One of the re-learnings during the pandemic is the importance of getting paid on time, which is a key reason that those companies with paper-laden financial processes have been scrambling to find better electronic solutions. There is also the opportunity cost of reliance on paper, since companies then lose the ability to capitalize on digital information to even further improve cash flow.
We have been pointing this out for many years in various forms of member research, but now that AI is more easily deployed and prevalent, it is not only becoming an obvious benefit, but also a competitive lever. This indicated posting is found in International Banker, penned by the CEO of a UK fintech startup named Previse, which specializes in software that optimizes the pay cycle through the use of AI.
As one might easily imagine, the cash flow issue hits small businesses like a sledgehammer, and late payments become an existential threat.
‘As Open Banking continues to reshape the B2C payments landscape, now is the right time to take the premise of open data sharing and apply it to the B2B world. Open data sharing could go a long way to helping solve the slow payments problem and help bring B2B payments into the twenty first century….A problem looking for a solution….Many of the issues that have tipped small businesses over the brink in the past year are chronic pain points which pre-date the pandemic. Slow payment of suppliers is a major one, but it is also one that can be solved. Suppliers to a large buyer often have to wait and chase for weeks or months to get paid, which results in real financial strain….To put the scale of the issue into perspective, it is estimated that as of January this year, UK SMEs are chasing £50 billion in late payments, according to research from Tide. The Federation of Small Businesses estimates that this slow payment problem causes 50,000 SMEs go out of business every year, taking with them jobs and investment which are needed more than ever as the economy starts to rebuild….To add to this, recent research from the Institute of Directors shows that two in five businesses are now facing an increase in overdue commercial debts, with nearly one in ten stating that late payment problems had become significantly worse.’
So the increasing use of electronic payments and systems across the cash cycle feeds into the growing digital ecosystem, spurred on by open banking and customer demand, which in turn geometrically expands the availability of data that can be used for machine learning efficiencies.
Matching up data for faster payment decisions, as well as earlier positive action on broken or problem payments, provides businesses with a vastly improved ability to control their working capital, thereby creating improved cash flow opportunities that can eliminate the need for costly short-term loans. Banks can of course be central to the solution as well.
‘Despite the immense promise technology can bring to solving slow payments, it is not useful on its own. FinTechs need access to the ERP data of large corporates so that their algorithms can assess payment patterns and unlock instant payment for suppliers.
Banks have an important part to play in this cycle too and can change financial markets for the better. By helping SMEs to access cash locked in the working capital cycle as early as possible, businesses can trade from a stronger position. Data makes it possible for a business to access cash as soon as their invoice is issued, removing the wait for lengthy payment terms and the uncertainty of whether the payment will be made on time. …This route to approaching sustainable finance is also another way for banks to put their money where their mouth is when it comes to fulfilling ESG commitments. It’s a financing solution which is sustainable and beneficial for all parties. …Using a rigorous risk control framework to release capital from invoices can make businesses more resilient and strengthen supply chains. That isn’t just good for suppliers, it’s good for banks, businesses and the wider economy, too.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group