Fintech or House Bank for Early Payment Solutions: Key Differences

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There are three buyer-centric solutions to facilitate early payment for suppliers: supply chain finance, dynamic discounting and commercial cards (p-cards, v-cards).

Bank-developed solutions in this space rely heavily on companies using credit lines. The focal point tends to be on p-card solutions, not dynamic discounting. Why? P-cards generate much more in fee revenue than dynamic discounting, particularly if a client uses its own funds to facilitate early payment instead of a bank credit line.

Typically, banks roll out a purchase-to-pay (P2P) solution for a corporate client in five steps:

  1. Collect paper invoices, PDFs, faxes and emails, then consolidate and convert into a standard file format for the middle-market customer
  2. The bank then provides visibility to suppliers in a branded company portal
  3. The company (buyer) will design business rules so it can auto-pay invoices (the ones that don’t have exceptions)
  4. Once approved, the bank will provide different methods of payment to the buyer — ACH, check, commercial card, domestic wire and, if the bank offers it, dynamic discounting or supply chain finance
  5. Once payments are made, the bank will then send a reconciliation file back to buyer, who will be able to see what has been paid by what means and close out the invoice

In the above scenario, banks typically attach a credit line for the buyer to facilitate early payment with their suppliers. This line of credit is part of their overall capital structure. Banks may fund something for a buyer, but they doesn’t necessarily provide the most sophisticated buyer dashboard technologies, supplier portals and the like.

House Bank Solutions are Not Always the Answer

While companies may choose their house bank in the above scenario, there are several additional factors that buyers should consider:

  1. Capital is scarce, so using it in this way means you may not be able to use in it in other ways, all things being equal
  2. You may need to provide your lender with a promissory note or irrevocable payment undertaking based on the contractual terms of the line of credit, potentially raising accounting treatment issues
  3. There are notable know your customer (KYC) hurdles at banks for funding non-client companies (see: KYC for Supply Chain Finance is an Unmitigated Disaster). Banks generally have onerous procedures they must follow, making it difficult for suppliers to make an easy decision to access funds quickly
  4. Bank technology tends to have big gaps compared with fintech providers in areas such as supplier portals, buyer program management dashboards, use of machine learning for dilution and invoice capture
  5. There is no off-platform lending option for suppliers, meaning suppliers can only fund the business with the buyer on the bank’s platform, not receivables they have elsewhere
  6. Perhaps the biggest challenge is the bank’s own credit risk department. Credit departments at banks are very conservative. Trying to make the bank comfortable that it can carry for 60 or 90 days a receivable purchased from a non-client supplier is an uphill battle at some banks. That may seem hard to believe, but credit policies and bank capital are what they are

While the bias is to work with your house bank, this is not a trivial issue for treasurers, controllers and CFOs to think through. Knowing all of the above and figuring out the best solution for your own economics may lead to the same conclusion, but in a capital-constrained world, it’s always best to explore all options.

David Gustin, a Spend Matters contributor and former editor of Trade Financing Matters, is chief strategy officer for The Interface Financial Group.

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