Companies use Bill.com to manage payables and receivables. To manage payables on Bill.com, a company uploads the invoices it receives from its vendors, categorizes the expense, sets an approvals process, schedules future payment and transfers funds (more on this later). To manage receivables, a company creates its own invoices in the system and Bill.com sends those invoices to customers, linking to an online portal where the customer can log in and pay. I’ve worked with two businesses that use Bill.com — in exchange for very reasonable per-user subscription fees and $0.50-1.50 per invoice paid, Bill.com provided us very positive ROI in the form of time saved, increased controls, a clear audit trail, and more precise working capital management.
Bill.com is fully functional as a standalone product; for a typical customer, almost all of the value of the service exists before any network effects are considered. Bill.com has built its product to work in both the digital and analog worlds. For example, I can have Bill.com print and mail physical copies of invoices to my customers at the click of a button, just as easily as sending them through email. For paying my vendors, Bill.com in fact defaults to analog mail for sending payments, printing a check and sending it through the US postal system. However, Bill.com has also built its system with an eye towards an increasingly digital world, and in this light, is flirting with the power of network effects.
When we send an invoice to one of our customers via Bill.com, our customer receives a PDF of the invoice and a link to an online portal. For many of our customers, their relationship with Bill.com ends there. They keep the PDF for their records and send us a check in the mail, typically using their bank’s bill pay mechanisms. However, should they choose to follow the link to the online portal, their relationship with Bill.com continues.
Using the online portal, our customers can pay their invoices directly using either a credit card or a bank transfer, but, only after they create their own free Bill.com account. Most of our customers take this route, and thus Bill.com’s user base expands as our customer base grows. As such, Bill.com has built virality into its platform, and the result is an extensive network of businesses with fairly rich data on the relationships between them.
So, how does Bill.com leverage this network to its competitive advantage?
For direct network effects, Bill.com uses their network to reduce payments costs for its users. We pay fairly typical B2B credit card rates on transactions, well below 1% of sales. However, after signing up to view the online portal, our customers can choose to link their bank accounts and pay via Bill.com’s own flavor of ACH, branded ePayments. When a customer pays us via Bill.com ePayment, we pay $0.50 per transaction, well below what might be hundreds of dollars for a comparable credit card payment. As such, we do our part to encourage our customers to pay via ePayments, thereby significantly reducing our processing fees. As Bill.com’s network of merchants grows, our processing fees decline.
Indirect network effects come in the form of more robust integrations with our other accounting systems. A larger user base encourages providers like Quickbooks (Intuit), Xero, Intacct and Netsuite to integrate more closely with Bill.com. As a user, this provides us tremendous value — the better the integration with systems like these, the better we are able to manage expenses, the lower our accounting costs, and the faster our monthly close. Indeed, we chose Bill.com in large part due to the quality of these integrations, evidence of the virtuous cycle.
But is this defensible?
At the moment, the jury is still out. The beginnings of a highly defensible network are there, but to a limited extent. Better integrations are a compelling feature, but not unique. To date, Bill.com has not opened up its platform for third party developers, which might be convinced to develop applications specifically for it. For example, creating invoices is still a highly manual process for us, but not unique for a subscription business like ours. Bill.com could use third party developers to add functionality for specific verticals like ours which it may not otherwise have the resources or expertise to tackle on its own. The challenge here, though, is that accounting systems providers appear to have captured the platform position in the finance stack.
The payments network which Bill.com is steadily creating seems to be a more promising path. However, from the point of view of the invoice recipient, the costs of multi-homing across payments networks is very low. The credit card network is much more robust and, while more expensive for payees, is a better deal for payers when things like points are considered. To strengthen the power of its payments network, Bill.com needs to provide a greater incentive for invoice recipients to pay via ePayments. A points system similar to credit cards may help, but unlike credit cards, Bill.com’s relationship with its users is bidirectional (both cash-out/payables and cash-in/receivables). Can Bill.com give discounts on its subscription fee to its receivables-customers whenever they pay their own vendors via ePayment? Doing so may strengthen and boost its network at a reasonable cost, though this does not seem sufficient.