Why Payment Companies are Missing an Opportunity with Early Pay (Part 2)

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David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

As we pointed out in our last post, payment companies are looking to convert paper checks to cards, and this is drawing interest from many firms, from private equity investing into payment companies to acquisitions (e.g., Fleetcor acquiring Nvoicepay, Visa buying Earthport).

The key weapon of payment companies is to leverage interchange fees to entice their clients (buyers) through rebates and extended terms to provide an early pay option for suppliers, typically with a discount from the invoice of 2% to 3%.

Yet there are several reasons why a “card only” strategy from payment companies is suboptimal.

  1. Only a small subset of suppliers will want to take card. There are three reasons why this is the case:
    1. While interchange fees can differ based on the type of card used, fees can get expensive, costing suppliers an average of 2.5% of the payment per transaction.
    2. Card payments do not always neatly integrate with company’s ERP systems to enable straight-through processing of the payment. Accounts receivable departments receiving card payments often have to manually retrieve the card number and remittance information, process the payment and then manually apply the cash into their ERP system.
    3. Opening a merchant account is costly due to bank know your customer (KYC) requirements to identify and verify the identity of clients with whom a business conducts transactions.
  2. Cards involve a credit line for buyers. This is a credit product. Credit does not come free. All companies have a capital structure. This line of credit is part of their overall capital structure. 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, especially in this leveraged environment.
  3. Dynamic discounting implementation by middle-market companies may cannibalize card payment revenues. More companies will adopt dynamic discounting as they increasingly automate invoice receipt through e-invoicing and AP automation solutions. This is especially true for companies above $100 million in revenue. When this occurs, you may find that your card solution could be cannibalized by dynamic discounting or some third-party finance solution that combines the latest technologies around artificial intelligence, machine learning and even blockchain.

Why Leave Money on the Table?

The goal for businesses should be to offer the widest number of options to advance funds earlier than payment due date, and to provide working capital options to a buyer’s entire supplier ecosystem. You want to enable funding for the total supply chain, not just tiny suppliers, as well as include choice suppliers, diversity suppliers, small business and mid-sized companies.

Cards can be part of the solution, but just a part. There are three other options that also should be considered that provide a flexible menu of choices for both buyers and their suppliers.  These include dynamic discounting, digital supply chain finance, and digital invoice finance.

Where payment companies typically lack functionality is the technology that powers options like dynamic discounting, buyer dashboards and a supplier portal to manage a suite of early pay programs. In addition, an underwriting decision engine that uses fast data — compliance, fraud, billing, credit reports — to predict post-confirmation dilution is key in order to ensure there are no accounting issues, as you do not want to ask the buyer to guarantee anything or sign an irrevocable payment undertaking. In addition, buyers do not have to add credit to their balance sheet like they do with card programs, thus impacting their capital structure.

In designing a suite of early pay solutions, perhaps the biggest issue is solution providers typically work with near- or investment-grade companies. The reason is simple: Banks can more easily get approval for credit, and non-banks can more easily distribute to non-investors (recognizable names). But middle-market companies are not investment grade or even near investment grade credit wise, so this is a huge untapped market for early pay finance.

As payment companies continue to push the card with their customers and their suppliers, it’s important to ask why procurement should leave money on the table by not offering a complete suite of alternative early pay solutions.

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