Digital Payments: Huge Untapped Market in B2B Payments

December 6, 2022


The last decade belonged to startups disrupting the B2C payment space. The next leg up in digital payments is the $120 trillion B2B payments market. The disruption caused by the pandemic brought to the fore the challenges, inefficiencies, and high costs inherent in the B2B payments space. Only 7% of the $120 trillion B2B payment volume is conducted digitally today. Legacy systems, lack of data standards, fragmented and siloed approaches to invoicing, accounts receivable, and accounts payable, and limited interoperability underlie the current payments systems. Goldman Sachs estimates B2B payments volume to reach around $200 trillion by 2028. A slew of disruptive startups across the payments value chain is rapidly emerging to capture a slice of this massive untapped opportunity. In addition to verticals including checkouts, processing solutions, and corporate spend management, investors are betting big on the startups in the cross-border payments, banking- as-a-service, and embedded finance space. The next phase of the disruption is plug-and-play solutions helping integrate financial products seamlessly with non-financial digital platforms. As the technologies evolve further, as is expected, we believe the market will be much larger as new opportunities arise in the digital and virtual worlds. According to Goldman Sachs, the Metaverse could likely be an $8 trillion market. This report focuses on three growth areas: B2B payments, cross-border payments, and embedded finance.

Key Points

  • Massive Untapped Potential in Payments. Digital payments have become integral to businesses and consumers alike but remain under-penetrated. In 2021, only 3% of payments were made by a mobile payment application, leaving a massive untapped market opportunity for digital payment startups to exploit. The continuous innovation in the space is helping create new business models and an expanding array of use cases.
  • Regulatory Changes Have Powered the Sector Ahead. For too long, the pace of digital payments penetration was held back by a cozy club of traditional financial institutions and credit-card firms. That changed with the Dodd-Frank act that had a far-reaching impact on bringing in better accountability and transparency in financial services. The act proved to be transformative for both the payments and the broader fintech space. It transformed the banking sector – deeply mired with entrenched relationships, high barriers to entry, and cumbersome regulatory hurdles – and ushered in a wave of innovation and competition in the banking sector.
  • Ecosystem Strategy to Enhance Moat. By bundling social, eCommerce, and other services into their offerings, digital payment start-ups offer con- sumers greater accessibility and flexibility. In doing so, they also create a significant moat around themselves. For instance, Stripe and Klarna offer an array of add-on solutions covering the customer journey. This increases the switching cost, making it difficult for competitors or larger banks to entice clients to switch to them. Research by the Economist Intelligence Unit also highlights that super-apps are likely to become the dominant portal for digital commerce over the next five years.
  • Emerging Payment Verticals will Drive Future Growth. We have identified embedded finance, B2B payments, and cross-border payments as areas that will drive future growth in the payments space. Despite being nearly three times the size of the B2C market, digital penetration in B2B has been relatively lower. Fintech startups are also increasingly paying attention to embedded finance as customer expectations evolve. Finally, with businesses diversifying supply chains and setting up manufacturing offshore, the cross-border payments sector represents a significant market opportunity for emerging start-ups.
  • Spotlight on Three Companies. This report rounds up with a spotlight on three companies – Stripe, Plaid, and Klarna. We believe as disrupters, best-of-breed, and leaders in their payment verticals, these companies are well-positioned to capture the large untapped addressable market in this evolving space.

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Executive Summary

Payments have come a long way since the days of magnetic strips and swipe at checkout. Once a corner of the financial services sector, the digital payments sector is now approaching the center. The sector – a major subsegment of the broader fintech ecosystem – is key to the development of digital economies and financial inclusion. Evolving consumer behavior, continuous innovation, and strong VC interest are some of the key drivers behind the growth of the sector.

With digital payments becoming increasingly embedded in everyday life, success will hinge on picking and embracing the untapped areas within digital payments. The report highlights three digital payments areas – B2B payments, cross-border payments, and embedded finance – which are likely to see further disruption.

Businesses-to-business (B2B) payment in the US is a nearly three-times larger market than B2C, yet digital penetration in the former market has been slower comparatively. Only 7% of the $120 trillion B2B payment volume is conducted digitally today with the large majority characterized by legacy systems, a lack of data standards, fragmented approaches to accounts receivable and accounts payable, and limited interoperability.

We also see immense potential in embedded finance, which could be a key enabler of financial inclusion. As businesses struggle to cope with the challenges of integrating with multiple banks and legacy systems, embedded finance could spark the next wave of innovation in financial services. According to research from Bain & Company, financial services embedded into e-commerce and other software platforms are expected to account for $7+ trillion by 2026 from $2.6 trillion currently with payments and lending expected to be the largest embedded financial services.

Further, with immediacy and personalization becoming key needs of customers, open finance is gaining prominence. Open finance aims to reduce the costs and friction of financial interactions, and in doing so, to expand access to financial services to a broader set of users. Lastly, the report highlights cross-border payments as an area that remains mired with inefficiencies and offers excellent opportunities for start-ups aiming to solve key pain points in the sector.

Digital Payments Landscape

Source: Cardknox Fintech has many components. The digital payments space, which we are focusing on, was $1.2 trillion in 2021. The digital payments ecosystem is complex and has multiple players that interact with each other during the payment transaction process with key participants including payment processors, payment gateways, independent sales organizations, value-added resellers, credit card networks, and payment facilitators. The sector includes multiple segments. These include cross-border transactions, currency exchange services, payment platforms, point-of-sale solutions, payment gateways, payment technology infrastructure

Figure 1: The Digital Payments Ecosystem

The digital payment sector has emerged as a breeding ground for innovative startups. Given the massive untapped potential and the strong investor support, the sector seems poised for disruption. Since 2017, the B2B payments space has attracted over $24 billion in VC funding (refer to figure 16 on page 14). The sector has seen a spurt in startups bringing innovative solutions to tackle pain points and legacy issues. We have highlighted some of the leading companies in the space that have seen strong traction over the last five years and will likely be promising long-term bets.

Figure 2: Leading Digital Payment Companies

Traditional Banks are Behind the Curve

Regulatory Hurdles and High Barriers to Entry-Disincentivized Innovation

While banks have tried to innovate, their pace of technology adoption has been relatively slower. According to a 2019 report from Ernst & Young, 43% of US banks still use COBOL, a programming language dating back to 1959. The report, which cites data from UK’s Financial Conduct Authority, further states that nearly 50% of banks do not upgrade old IT systems as soon as they should. Regulatory changes have profoundly shaped the payment space and have been a key catalyst in ushering in a much-needed wave of innovation, transparency, and competition. While other aspects of banking and financial services had seen a degree of digitization/ dematerialization, payments were a largely neglected space often requiring a physical presence and a massive investment in infrastructure including branches and ATMs.

Open Finance on the Rise

Open finance is unlocking a wave of digital financial innovation— and likely disruption. Brought on by a combination of government regulation and market forces, open financial data allows an expanding universe of players—both financial and non-financial— to access customer accounts and data to offer new products and services. For customers, open financial data affords greater flexibility in how their money is managed, allowing, for instance, better visibility of accounts and more convenient access to payments. Open finance is reshaping everything from bank accounts, credit cards, payments, mortgages, small business loans, and even insurance policies.

Figure 3: Open Banking Platform and APIs Ecosystem

Dodd-Frank Wall Street Reform and Consumer Protection Act - 2010

The multipronged bill was a game changer for both the payments and the broader fintech space. In addition to bringing in better accountability and transparency, the bill primarily addressed the lack of innovation and competition in the banking sector deeply mired with entrenched relationships, high barriers to entry, and cumbersome regulatory hurdles. In particular, Section 1033 provides for sharing information relating to consumers’ products and services obtained from banks with approved third-party service providers (TPP). Consequently, consumer data portability revolutionized the sector by commoditizing banking services. In addition to lower switching costs, it encouraged fintech startups to operate in the space, giving rise to platforms and marketplaces for financial products and services. More importantly, it induced a strong network effect of higher consumer engagement spurring more innovation and vice versa.

Figure 4: Marketplace Banking

EU Payment Services Directive II (PSD2)– 2015

Similar to the Sec 1033 of the DODD-Frank Act, PSD2 was a pivotal step in boosting the payment space. It mandated the banks to share the banking data of consumers with third-party providers – their competitors - for free. The act further moved the needle toward an accelerated rise of innovative payment services and making payments safer and more efficient, and convenient. Additionally, post-2008 financial crises era, the competitive landscape tilted in the favor of fintech companies. The GDPR, for instance, placed limits on reciprocal data portability by TPPs and big techs by mandating data transfer only when technically feasible.

Additionally, GDPR also made customer consent essential for data transfer, which again put banks at a relative disadvantage. In addition to laws encouraging open banking and competition, compliance with stringent and onerous capital requirements and leverage and liquidity measures (BASEL III) became a focus area for banks. In contrast, the fintech startups, with staunch support from a surging VC investor base uniquely focused on innovation and introducing new products and services, gained strong market traction.

Figure 5: Key Goals of Regulatory Measures

As innovation in financial technology brings banking products such as payments, lending, and some forms of deposits out of the traditional banking system, banks are under pressure to transform and modernize the way they host, run, and process payments. To that end, banks are now increasingly seeing their relationship with digital payment start-ups as partnership and collaboration rather than threats with the end objective of adding value for clients. While innovative start-ups in the digital payment space can benefit from the scale and client relationships banks can offer, traditional financial institutions can use innovative technologies and adaptive approaches. When the strengths of a bank are paired with best- in-class cloud-based software to complement existing systems, customers get access to invisible and frictionless payment experiences.

Ecosystem/Super App Model Driving Increased Adoption and Entrenched Customer Base

Fintech companies are getting more entrenched in their B2B relationships with an increasingly “payment plus” business model, as per BCG research. In addition to the core payment offering, they are bundling related addon services – financial and other SaaS solutions including insurance, spend management, automated tax services, cyber security, and legal solutions – making their offerings more entrenched. For instance, Stripe and Klarna offer an array of add-on solutions covering the customer journey. This increases the switching cost, making it difficult for competitors or larger banks to entice clients to switch to them.

Figure 6: Ecosystem Model Gaining Traction

Payments – Massive Untapped Potential

A subset of the wider fintech industry, the sheer size of the payments segment and the fact that payment as a means of transaction is fundamental to every industry, make the space so attractive. However, each industry is different with its value chain and siloed participants at each stage. This makes payments a highly complex process and hence, of all the fintech verticals, this has the lowest level of technology adoption with less than 15% of payments being done using cards.

Some of the key gaps lie in the IT infrastructure for digital payments, siloed nature of different systems involved in the payment process including accounting systems and payment applications.

The payments Category Has Reached an Inflection Point

Roughly 20,000 fintech companies launched globally since 2000. The payments category has been a key driver of growth and innovation in the space, attracting nearly 25% of all funding between 2015 and 2020, per BCG research. Since 2018, $106 billion was invested in the segment globally. The US is the biggest market accounting for roughly 33% of this investment.

Even amid market uncertainty, recessionary fears, and a slowdown in private market funding activity, the payments category has attracted higher funding than other fintech segments, per data from ABN-Amro ventures. The 23% drop in funding notwithstanding, in absolute dollar terms, the payments category is still an investor favorite.

Figure 7: Payment Startups Still Top VC Funding Despite Broader Slowdown

Rising Ecommerce and Subscription-Based Business Models Driving Digital Payments


Digital payments underpin online commerce, which continues to account for an increasingly large part of the broader retail sales, reaching 20.6% in 2022, according to Digital Commerce. In 2020, nearly 40% of online grocery shoppers were first-time users with 90% of them having a positive experience and were likely to use online channels for grocery buying, per BCG research. The growing e-commerce market, with benefits like ease, flexibility, and greater selection, augurs well for the growth of digital payments start-ups.

Growth of Subscription Business to Drive Demand

The subscription revenue-based economy has been on a tear, registering soaring growth since 2013, with its inherent advantages including (1) predictability and resilience during uncertain times, (2) an entrenched customer base - in varying degrees depending on the industry, (3) recurring revenue stream, and (4) lower customer acquisition costs. The rise in the subscription economy is driving demand for digital payment start-ups as online payment is inherent to all subscription businesses. According to research from McKinsey, 15% of all online buyers (2.14 billion buyers in 2021) have signed up for one or more subscription services. The increasing intersection of software and payments and the rising adoption rate of SaaS platforms are bright spots for digital payments.

Large Addressable Market – Digital Payments

The digital payments space is large and growing. The industry represents an enormous addressable market that continues to expand due to strong, durable secular tailwinds. The spending power of customers, particularly Gen Z and millennials who are increasingly looking for seamless and transparent payment solutions, continue to increase. Estimates from Morgan Stanley paint a promising picture of e-commerce growth. According to Morgan Stanley, the global e-commerce market is expected to reach $5.4 trillion in 2026 from $3.3 trillion currently.

Figure 8: Total Addressable Market

Buy Now Pay Later (BNPL)

BNPL sits at the intersection of payment and commerce enablement. Deferred payment, including interest-free options, higher conversion rates, and average ticket sizes, the segment is surging. According to Bain & Capital, the BNPL transaction volume could grow by 10 to 15 times by 2025, reaching up to trillion dollars in the US. Several startups have emerged globally to benefit from the surging adoption of BNPL services.

Figure 9: BNPL Providers Globally

Digital Payments Subsectors

The following sections highlight the market opportunity, key drivers, and challenges of three key subsectors of digital payments – B2B Payments, Cross border payments, and Embedded Finance.

B2B Payments Ripe for Disruption

Figure 10: B2B Payments – A Massive Untapped Opportunity

Market Opportunity

There is a shift away from paper-based processes and payment methods toward rapid digitization to make the movement of funds efficient, faster, and cost-effective. On average, manual processing of payments is 67% more time-consuming compared to automated payment solutions, per PYMNTS data, 2021. In terms of costs, manual processing costs are in the range of $12-$30 per invoice (per Planergy), whereas manual international payments cost $50-$60. On an annual basis, paper invoice processing can cost over $170K. The situation is particularly dire in the EU with a mere 10% of SMEs – accounting for roughly 50% of the EU’s GDP –using fully- digitized document and financial management systems. Nearly, 50% of SMEs are still stuck using anachronistic manual payment and manual systems. The increasing digitization of B2B payments will be an important step in minimizing cash flow problems that is inherent to businesses using legacy payment methods, especially SMEs.

Digital Payments Subsectors

Figure 11: Key Factors Behind Cash Flow Challenges

Key Challenges

Key challenges that have contributed to the delay in B2B payments benefitting from digital innovation sweeping across consumer/ retail payment include (1) lack of common framework/standards for sharing payment information supporting B2B payments, (2) disparate and fragmented payment processes and systems, (3) and lack of data and actionable insights around efficiency gains from increased digitization. Continuing with legacy practices also entails huge opportunity costs in terms of missing out on potential business expansion.

Figure 12: Costs Associated with Delay in B2B Payments

For instance, payment receivables have surged over twofold since 2019 for SMEs in the US. Globally, on average 23% of payments to small businesses are delayed. These issues can potentially impact the growth, and a company’s ability to create employment opportunities, and in one of five cases lead to business closure.

Figure 13: Surging Uncollected Receivables

Digital Payments Subsectors

High remittance amounts, limited payment options, and handling the vast amount of accompanying transaction data are other factors necessitating the rapid adoption of more digitization in B2B payments.

Digitization virtually eliminates the data issue helping minimize manual intervention in payment processing. These efficiencies give corporates more visibility into their cash position across their supply chain and innovations in accounts payments and receivables are helping buyers and suppliers to align on payments terms and trade credit.

Figure 14: Surging Utility of E-Invoices to Spur Digitization of B2B Payments

The obvious benefits are manifold - lower costs, cash management, error reduction, risk mitigation, and increased transparency.

In terms of the addressable market, the B2B payments space is expected to cross $1.5 trillion by 2027 from roughly $943 billion in 2021, growing at a CAGR of 8.3% between 2022 and 2027, per ResearchAndMarkets data. Accordingly, payment start-ups have been strong drivers of funding attracting $7.6 billion out of the $24.1 billion in 2Q22. Several innovative startups across e-invoicing, AR, and AP automation have emerged and have seen healthy investments from investors.

Digital Payments Subsectors

Figure 15: B2B Payments Market Map – US

Of the total VC funding, payment start-ups accounted for nearly 32% of all VC deals in the second quarter. B2B payments have seen a strong inflow of funds over the last few years and lead other industries and even the broader fintech space in terms of VC funding raised. In 2022 (as of Oct 10), $4.4 billion of VC money flowed into the B2B payments space, which is 87% of the $5.1 billion raised in all of 2021. Some notable companies include expense management platform Ramp’s nearly $750 million in a Series C round at a post-money valuation of $8.1 billion and API- based payments companies Scalapay and GoCardless raising $524 million in a Series B round, and $312.0 million in a Series G round, respectively.

Figure 16: B2B Payments – Total VC Funding by Year

Digital Payments Subsectors

Figure 17: Key Companies in B2B Payments


I, Santosh Rao, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

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