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 – 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. 

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.

Take the example of a supplier’s insolvency. In this instance, if the assignment of the receivable has not been perfected, the administrator would argue the invoice still belongs to the supplier. In turn, the buyer could find itself in a situation where it has to pay the same invoice twice – the supplier would still have a claim against the buyer under the original invoice, and the financier (often protected by some form of irrevocable payment undertaking) could theoretically also still claim the value underlying the discounted receivables. 

Second, corporates need to ensure their programme is structured in a way that meets the appropriate accounting standards – and prevents the reclassification of trade payables as bank debt on the balance sheet. Although in pure cash terms, there is no difference between having a trade payable due in 60 days, and having a bank debt due in 60 days, there are important perception differences between the two. Put simply, while trade payables are considered ‘good debt’ (in the sense that these payment obligations relate to a corporate’s core business operations), bank debt is considered ‘bad debt’ (it is the type of debt that could, in the view of some analysts, lead to bankruptcy). As such, a reclassification could have negative implications for a corporate buyer’s loan covenants, its leverage, and its access to additional credit. 

Finally, corporates must recognise the value of strong supplier due diligence. While these procedures can slow down on-boarding processes, they are an essential part of the holistic offering. Non-performance or underperformance of Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements would not only put financiers at reputational risk, but also compromise their role within the entire trade ecosystem. By proxy, it would raise the same reputational concerns for those companies involved in the supply chain finance programme. 

Building on firm foundations 

Moving forward, a provider’s use of emerging technologies may become another key area for corporates to watch. Already, a number of providers are exploring how artificial intelligence (AI) could be used to enhance KYC and risk management processes –in terms of both speed and effectiveness. For example, an AI-enabled system that had learned money-laundering typologies could, in theory, proactively ascertain when and where risks are likely to emerge based on past trends. Moreover, it could also intelligently analyse high numbers of contextual data points (such as account profile data from CRM [Customer Relationship Manager] databases and non-transactional behaviour from web login activity) to create a highly refined risk score, and help ensure strong risk controls. 

In addition, there is huge excitement in the industry surrounding blockchain’s potential in the payables finance space. The theoretical benefits of a blockchain-enabled platform are multiple – reduced chance of fraud, a more holistic and real-time view of supply chain flows, the elimination of paper-based processes, and the opportunity to implement efficiencies such as ‘smart contracts’. However, it will be some time before a blockchain-enabled system becomes a practical reality – with success dependent not on the efforts of one provider, but rather the development of global standards and industry-wide collaboration. 

However, even as new emerging technologies continue to broaden the current and future options available to corporate treasurers – the fundamental questions a corporate must ask of its provider remain the same. Is the programme easy to set up (and how is technology facilitating this)? Can the provider successfully on-board suppliers in all the geographies where I do business (and how is technology being used to make this more efficient)? And perhaps most importantly, is the offering structurally sound and sustainable? 

To read more on this, see Deutsche Bank’s Payables Finance: a guide to working capital optimisation – an industry-wide collaboration and practical guide to to the past, present and future of payables finance.