I think that's the way I describe it for Key.
And maybe the one nuance that I would add to that is I think API enablement has been something that we knew we needed to run at because it certainly allows for us, again, to meet the customer where they are, where they want to use our portals, whether they want to use the ERP, whether they want to use a software layer on top of it, whether it's for the customer servicing part of the organization, the point of sale.
Wherever it is, we know that there are a number of different ways that the businesses that we support want to touch their customers.
And so I think API enablements has been something that is not a new idea, but the ability to start to think about it beyond just payment execution, into all the value added services that surround it, is really what has probably advanced for us.
Karen Webster Ken, are your customers asking you for different things today than they did in January? I mean, obviously, automation and trying to think of new ways to do the same things is the topic of conversation.
Are they asking you for different types of things today? Ken Gavrity I would probably phrase it just a little bit differently to say, if you go back five or six years ago, the notion of automation, there wasn't awareness in the marketplace and so it was really more white space discussions.
Then you go back maybe just a year or two, you'd start to see a lot of the surveys that come out, whether it's Phoenix-Hecht, McKinsey, and others, that would say, "There was much wider, 75% to 85% of treasurers and assistant treasurers knew of automation and we're thinking about it from a planning perspective.
" I think the environment that we found ourselves in now is you've now created a catalyst.
Back to maybe one of your earlier questions, you've created a catalyst to break the inertia.
So it's gone from awareness into execution.
What do I need in order to pull this forward into 2020, into 2021? So I would say that's really the ask from our customer base now, with maybe the one other added caveat, which is there's a lot more desire for advice.
And I think that's been something that's been incredibly important in how we built our business at Key, which is it's one thing to have the right product roadmap.
It's something entirely different to be able to take that product capability set and be able to talk to a customer in the middle market with a unique setup and workflow to say, "Here's how this fits into your business model.
And we recognize where you are in your maturity set.
And depending on where you are in your maturity set, we can meet you where you are.
How much hand holding do you need versus how much plug-in capability do you need?" And that is very different when talking to a SaaS platform based out of Silicon Valley versus talking to the industrial manufacturer based in Detroit.
Karen Webster I was going to ask about that.
Have, in fact, these kinds of projects and initiatives moved up the ladder in terms of getting funded? Ken Gavrity Look, I think at Key we've been very public around the fact that we believe that digitizing the enterprise internally and then our ability to use that to face off with our customers, whether it's consumers or businesses, that's a strategic pillar for us and it's at the top of the house.
And so we've shifted so much of our investment toward making sure that we're providing those capabilities and in a way that meets the demand of those customers.
So we're not trying to build solutions that are incubation, wouldn't it be nice? We always start with the customer, what are you trying to solve right now? And then how do we put the dollars toward making sure that we're providing capabilities in this new digital environment to help them get through that hurdle or provide a great experience? Karen Webster How are you [inaudible 00:17:15] 2021 across the B2B payments ecosystem? Ken Gavrity Say that one more time, Karen.
Karen Webster How are you handicapping 2021 with respect to B2B payments across the ecosystem? Ken Gavrity Look, I break that into two pieces, volume and then innovation.
If I think about volume, it's probably somewhat muted.
I think we're going to see growth regardless.
Is it going to be at the levels we've seen previously? No, because the existing customers that are already starting to use the cardable type of payment spend or electronic payments in general.
Overall spend in the system has gone down.
So we expect those customers maybe have a little bit more muted volume than we've seen in the past.
On the flip side, the tailwind is we have so many customers that are implementing these capabilities for the first time that you start to have a leveling effect there.
So I think from a volume perspective, muted, will grow through it, but not maybe the fund levels we've seen in the past.
But I do in the out years see it coming back to where we were, if not even changing that inflection point.
On the innovation side, look, I think we're going to continue to see, even in 2021, the verticalization of B2B payments.
And I think that expertise, understanding how a real estate industry is different than a business services company, different than a SaaS platform, being able to speak to those companies in the terminology that's consistent with how they run their business and understanding how those workflows differ will be the difference between winning that business and losing that business.
So I think we see that in the marketplace now.
I think we've seen some wildly successful IPOs on the FinTech side that are vertically oriented.
And so I expect to see that there.
And maybe from a broader ecosystem standpoint, I think whether it's the FinTech, whether it's the bank, whether it's the ERP, I think all of us are thinking now in a platform mindset.
So, how do we get customers onto our capability set and how do we continue to add value added services to that platform? Karen Webster Ken, it was a pleasure.
Thanks so much for all of your time and your great insight.
Ken Gavrity I really enjoyed it.
Thank you, Karen.
Karen Webster Thank you.
Best of luck in 2021 and the rest of 2020, too.
Ken Gavrity All right.
Same to you, Karen.
I'm sure we'll catch up soon.
Karen Webster I'm sure we will.
Ken Gavrity Take care.
Banks, corporates and even regulators recognize the imperative to modernize — not just digitize — the infrastructures and workflows that move money and data between businesses domestically and cross-border. Ken Gavrity, EVP and Head of Payments and Analytics, joined PYMNTS CEO Karen Webster for a fireside chat during PYMNTS.com and Visa’s month-long virtual series, “B2B Payments 2021: What Will You Change?” Click on the video above to view the interview in its entirety.
The pandemic has forced a fundamental reckoning for businesses large and small.
To that end, Ken Gavrity, EVP and Head of Payments and Analytics, told PYMNTS CEO Karen Webster that companies must reexamine the most basic operations in order to stay afloat and maybe even thrive – or face existential threats as they mull the great digital shift. And he noted, too, that the “verticalization” of B2B is upon us.
Tech helps, of course, but innovation alone won’t solve corporates’ problems. Deploying the right solutions hearkens back to the “jobs to be done” theory of innovation noted by Webster during an earlier B2B webinar. People don’t buy products – they buy outcomes.
And the most important jobs to be done change entrenched processes that simply don’t work anymore: “There's nobody in the office,” Gavrity said.
That’s translated into a fundamental shift in workflows, spanning everything from procurement to invoice approvals to payments that need to be made. Not rethinking those workflows can be catastrophic, he warned: “If I don’t do this, I’m not going to be in business.”
Looking at Working Capital – and Security
Beyond the examination and revamping of internal flows, Gavrity maintained that companies must acknowledge that working capital management is more important than ever.
The economic picture is certainly less than rosy, where unemployment may be high well into the next few years.
“The revenue and the cost equations for these companies have been shocked in a lot of ways,” he said, across all industries. “Certainly there are some net winners and losers, and how they think about those line items is fundamentally different.”
Many verticals have been able to pivot into the digital age, such as grocers who shifted to delivery models (“it only took them a few weeks to solve daily delivery,” he told Webster) and retailers who offer curbside pickup.
Restaurants and retailers without that digital flexibility have fared less well, of course.
But overall, supply chains and online ordering platforms have been able to integrate payments and other functions into a seamless experience. “A lot of these digital road maps are being accelerated forward, and I think there's no longer a view that this is going to be a ‘temporary’ new way of doing business,” he said.
If the way companies interact with end customers – and one another – is changing, so too are the ways departments within firms intersect and interact.
Accounts payable and receivable used to be concrete, separate operations. Now, more than ever, noted Gavrity, workflows are integrating through software solutions.
That’s especially true for smaller firms, where, he told Webster, “CEOs or owner-operators do not have the time to be the CFO or the treasurer.”
Middle-market and larger companies (where the ERP landscape is fragmented) have more complex processes in place and need more data analytics to help them run more efficiently.
“What I'm starting to see now is more momentum around open architecture, whether it's from the banks and our ability to use APIs to integrate our services into those platforms, or the ERPs themselves, or the FinTech starting to provide [services] – you're seeing different providers in the ecosystem, all moving toward each other to try to solve problems.”
When asked how B2B might be transformed as a result of that collaboration, Gavrity stated that volumes may be down (as firms grapple with economic headwinds), but moving forward he expects to see the “verticalization of B2B payments.” Platforms are providing value-added services to corporate users, offering expertise across several industries and moving payments beyond paper checks and ACH.
At the end of the day, he said, every company (regardless of size or focus) should endeavor to know exactly how cash is flowing in and out of accounts, and what liquidity positions are in real time (which, of course, requires real-time data exchanges).
That (internal) examination has carried over to banks (including KeyBank), noted Gavrity, which in turn has led to better reconciliation of data, more payment choices for corporates and more investments in digital solutions.
(All high-tech is not created equal. For example, he noted, blockchain exists as “technology looking for a problem.”)
Keeping an eye on the cash is especially urgent when in the midst of a recession – chiefly because the cyberthieves come out of the woodwork to defraud companies.
“We're in a downturn and we're trying to digitize workflows – and as you digitize, that potentially provides more access points for those bad actors,” said Gavrity. He noted that companies such as KeyBank have been reaching out to educate enterprises on leveraging security solutions and improving defenses against fraudsters.
Looking at the broader payments landscape, Gavrity took stock of a few inexorable trends. The push toward real-time payments may have been moving a bit more slowly than some observers expected, but the “hockey stick effect” is taking shape.
“The benefits are clear for having real-time payment delivery, and information traveling with it. So I expect that gradual increase to exponentially ramp up over time,” he predicted.
Disbursements represent a real opportunity in the space, as people want their money faster – especially when it comes to getting benefits tied to unemployment or stimulus packages.
The third quarter is over, and looking toward the end of the year and beyond, KeyBank’s focus on automation will continue, with particular emphasis on API enablement beyond payment execution. Gavrity said APIs “allow us to meet the [corporate] customer where they are – whether they want to use our portals or the ERP or a new software layer,” in order to support customer servicing of point-of-sale operations.
“There's so much opportunity for us to understand that customers want choice – and want to be able to deliver it in a much more integrated way,” he said.
To see all prior programming on demand, please visit the PYMNTS.com event page: https://www.pymnts.com/news/b2b-payments/2020/keybank-gavrity-verticalization-b2b-payments/.