Fintech: Redefining Responsible Business Practice in Payments

The last few years have seen a revolution in how business thinks about itself. A business doesn’t just serve its shareholders, it serves a community. It has responsibilities to its employees and its customers but also its suppliers and even the environment. Recent events have further underscored the important role business plays in society, as some companies have joined the effort to produce ventilators and face masks, while others have put the health of their workforce before profit by temporarily shutting shop.

One of the most critical, and under-appreciated, elements of responsible business is the commitment to the supply chain. The coronavirus pandemic is putting unprecedented pressure on supply chains and ruthlessly revealing their shortcomings across the world. Now is a better time than ever to redefine our notion of sustainable business practice.

Shifting the paradigm

The importance of environmental, sustainability, and governance (ESG) issues has been playing a larger part in business decision making for some time. Many firms give these efforts a significant place in their shareholder reports and investors have responded with ‘green funds’ becoming increasingly popular.

These issues are undoubtedly important, both financially and morally. Quite apart from the obvious need to take better stewardship over our environment to tackle rising sea levels, mass species extinction, and increasing numbers of climate refugees, it is just good business sense. Better educated consumers care about ethical sourcing of products while talented workers express a clear desire to work at companies with purpose beyond just increasing the bottom line.

However, a definition of sustainability which only considers environmental concerns is too narrow. The Business Roundtable last year issued its “Statement on the Purpose of a Corporation” which includes Commitment number 3 to deal “fairly and ethically with suppliers”. With strains on supply chains being a long-standing and well-documented issue globally, it is time to introduce the idea of faster payment practices into our definition of sustainability. 

Strains on global supply chains have been made even more intense due to the ongoing coronavirus pandemic, which has plunged economies the world over into a cash flow crisis. SMEs have invariably been hit the hardest in this, both because they have limited reserves and also because many of their large corporate customers hold onto their cash reserves and are slowing down their payments. This issue will get worse in the post-Covid recovery as there is a demand surge which will put additional pressure on the working capital of SME suppliers.

However, there is a route to achieving immediate economic stimulus that not only serves as a cash injection that the economy so badly needs, but also contributes towards sustainable business practice. That route is instant payment of suppliers. And it can be done easily and with no cost to large corporate buyers.

The state of play

For every large company in the world, there are potentially thousands of small and medium-sized businesses servicing that large corporate. The single best thing any large company in the world could do to help these small suppliers is simply to pay them faster. It’s a really natural and easy thing that a large corporate can do to help foster sustainability to help SMEs to create jobs and to drive growth. 

Put into context, there is USD 125 trillion[1] of annual business in the world. Of that, USD 30 trillion a year involves the world’s five thousand largest corporates purchasing goods and services from 20 million SMEs. That is 30 trillion dollars of business that typically has between 60 and 120-day payment terms, with 20 million SMEs that struggle to access finance, waiting to get paid.

SMEs make up the majority of economic growth and job creation in the world. So, there could be no greater boost to the world economy than to pay them instantly.

At present, the buyer-to-supplier payment system typically includes a supplier sending an invoice to a large buyer, who has to process it into their systems, reconcile the data, validate receipt of goods or services, and approve the invoice. It is a hugely inefficient, cumbersome, paper-based process. There is no reason why payment should be held up for this cumbersome validation process, because if the buyer turns out not to be happy, they can issue a credit note, and offset it against the next order (or get a refund). That’s how B2C works. The reality is that the state of invoice payment and settlement in business is at least fifty years behind where it should be. 

In developing economies, this problem is even worse, with longer settlement times, less data and harder to access finance for SMEs. 

For example, if you are a tea grower in Assam, not only do you have the struggle of payment terms and waiting to get paid but, your access to finance is much more restricted. It’s harder to get bank loans, there’s less credit history and less data that the providers of finance can use to get financing to SMEs in developing countries. 

The solution

AN ESG approach must take into account dealing fairly and ethically with suppliers, and the most important element of that is payment practices.

A product that pays almost all of the invoices received by a large corporate on their behalf, the moment they are received, and with 3rd party (bank) capital is what is needed. AI analyse can help facilitate this process and detect the very few invoices that need intervention so the rest can be paid instantly. It is easy and costless for a large corporate to adopt and there is no reason why a large corporate would not do this. 

There is no more efficient way to deliver cheap and efficient finance to SMEs in developing economies. The tea growers in Assam sell most of their products to large corporates in the US and Europe, who impose payment terms. If those corporates paid on day-1 rather than day-120, it would be transformational. 

The dialogue around sustainability is only going to play a larger part in business discussions in the future, the coronavirus pandemic notwithstanding. If anything, the crisis has shone a light on the state of supply chains at present and how these need urgent reform. By bringing payment practices into a notion of sustainability, businesses can not only achieve sustainability in its truest sense but also make an important contribution to economic activity. The solution is simple and it is available now. There is no more powerful way that large corporates can help SMEs during the COVID-impacted business recovery and operation.


 

 

Helga Kaminskiis Head of Sales at artificial intelligence (AI) & data science Fintech, Previse. The company recently raised $11 million in a funding round led by Mastercard. Previse aims to address the systemic inefficiencies in the existing supplier payments platforms.

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