Each year, Ardent Partners conducts a series of market research studies focused on the accounts payable (“AP”) and P2P markets. Our most recent of these looked at the state of business-to-business (“B2B”) payments and captured the key findings in a report called “The State of B2B Payments 2015: Emerging Business Value.” The report captures the perspectives, experience, and performance of more than 200 AP and finance leaders, and also examines the key trends impacting the market; as with all of our state of the market reports, it also includes a series of recommendations. The full report is available for download by clicking here (registration required).
Paper checks have retained a significant portion of B2B payments (particularly in North America) because of a combination of enterprise inertia and familiarity. Most every business professional has certainly paid a bill with a check in their personal lives because of how easy it is to use and understand a paper check. The process is much the same in a B2B context; a supplier receives the check, reconciles the payment, and deposits it into the bank. Checks have also been used for so long that many suppliers see no value to a change. It is because of these reasons that checks have managed to remain used in more than a third of B2B transactions, but this reality is changing.
The Times, They Are Changing
Recent developments in electronic payments (“ePayments”) have created an environment where the business value of paying suppliers electronically is better understood. Part of this environment are new technologies that are much more in line with how enterprises use software in other parts of their business. These emerging technologies include network-based payment solutions and associated processes, such as supply chain finance (“SCF”) and dynamic discounting. It is because of this closer alignment to traditional enterprise software that more organizations use ePayment solutions and services than ever before; today, 63% of payments are made electronically, compared to only 37% made with paper checks.
As a result, enterprises looking to increase their ePayment usage have much to consider. If they seek to use these emerging technologies as part of their overall supplier payment strategy, a coherent plan must be developed prior to any technology implementation—a plan which includes buy-in from key stakeholders, such as Treasury and Procurement, as well as a supplier enablement program to convince suppliers that there is value in receiving ePayments. Only once this is done can P2P teams truly begin to think about how emerging technologies can fit into their supplier payment strategy.
How Do Network-Based Payment Solutions Fit In?
Network-based payment solutions, sometimes called “payment networks,” are designed around the ability to automate and facilitate the payment process (and frequently the invoicing process) between trading partners. One of the key capabilities of many payment networks is visibility into supplier payment data, including upcoming payments, which can be used to inform decisions around days payable outstanding (“DPO”) and deciding whether to pursue an early payment discount or offer alternative payment methods to the supplier.
Network-based payment solutions can impact a supplier payment strategy through the increased visibility that is a hallmark of the platform. And, as more suppliers join the network, this visibility increases because the P2P team is able to take advantage of the improved communication and collaboration that is enabled via network-based payment solutions.
Leveraging Supply Chain Finance
Supply chain finance is not a payment method in the same vein of wire transfers or commercial cards. Rather, SCF is a financing solution that uses third-party capital—typically from a bank or other lender—in order to pay invoices at the point of approval rather than delay payment to the end of the contracted payment term. This results in the supplier receiving payment faster than under normal conditions, and allows the buyer to delay payment longer because they owe the third-party lender instead of the supplier.
SCF fits into a supplier payment strategy through allowing enterprises the ability to pay suppliers quickly while also extending their DPO, which can improve a supplier relationship while also managing a key metric of financial health. SCF is particularly useful when buyers want to pay strategic suppliers early but do not want to sacrifice DPO in order to do so.
How Does Dynamic Discounting Fit?
In standard early payment discounts, buyers receive a discount if they pay the invoice before a set number of days have passed. One of the most common discounts on offer is “2/10 net 30,” which equals a 2% discount if payment is made before the tenth day. If it takes longer than 10 days to approve an invoice and schedule payment, which frequently happens, there is little incentive to pay the supplier early under this system. Dynamic discounting changes this narrative, as discounts under this method are provided on a sliding scale throughout the entire payment cycle.
Dynamic discounting fits into the supplier payment strategy by expanding the potential for early payment discounts. Buying organizations can use dynamic discounting to offer “financing” to suppliers willing to participate in the program, while also sending additional capital to the business’s bottom line. In a departure from SCF, dynamic discounting also uses the enterprise’s own capital to fund the payment program. The value of dynamic discounting lies in the ability to have more time to capture early payment discounts throughout the payment cycle, which could result in more savings going to the enterprise’s bottom line.
Final Thoughts
Paper checks have retained a sizeable portion of the B2B payments landscape in North America partially because they are familiar and easy to accept. This has slowly begun to change since the early 2000s, as new technologies that are more in line with traditional enterprise software have come to the forefront. Between network-based payment solutions, SCF, and dynamic discounting, AP and P2P teams have much to consider when leveraging emerging payment technologies. These can be powerful tools that, when well-implemented, can create a much richer supplier payment strategy than one that depends on legacy tools and processes.
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