Open Banking: Merchant Working Capital Innovations

Innovating in business-to-business (B2B) payments and receivables management for small businesses is not a new concept, considering top startups like Israeli FinTech company Melio and US company Routable that have been exploring the space for decades. years.

But when it comes to Europe, Philipp Adrian Pohlmann, co-founder of Berlin-based payment processing start-up Denario, says the region has some catching up to do because, compared to the United States, for example, it lack of a strong Accounts Payable, Accounts Receivable Management (APAR) solution for small and medium enterprises (SMEs).

Pohlmann explained that in Europe the space is not very attractive, which is why the concept has not been widely adopted by more startups – despite some expense management solutions like the French company Spendesk or l German Moss [Germany] trying to innovate more and more in AP processes.

The challenge with most of these European FinTechs, he noted, is that they started with a very profitable value proposition that could be easily monetized with debit or credit cards only if people pay with cards and are charged subscription fees in addition to interchange. fees incurred by merchants.

But for APs or vendor invoice management as a value proposition in itself, he said there are fewer monetization angles — it’s harder to create a business model that works.

To address this issue, Denario created a network effect strategy that considers both sides of transactions so both beneficiary and receiver can benefit from using the platform, which Pohlmann says is not not widely offered in Europe.

The young company, launched only last year, has also looked beyond offering a basic APAR software solution to focus more on the automation space.

“We basically thought about how the business payment experience differs from the consumer payment experience and how a business owner or someone with limited finance or accounting experience would complete a transaction “, Pohlmann told PYMNTS in an interview.

With this analysis, they concluded that to add value, any new software must automate the multiple steps common in business payments that do not exist in consumer payments.

“There are just a lot more steps involved [for businesses]from receiving, paying, processing, reconciling and reporting payment to recovering part of the VAT [value added tax],” he said. “The complete cycle of a [business] the transaction is just much longer than when you pay for a product as a consumer.

An Uneven Open Banking Playground

Pohlmann said taking a legacy banking product used by many existing institutions and turning it into a modern software product that automates most of these B2B payment steps can be challenging due to the difficulty of importing payment documents, invoices and receipts from different sources – and the need to keep adding integrations to make the process easier.

In Europe, he said, open banking technology has been helpful in addressing some of these challenges, but it remains unevenly applied across countries.

In the UK, for example, it is widely applied and allows users to make quick and easy account-to-account transactions through Denario.

In other countries like Germany, however, it is more complex due to the legacy systems the banks operate on. While these banks are PSD2 compliant and manage to offer an interface for Denario to connect through an open banking system, Pohlmann noted that “coverage is pretty poor.”

Moreover, most mechanisms such as scheduling a payment or split payment cannot be done through these banks, he added.

“That’s why we’re expanding our reach and trying to bridge that gap by working with a bank-as-a-service partner to use a real account in the middle to then complete a transaction and then transfer it with a payment method. [of our choice]. It’s a complicated process, but we’re working on it,” he said.

Solution for merchant financing

To further its mission of automating the B2B payment experience for SMBs and startups, the startup announced this month that it has raised €1.3 million ($1.5 million) in capital risk.

Related News: German payments startup Denario raises $1.5 million to automate B2B payments for SMBs

This cash injection will likely help Denario bring to life another solution they are currently working on, which is access to cheap credit and liquidity for traders. It’s a need that grew at the start of the pandemic, Pohlmann said, when many small business owners ran out of money despite benefiting from several funding programs put in place by the government. European Union.

He added that they had consulted with underwriters and financial partners on the possibilities of offering liquidity through invoice financing, for example, to finance transactions.

“We will probably look at revenue-based funding [RBS] solution – trying to figure out how to connect bank accounts to other financial tools and reviewing past transactions and bills for [better] understand basic incomes,” he explained.

From there, they’ll be able to create a risk model that gives the underwriter a better indication of the client, which can then lead to better terms instead of the “very unfavorable terms that some might be used to in the framework.” subprime loans, for example,” he explained.

Offering this solution could potentially be the next step the startup is taking after successfully growing volume on the platform and executing a successful beta launch, he said.