Understanding the wider B2B payments ecosystem in which commercial cards operate has never been more important. Anyone who subscribes to the latest news and updates from the payments industry will have seen numerous examples of new technologies designed to optimise how a B2B payment can be made and received. Substantial investments continue to be announced as FinTechs provide refreshed and compelling approaches to Supply Chain Finance (SCF) and Dynamic Discounting (DD). Some solutions can complement existing commercial card programs, but discussions with FinTechs and end users have revealed an increasing momentum which effectively replaces the equivalent value of an MSF with a discount. Such solutions can directly enhance the bottom line of both buyer and seller.
SCF and DD are not new concepts and commercial cards already offer complementary services designed to directly empower employees with full accountability to make purchases. The ability to make a prompt payment to a supplier, whilst extending payment days for the buyer, is a core function of a commercial card program. Further supported by controls, data and transparency on who is buying, from whom, how much and when, commercial cards continue to provide the potential for significant process cost savings and business critical efficiencies.
However, with their innovative approach, new and emerging technologies are providing solutions that could provide alternatives to commercial cards through combining the benefits of eInvoicing, SCF and DD functionality to support B2B payment solutions. These providers deliver solutions supported by great UX (user experience) and UI (user interface) design with enhanced data and rapid supplier onboarding at scale. From a user perspective, there is still a complementary role for commercial cards in B2B payments if the options are fully understood.
The positioning and communications for a commercial card program can offset any potential for disintermediation and it is important to have a fully informed perspective on how an organisation balances the relative merits of the options available. By better understanding the wider B2B payment ecosystem, organisations are able to manage and position their programs to maximise the combined benefits.
Considering the options
To cover the basics, SCF involves an agreement between the buyer and seller to involve a financial service provider (FSP), with the aim of providing access to short term credit. This is designed to optimise the available working capital for both the buyer and the seller. A win-win. Buyers want to delay payments for as long as possible and sellers want payments to be received as soon as possible.
To meet these apparent contradictions, the suppliers effectively sell their invoices to the FSP and they can immediately receive the money they are owed, less a discount charged by the FSP. This allows them to improve their cash flow and use it as working capital. The buyers are also offered more time to pay by the FSP and extended credit can be accessed by the buyer. In a typical SCF arrangement, the terms are subject to the creditworthiness of the buyer rather than the supplier.
SCF is also very effective at connecting an extended supply chain of buyers and seller by providing an ongoing injection of liquidity and increased velocity of payments across the supply chain. An optimised SCF process protects the integrity of a supply chain, increasing confidence and certainty of payment, reducing friction as value flows to all parties through a more collaborative buyer-seller relationship.
To ensure that any SCF solution can operate most effectively, there is a need for a technology platform to enable the approval of an invoice as easily and as quickly as possible. Any errors or discrepancies can be identified and addressed through an automated process. The recent growth in SCF solutions has also been marked by a much improved UX and UI that makes access to a wider range of payments more accessible. This automates transactions and enables invoice approval with a robust settlement process from initiation to completion.
To maximise the working capital potential of any SCF programme, it needs to be based on an integrated procurement and accounts payable strategy. The first step is to ensure that the process of receiving and agreeing invoices is confirmed as quickly as possible. As soon as this is completed, the invoice can be financed and payment made to the supplier. Alternative models based on DD functionality enable the supplier to choose how quickly they want to be paid. The longer the settlement period, the less the discount factor becomes and the flexibility helps the supplier to optimise cash flow and working capital.
When comparing the range of options available through SCF and DD solutions with a commercial card B2B payment solution, the costs and benefits to the participants can be considered. In the traditional commercial card scenario, the supplier pays the charge to receive prompt payment. In the SCF and DD scenario, the buyer and FSP effectively take the value of the discount being offered by the supplier.
To illustrate the latter point, a $48M purchasing card program was recently replaced with a new procure-to-pay solution that channels the value of the MSF to the buyer. An online hub matches POs to invoices, identifies and rectifies any discrepancies, automatically seeks approval from the buyer to pay once receipted, and issues an instruction to pay the suppliers immediately through a bank transfer. Discounts provided for prompt payments range from 1.5% - 5% and the transactional data is directly integrated into the buyer’s enterprise system at a level equivalent to the level 3 data available through purchasing cards.
In this example, the monetisation of the MSF through the discounts has exceeded the rebates associated with the commercial card program. No finance facility is required in this example at present, but the ability for the buyer to extend payment terms whilst still benefitting from a discount is likely to be part of phase two. Feedback from the suppliers under the previous purchasing card program had been consistently positive based on the certainty of payment within agreed terms. Since the introduction of the new solution, their feedback is reported to have also been extremely positive and the improved buyer-seller relationship has seen an improvement in delivery times and SLAs.
Looking forward
The B2B payments ecosystem can sometimes appear to be complex, with the pace of new innovations continuing to dominate the financial newsfeeds. The challenge for commercial card providers will be to ensure that they continue to refresh and amplify their messaging to ensure that their solutions are positioned as dynamic, current and compelling. Options also exist to integrate the enhanced UX/UI experience available through the new SCF and DD providers into a virtual card experience.
The credit provided through a commercial card transaction offers an equivalence with an SCF solution, but the additional layer available through a DD facility can offer an either-or scenario based on who the supplier is paying for prompt payment. The commercial card market has the potential to evolve and enhance B2B payment functionality through leveraging integrated and complementary solutions in partnership with the new FinTech providers.
From the perspective of a commercial card user, an informed opinion is essential. To be able to understand the relative merits of the various B2B payment options, connect with colleagues, liaise with other organisations, engage with industry experts and regularly review online resources. Having an understanding of the wider B2B payments ecosystem will ensure that an organisation can optimise its choices from the available solutions. This will enable existing programs to maximise their potential.
With a fully informed perspective, being proactive with colleagues and senior management will ensure that they are fully aware of how a commercial card program can best complement other existing and emerging B2B payment options, to anticipate and mitigate any potential disintermediation.