Corporate treasurers may want to consider how they can maximize the efficiency of their payment function through a strategic supply chain finance program.
The low interest rate environment across Europe continues to make a strong case for supply chain finance. As recently as 14 June of last year, the European Central Bank held its benchmark refinancing rate at zero percent and expects key interest rates to remain unchanged at least through the summer of 2019
Before putting away the spreadsheets and powering down the laptops prior to heading off to the shore or mountain retreat, corporate treasurers may want to consider how they can maximize the efficiency of their payment function through a strategic supply chain finance program.
The low-rate environment in Europe continues to have implications for both buyers and suppliers. Many large buyers have lengthened payment terms with suppliers in order to hold onto cash longer for use in other parts of the business. Of course, the desire to maximize returns is much more challenging as a result of these low rates. The impact of this focus on working capital is being felt by suppliers, who must wait much longer before being paid. According to the 2017 Supply Chain Finance Analyst Report, the average Days Payable Outstanding (DPO) worldwide was 64.5 days in 2016.
The 2016 European Payment Report published by Intrum Justitia found that 41% of SMEs reported that late payments from buyers were impeding growth and that the very survival of 35% of these suppliers was at risk. With DPO in Europe averaging approximately 59 days just a few years ago, it is clear that suppliers need ready access to capital, but banks are often wary of lending to these businesses. This is where supply chain finance can be an effective solution that is a win-win for both buyers and suppliers.
Supply Chain Finance: A Perfect Match for Buyers and Suppliers
When properly deployed, supply chain finance can increase DPO, delivering important working capital improvements for buyers, while deepening relationships with suppliers. Suppliers receive payment options that work for their business, at the same time buyers are able take advantage of the improved and predictable cash flow as a result of better payment terms.
While banks have traditionally focused supply chain finance programs on investment grade buyers, FinTechs entering the financial services space have expanded the reach of such offerings to a segment of the marketplace that has largely been ignored — smaller businesses. However, rather than being perceived as interlopers, banks have an opportunity to partner with FinTechs to service these smaller organizations and offer access to reverse factoring solutions.
Better Than a Holiday Romance
When banks partner with FinTechs to offer working capital services, such as dynamic discounting, to businesses who would not previously have such solutions available to them, such collaboration can be much more than a marriage of convenience. Partnering with a FinTech, such as Traxpay, can enable a bank to leverage its existing technology and further enhance current capabilities by utilizing its own advanced platforms. This enables the bank to maintain the vital link with buyers and suppliers, and thus preventing them from being disintermediated.
By working with a FinTech, banks can leverage the huge amounts of valuable data collected from supply chain finance platforms. For example, Traxpay captures the data streaming between banks and their client’s Enterprise Resource Planning (ERP) solutions, such as SAP and Oracle. This data, which encompasses purchasing and paying habits of buyers and suppliers, can enable banks to tailor offerings, such as reverse factoring, cash forecasting, and metrics to more effectively manage DPO and Days Sales Outstanding (DSO).
While always staying within the framework of new data protection laws in Europe, banks and FinTechs can leverage critical insights obtained from this wealth of data to facilitate more robust communications between buyers and suppliers.
As more and more banks collaborate with FinTechs to extend the reach of supply chain finance solutions, corporates shouldn’t hesitate to ask their bank about how they can take advantage of this powerful tool. What better way to head off on holiday than knowing your organization is taking advantage of the latest supply chain finance tools for the betterment of yours and your suppliers’ businesses.
BY MARKUS RUPPRECHT
Markus Rupprecht is founder and CEO of Traxpay. A financial services innovator and entrepreneur, he has more than 20 years of experience leading payment initiatives for banks and startups.