Financial Supply Chain

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What Makes a Payables Finance Programme Successful? In an increasingly competitive supply chain finance ecosystem consisting of banks, non-banks, and a combination of the two how best can corporate treasurers select an effective payables finance programme provider? Deutsche Bank suggest three simple questions that corporates can ask.

What Makes a Payables Finance Programme Successful?

What Makes a Payables Finance Programme Successful? 

By Anil Walia, Financial Supply Chain Head, EMEA, Deutsche Bank

 

In an increasingly competitive supply chain finance ecosystem – consisting of banks, non-banks, and a combination of the two – what makes a payables finance programme ‘successful’? And how can corporate treasurers select an effective provider? Anil Walia, Deutsche Bank’s Head of Financial Supply Chain Finance, EMEA, suggests that corporates need to ask their providers three simple questions.

In the late 1990s and early 2000s the payables finance landscape comprised only a handful of banks implementing programmes as working capital solutions for their largest corporate clients. And even then, it was largely limited to the retail and manufacturing sectors. In such a landscape, choosing a payables finance provider was simple.

Two decades on and the picture is quite different. Payables finance has become big business: in 2016, global volumes were estimated at US$447.8bn.[1] As the market has grown, so has the number of providers seeking a slice of the action. According to PwC, non-bank fintech providers now hold 14% of all payables finance programmes.[2] Broadly speaking, these third-party providers place emphasis on their funder-agnostic digital interfaces, simplified implementation and on-boarding processes, and different business models – such as those focused on smaller suppliers. However, not all third parties are the same – there are multiple providers all of which offer slightly different solutions.

How can corporate buyers make sense of this increasingly competitive environment? We believe they need to be asking three simple questions of their provider: is the payables finance programme easy to set up, can the provider on-board suppliers efficiently across all relevant geographies and, finally, is the programme safe and sustainable? 


1. Is the payables finance programme easy to set up? 

The underlying driver for setting up a payables finance programme is almost always working capital optimisation. Using payables finance, large corporate buyers can extend, or maintain, existing supply payment terms and decrease the cash conversion cycle, without threatening supply chain stability. However, if the buyer has to set up extra infrastructure or change operating procedures to interact with suppliers, the essence of ‘optimisation’ is lost. Therefore, speedy and swift implementation is the first step towards a successful programme. 

Today, a number of providers offer a ‘plug and play’ model to facilitate programme implementation, connecting directly with the buyer’s ERP system so that the data required to initiate a programme can be extracted automatically. This in turn, significantly, reduces the effort required by a corporate buyer to initiate a programme. 


2. How effective is supplier on-boarding? 

With ‘plug and play’ technology becoming increasingly standardised across platforms and providers, well-executed programme implementation is no longer the differentiator it once was. Today, the ability to provide a first-class on-boarding service – to enrol suppliers quickly and in vast numbers, in all the geographies where the provider does business – is the more important barometer of success. McKinsey research, published in 2015, revealed that anchor buyers (those initiating a programme for their suppliers) consistently ranked on-boarding capabilities as the single most important factor when evaluating their payables finance programmes. [3]

Technology inevitably plays a significant role here: being able to upload or fill in the required documentation online reduces the need for manual input and significantly improves efficiency. However, arguably just as important given the increasing instances of cross-regional programmes is a strong ‘on-the-ground’ on-boarding presence – providers need a strong understanding of the suppliers’ local environment and the capacity to respond to the suppliers in the same time-zone and the same language. 

 

What is payables finance? 

Payables finance is a specific buyer-led supply chain finance technique through which sellers in a buyer’s supply chain can access liquidity by means of receivable purchase (selling their trade receivables held against the buyer). 

Using payables finance, corporate buyers can extend, or maintain, existing supply payment terms without threatening supply chain stability. Suppliers can access financing at a more attractive rate than normally available (given that the financing cost is aligned with the higher credit rating of the buyer). 

Source: Payables Finance: A guide to working capital optimisation (Deutsche Bank AG)

 

3. Is it safe, sound and sustainable? 

Given that most corporates tend to mandate one provider for a minimum four-to-five-year stretch, any programme must be safe, sound and sustainable.  

What do we mean by this? Firstly, corporates must be sure that the legal documentation surrounding the underlying payables finance transaction is secure and enshrines all rights and obligations of the provider. In particular, they must be sure that the assignment of the receivable from supplier to financier has been ‘perfected’ according to jurisdictional requirements. Although reaching perfection on the assignment of the trade receivable is not always an easy process (even in the EU, the rules relating to perfect assignment are different in almost every country), the potential consequences of failing to meet perfection are much more serious than a mere administrative burden – and not just for the provider.  

 

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