Meeting the middle market's payment needs
Are you offering the right solutions to keep pace with its growth?
Leigh Hocker Radtke
Head of North America Visa Business Solutions Product
Leigh Hocker Radtke
Head of North America Visa Business Solutions Product
Introduction – leading from the middle One third of US private sector GDP is driven by 220,000 companies. While not a mass market in terms of number of companies this segment, known as the middle market, is economically significant in terms of growth, consistency and resilience.
The middle market includes companies with revenues between $10M and $1B who collectively generate $10T in revenue, according to the National Center for the Middle Market (NCMM) whose Executive Director, Tom Stewart adds that, “we’ve been tracking the middle market for nearly a decade, and one thing is clear: this is where the growth is. The middle market has accounted for about three out of five new private sector jobs; middle market companies have consistently grown faster than the S&P 500.” ¹
These companies are serving the economy in a meaningful way. Their brands are typically not broadly known but these companies are the engine of the supply chain – purchasing over $6T in goods and services annually (roughly the purchasing parity of the German economy).² With all of these B2B transactions between buyer to supplier, one would think that middle market companies have fully automated, integrated and streamlined financial and payment processes. Yet, the reality is that this segment continues year-over-year strong performance, despite challenges related to managing cash flow, working capital and the cost of manual processes. The right business, financial and payment solutions are often not available for middle market companies.
The middle market has accounted for about 3 out of 5 new private sector jobs; middle market companies have consistently grown faster than the S&P 500
Middle market companies tend to fly under the radar of banks and technology companies offering solutions for smaller companies with less complex business operations or larger companies with complex operations and a broad finance team of CFOs, treasurers, and controllers. The financial process optimization and payment automation opportunity in the middle market is underdeveloped, and this is in part because of the unique needs, characteristics and preferences of these typically well-established, privately-owned companies that are neither large nor small but somewhere in the middle.
Here, we look at the needs and shifting priorities of middle market businesses to automate payment processes in support of growing revenues (in normalized economic conditions) and in support of recovery (post-COVID-19). This article highlights the challenges that middle market companies face with inefficient manual processes and the negative impact this can have on cash flow. It then goes on to look at potential payment solutions that can be delivered to help address these challenges.
Middle market companies are moving ahead but financial processes and business systems are left behind
The middle market segment is in need of the solutions with just the right balance and formula from financial and technology providers.
Tom Stewart recently commented to Visa: “As a whole, the middle market is the fastest growing sector of the economy. As they grow, they need to design processes, build out functions, and create ever-more-sophisticated systems and infrastructure to support their growth. But at the same time, they tell us, they want to preserve their agility and they don’t want to get ahead of themselves. I call it just enough process – enough to support growth, not enough to encumber it.” ¹
Stewart went on to emphasize the resilience of the middle market, “As the country and the world navigate the Covid-19 crisis and its economic consequences, we expect that the middle market is likely to play an outsized role in the recovery. These businesses played a similar role in driving growth following the 2008 financial crisis and in the long boom that followed.” ¹
Growth and resilience are both indicators that the performance of middle market companies can outpace the capabilities of their business systems, processes and payment solutions. The challenge is that these companies struggle to change systems and processes to keep pace. The right systems or tools may not be available, or the company may not know how to make necessary changes, or they may be too resource-constrained to consider change or even to filter through the noise of choices that are not tailor-made for their business needs. Middle market companies are often inundated by both small business and large market options – that are not the right fit. These options span across their business operations from accounting systems to ERP to payment solutions.
Whether they’ve grown rapidly from a small to mid-tier business, or they’ve been in business for decades, they sometimes find themselves operating either with financial products designed for small businesses, or enterprise solutions meant for large corporations. This is particularly true of the smaller end of the middle market segment where company annual revenues typically are in the $10M – $150M range. There are over 190K companies – 87% of the middle market segment – fall in this $10M and $150M annual revenue cross-segment of the lower and part of the core middle market.
Middle market companies are seeking advice on better financial and payments automation
In a recent Visa/Barlow Research Cash Flow study which surveyed more than 600 financial decision makers in US middle market companies across six verticals of interest (construction, manufacturing, wholesale, healthcare/medical services, business services and retail), it was confirmed that companies in the ‘lower’ and ‘core’ microsegments of the middle market are seeking both better automation for their payments, as well as advice from their banking partners on how to achieve this transition. Almost 50% of these companies had a desire (pre-COVID-19) to transform payments through workflow, accounting and payment systems within the next five years.³
An additional Visa/Barlow Research flash panel study conducted in April 2020 underscored the need for a more immediate approach to automation. Middle market companies surveyed specifically mentioned the need to displace check payments and the need for consultation and solutions from their banks in the wake of COVID-19.⁴
Further COVID-19 related studies by the National Center for the middle market help shed light on why middle market companies may suddenly be looking for new options. NCMM research shows that companies in this segment are struggling most with supply chain disruptions and the need to find cash and preserve working capital.²
The core value proposition of commercial cards in face-to-face, ecommerce and Accounts Payable transactions is designed to help companies better manage cash flow, insights into spend and integration across business systems. When it comes to check displacement specifically – automating payments and connecting accounting, expense and ERP systems internally – middle market companies often have fewer than three people in financial management roles, and may have a lean IT staff.
Accounts payable automation for the middle market therefore requires a different approach with financial and technology providers offering solutions that are 'just enough'¹ to remove potential roadblocks and lighten the lift.
In industry interviews with clients, partners and fintechs, Visa has found that when companies are presented with tailored solutions by their banking partner they will make the shift from a static state of using a variety of disconnected payment solutions, such as personal payment products and checks, to solutions like commercial cards and accounts payables, and in turn reap the benefits of reduced administrative costs, elimination of manual entry, improved cash flow management and better business insights.
64% of middle market payments are initiated using checks and 50% of companies surveyed said that they use personal cards for business spend³. Even where there is a hesitancy to change, companies still have a desire to automate payments. 34% of the companies surveyed (Pre-COVID-19) indicated they are taking steps to write fewer checks, while the remaining companies said they will initiate payments using automated payment methods, including commercial cards, to reduce manual processes, inefficiencies and errors.³ Companies in the segment indicate more urgency to displace checks and seek better cash flow and working capital solutions as a result of COVID-19.⁴
The middle market’s need and willingness to change seems clear, especially when provided with simple-to-use, automated and fully-integrated solutions.
Better cash flow management powered by advice, connected systems and payment solutions
Filling the payment automation void for middle market companies is important, as cash flow can be directly affected by the level of payment automation within a company. Inefficiencies associated with manual payment processes can result in sub-standard cash flow management practices. Initiating check payments as well as using payment methods not integrated with financial systems requires time-consuming tasks including manual paper-based payment approvals, manual processes to create payment records, and reconciliation of payments to the originating system.
Companies responding in the Cash Flow survey indicated that internal financial systems are mostly process-integrated, but improvements need to be made with external systems (especially to online banking and cash management or treasury portals). These companies also indicated that they check their cash position at least daily and go to multiple systems to do so.³
Automation and technical integration can assist in checking cash position and forecasting future cash positions. The technical integration of these systems enables real-time updates and visibility through the synchronization of data across multiple platforms. Lack of tight interoperability between different systems creates issues with managing cash flow – only 46% of companies surveyed were happy with how they were managing their company’s cash flow.³
Middle market companies are seeking advice about their cash management practices. Over half of the companies surveyed have consulted with their primary bank to automate the way they make payments, indicating a desire to center the payment automation decision with their bank relationship manager.
Checks remain the preferred payment choice for supplier payments
Just enough¹ can be everything
Middle market companies have experienced strong growth for a couple of decades and, as NCMM has indicated, are expected to lead in the economic recovery following COVID-19. ¹ ² Now more than ever this segment represents an area of opportunity to transform payments through integration of disparate systems and automation. A commitment to understanding the sub-segments of the middle market, current financial processes and payment practices and desired capabilities are critical to helping middle market companies to gain the large corporate benefits of process optimization and automation balanced with the usability and ease of implementation of smaller company solutions. Financial and technology providers delivering solutions that are easy for middle market companies to adopt and also modular and fully-packaged will ensure this powerful segment continues to thrive.
Tom Stewart recently commented to Visa that “The solutions that help middle market companies grow are those that leverage the capabilities of others like – the ability to lease assets instead of buying them, to use cloud computing and software as a service, to partner with third parties to handle elements of data processing, finance, and other workflows. These solutions allow companies to grow in an asset-light way – to scale without tipping the scales, as it were.”¹
These are tools that advanced middle market companies were using to grow. The same tools can help them restart growth following the current crisis. Indeed, they will help them to recover faster because they won’t have to invest as much in building their own infrastructure and processes.¹ ²
Middle market companies are caught in between needing more than a small business-designed financial solution and the complexity and implementation requirements of a Global 1000-designed solution. However, these companies just don’t have the resources or the time to implement complex solutions. The organizations best able to chase the opportunity presented by the ‘just enough’¹ gap in the middle market will be those financial institutions, fintechs, and companies that strike a balance between delivering an easy-to-use and easy-to-implement solution that requires few people to implement, with functionality to drive scale process efficiencies.
Get the formula right and the middle market engine can continue its revolutions in growth in the months and years to come.
¹ National Center for the Middle Market commentary to Visa Inc for use in Middle Market publications.
² National Center for the Middle Market www.middlemarketcenter.org
³ Visa-commissioned Cash Flow study by Barlow Research
⁴ Visa-commissioned COVID MM Flash Panel by Barlow Research
The solutions that help middle market companies grow are those that leverage the capabilities of others.