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.