DAVID GUSTIN, Chief Strategy Officer, The Interface Financial Group

February 27, 2019

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

Few source-to-pay platforms, payment processors or other networks have been able to develop early pay dynamic discounting management (DDM) or supply chain finance solutions that have added significant revenue to their enterprises.

This comes at a time when these platforms are building new capabilities to boost revenues, including providing supplier invoice aggregation services; adding payment functionality; and helping clients migrate to cloud solutions.

S2P Objections

From my conversations with many S2P platform vendors and payment processors, I hear three buckets of objections about early pay solutions:

Bucket 1: There is little or no demand. Our clients are just not asking for early pay.

When asked why early pay solutions have not been successful to date, S2P vendors and others say, “We’re just not seeing this on RFPs.” S2P platforms don’t see this as a driver in a deal. Or they will claim that buyers view early pay as too complex.

Bucket 2: S2P platforms and payment processors do not engage with treasury people instrumental to program design and success.

S2P platforms work with AP and procurement people and not treasury. AP and procurement typically do not have the internal authorities to implement DDM + supply chain finance (SCF) programs. S2P platforms have no relationship with treasury, a critical cog in creating a complete DDM + SCF solution. Vendors have a hard time reaching C-suite executives that can champion change.

Bucket 3: Product objections that come in the form of supplier on-boarding or revenue sharing, etc.

S2P platforms have commented that buyers view sharing revenue with outside third parties as perhaps creating friction in their supply chain or creating a situation of too many mouths to feed.

Addressing S2P Objections

Lack of Buyer Demand

The practice of offering discounts for early payment (e.g., 2%, net 10) goes back decades. For most large companies, there is nothing like standard payment terms. Their payment terms vary across divisions, regions and with time, to the point that it is rare if a large company has less than 40 to 50 different terms.Most large companies have introduced at least two early pay initiatives to a segment of their supply chain. Purchasing cards, or p-cards, are typically used to pay small suppliers for non-ERP, no purchase-order spend. For large investment-grade companies, there is “bank-led” supply chain finance, where banks underwrite the buyer to purchase receivables from their suppliers they do not bank.

So implementing early pay solutions is not the issue. The issue would be “seeing” value from the buyer’s perspective to create demand. In the case where a buyer, in one platform, can have dynamic discounting, digital supply chain finance and off-platform lending, the value proposition becomes very strong. The company can extend DPO to improve working capital. The company can use dynamic discounting and digital supply chain finance to earn revenue.

For the buyer’s sellers, a DDM program tied to digital supply chain finance lowers their days sales outstanding (DSO), provides a new working capital option at a rate the buyer chooses and improves the seller’s cash flow on an as-needed, seasonal or all-the-time basis. For a buyer’s long tail (and that could be diversity suppliers, small suppliers, suppliers prone to factoring, etc.), this option could lower their suppliers’ cost of capital.

Flawed Sales Engagement

If you got the right people in the room (treasury, procurement, AP, IT, etc.) to think about this for a second, creating a holistic DDM + SCF program becomes much more compelling. Early payment impacts several departments (i.e., procurement, treasury, shared services, etc.). They all need to understand the proposition, not just Mary in AP or Bob in procurement administration when making a presentation. So S2P platforms need to get out of their comfort zone and engage some treasury folks and talk about the holistic value proposition.

From treasury’s perspective, they will need approval from their executive committee/CFO to invest operating cash into paying suppliers early in exchange for a discount of say 1% to 2% per month (APR = 12 to 24%) or have the option to use a third party. Treasurers need to understand how this will work and be comfortable with the process.For many companies that do not have surplus cash, operating a DDM program without any source of third-party funds can be risky. While the logic says you will pay these suppliers upon payment term and thus need the operating cash, many reasons exist why a company may not want to commit cash early (capital projects, acquisitions, early retirement of debt, stock repurchases, unexpected demand, port strike, etc.). The beauty with DDM + Digital Supply Chain Finance is that both the suppliers chosen and how you choose to fund can be managed with a few simple clicks on a dashboard.

Product Concerns by Buyer

Most large companies have now introduced at least two or more forms of early payment (p-cards, bank supply chain finance and now dynamic discounting). The biggest issues for them are supplier on-boarding and use of third parties that are not their house banks.

In the case of bank-led on-boarding, complex requirements for know-your-customer (KYC) and know-your-customer’s-customer hamper on-boarding efforts. Dynamic discounting + SFC can touch on all your suppliers or a select few. It’s your choice.

In the case of third parties (i.e., non-banks) and mouths to feed, the reality is an outside party takes a risk funding a supplier based on a buyer’s scheduled payment. The risk is low, but it is still there — and it’s called post confirmation dilution. Third parties are compensated for managing that risk. Some third parties pass that risk back to the buyer in the form of irrevocable payment undertakings, which may have accounting issues.

In sum, with prominent early pay success stories in the market, and many companies with excess cash in this low yield environment, the question comes up why aren’t more companies being more aggressive with these programs?

I believe these discussions need to happen with the right people in the room, to overcome objections that it’s too hard or clarify misconceptions developed given all the confusing material out there on SCF, approved payable finance, dynamic discounting, etc.

What are we waiting for?