Banks can put together a comprehensive purchase to pay solution that includes invoice automation, workflow approval, business rules, and of course payment processing (via commercial card, ACH, and wire payments to the supplier) as well as dynamic discounting (DDM).
But one area where some banks have their doubts is dynamic discounting. One banker explained that DDM has not taken off at levels in domestic U.S. as he would have hoped. The banker mentioned a few concerns that have impacted their solution to date:
- Suppliers lack bandwidth – his point was that suppliers do not have bandwidth to make invoice finance decisions invoice by invoice. His concern was for a supplier that decides not to OPT-In to a program, it seems time consuming for that supplier to log into a web site and select what invoices to discount.
- Their bank data says payment terms for mid market are 30 to 35 days. This is based on their actual spend data coming out of ERPs that the bank receives on invoice level for each of their customers. His concern is 25 to 30 day terms are not enough for suppliers to want to accelerate payment.
- Suppliers want a multi-buyer solution. This banker believes that from a supplier’s perspective, dealing with multiple buyer solutions becomes time consuming.
I think what the banker is missing is that leading vendors in this space can pull all invoices approved and awaiting terms date and add them to invoices they are collecting. This has become part of the functionality at leading vendors like Tungsten and Taulia. There is also enough evidence to support suppliers do want accelerated payment even if terms are 30 days or less.
And from a buyer’s perspective, dynamic discounting offers an opportunity to early pay all your invoices, not just your pcard suppliers. Many suppliers just do not like to take pcards. Pcards rates can run 2.3% to 2.5% and it is a process to onboard. If you can do a dynamic discount piece at 1.25% or 1.5% discount for larger direct inventory suppliers, that might incent larger vendors to use the solution for early payment.
What will be interesting is when we can aggregate one advance across a number of buyers. But this will take third party capital. And that involves a whole set of complex issues.
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There are two key drawbacks to dynamic discounting which prevent it from expanding beyond a small niche within the supply chain. This is the reason why dynamic discount providers are aggressively trying to get into the much larger (by spend) third party or bank funded segment of Supply Chain Finance.
1. The interest rates, on an APR basis, are very high. Usually over 10%. The APR rates marketed by dynamic discounting providers are generally in the 12%-15%+ range. That’s competitive only with capital sources such as equity financing, p-cards and in some cases factoring. Those sources don’t suffer from disadvantage #2.
2. It’s not a dependable source of capital. The buying organization offers dynamic discounting based on their sources and uses of cash. It may be offered today but not next month, or the price may change significantly.
Dynamic discounting can fill a role in a company’s overall Supply Chain Finance strategy, but it’s a minor role with smaller, non-strategic suppliers.
Bob Kramer
VP, Working Capital Solutions
PrimeRevenue, Inc.
Bob
Thanks for the thoughts.
to your point 1, why do rates have to be that high? They are today, but dont necessarily have to be. Dynamic Discounting requires no bank line. Programs can be done by any corporate, investment grade, non rated, non investment grade, etc. So are they have been for the long tail of indirect spend and those suppliers have paid APRs closer to 20+. But again, rates are set by Treasury, and can be different for different supplier groups.
To point 2, Corporates tend to self-fund using their own surplus cash but options are being developed to use third party non bank funds.
Time will tell if this is a niche product or more widespread.
David Gustin