Will supply chain finance and p-cards collide as B2B payment techniques?

There was a time when bankers wanted you to think supply chain finance was special. It was a way to go deep into a supply chain and leverage orders from an anchor buyer with a strong balance sheet, offering finance to suppliers who actually needed it in the supply chain (i.e., emerging markets, smaller suppliers, tier 2 suppliers). However, it never seemed to work out that way in practice (see Is ‘supply chain finance’ a fancy way of saying ‘financialization’?).

From the banks’ perspective, supply chain finance (SCF) is an uncommitted credit facility to a large company to purchase invoices from their suppliers. There are many issues around this simple statement, from the complexity of onboarding non-customer suppliers to the accounting treatment concerns that are now reeling heads.

In addition, over the last several years there have been many non-bank solutions focused on approved invoice finance, with vendors like C2FO, Taulia, Greensill Capital (acting as asset arranger), PrimeRevenue, Orbian, Coupa and many others. The focus has been on approved invoice finance because the risk (post confirmation dilution) can be controlled through buyer guarantees and/or insurance. From the non-banks’ perspective, such as a Taulia-Greensill arrangement, there is still someone taking a credit risk and underwriting the exposure. An asset arranger and syndicator can manage the flow to investors.

So what does any of this have to do with payments?

With any finance technique, money needs to change hands and a payment is made to some supplier, either domestically or offshore. With SCF, the payment happens to be done early, by a third party that transfers funds electronically to the supplier’s bank account. In most cases, the supplier is paid on the next business day, probably using ACH if in the U.S., or SEPA if in Europe. The payment made to the supplier by banks or non-banks means they must maintain supplier bank details and do appropriate KYC procedures (especially banks). But it’s a payment nonetheless, that happens early, that comes with rates that are tied to a benchmark rate (now Libor, but in the future to be some other benchmark) and the credit quality of the underlying buyer and any fees. What is important from a payment perspective is that the buyer needs to make sure an adjustment to the payee is made in the system of record to avoid a duplicate payment to the supplier.

Which brings us to p-cards. P-cards are another credit product with the payor (buyer organization) that enables them to both get rebates and extend time for payment. They have become increasingly popular as firms such as AvidXchange, Acom, Nvoicepay, Veem and others that push “e-payments” on the tail spend for many large organizations. The idea of converting manual or check payments to card payments is a big part of the business and revenue model for many of these companies.

Both of these techniques, SCF and p-cards, originate from a buy-sell transaction, with some form of early or immediate payment to the supplier, which pays a fee and/or interest or discount off the invoice value. But it is still a payment at the end of the day.

While supply chain finance is sexier, it has been the cards that have had the biggest growth story providing solutions to large enterprise companies’ long-tail suppliers. Virtual cards, also known as single-use accounts (SUA), are growing in popularity. Source-to-pay vendors have added card functionality to their offering to push e-payments and facilitate the last mile of spend.

Implications for different parties:

  • Banks — Supply chain finance and commercial cards are managed in separate areas, but they have so many synergies: supplier onboarding, buyer credit and technology interfaces, to name a few. The issue from talking to bankers is more around turf — the trade finance yields from SCF tend to be much lower than the margins from cards. At some point, you have to decide what’s right for the customer.
  • B2B payment vendors — Fintech B2B payment companies have started to look at this space to determine how they can add early pay invoice finance off the back of a buy-sell transaction. Quite a few have started the journey, and it is something I will explore in the next post.
  • SCF automation vendors — Pure supply chain finance vendors, which enable companies to run programs, either independently from their banking group or enable companies to choose bank partners, could look to add card functionality for supplier payment.
  • Corporates — As more companies move payments to electronic means, opportunities will increase to add early pay technologies. Large enterprises are typically running silo schemes where they may have three separate supply chain finance programs, two card programs, a dynamic or static discounting program, etc. But manual payments persist in most companies, and it is here that opportunities present themselves.

In many areas, worlds are colliding. Supply chain finance and cards could be one of those areas.

What do others think?

David Gustin runs Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be reached at dgustin (at) globalbanking.com.

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First Voice

  1. Robert Solomon:

    Oh, yeah, there are lots of collisions in this space: add in dynamic discounting, factoring, SCF, and v-cards and it is collision-filled.

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