Since the emergence of open banking in 2018, the promise of sharing data to achieve more efficient, personalised banking services has been made a reality.
Throughout this guest-authored piece for The Fintech Times, Paul Christensen, CEO of Previse, explores the use of open banking data to streamline B2B payments, and why AI and advanced technology could bring an end to the cash flow problems that have mired small businesses throughout the course of the pandemic.
While open banking has helped deliver smarter, more aggregated services on the consumer side, business-to-business payments have not seen nearly the same level of innovation that B2C has. One of the starkest illustrations of this is the chronic and ever-growing slow payments issue, which keeps many businesses waiting months to be paid.
As open banking continues to reshape the B2C payments landscape, now is the right time to take the premise of open data sharing and apply it to the B2B world. Open data sharing can be a powerful driving force in tackling the slow payments problem and accelerating the recovery and growth of small businesses.
Sizing up the Issue
The slow and late payment of invoices is one of the most serious, yet often overlooked pain points affecting the financial stability of SMEs. Suppliers to a large buyer often have to wait weeks or months for a payment that they have no certainty of even receiving, causing real strain.
To put the scale of the issue into perspective, the Federation of Small Businesses estimates that this slow payments problem causes 50,000 SMEs to go out of business this year, taking with them the investment and jobs which are needed more than ever as the economy starts to rebuild.
Despite the considerable scale and scope of the slow payments issue, payment terms range from 30 days to 90 days, or even longer. Late payment is a persistent, chronic issue that has worsened during the pandemic, increasing the pressure that suppliers are facing.
Government-led efforts like the Prompt Payment Code, to which signatories join voluntarily, have failed to move the needle on the issue of slow and late payments. Even the UK Government’s own payment policy only mandates buyers bidding for government contracts to pay their suppliers’ invoices within 60 days – which is still 60 days too long.
What is needed are technology-driven solutions that can deliver scalable, smart liquidity to every small business. When SMEs account for 99.9 per cent of the business population and around half of the turnover in the UK private sector, the stakes are simply too high to overlook the cash flow challenges they face.
Turning to technology
Only a few years ago, the rollout of artificial intelligence (AI) to fix everyday problems was something of a pipedream. Technology, however, has come on in leaps and bounds since then and is already transforming the way businesses operate and economies function. And crucially, the use of an AI-driven system can turn the tide on slow and late payments in a win-win for both buyers and suppliers of goods.
The true risk in the payments chain is the small number of problematic invoices which will not get paid or will be queried by the buyer. Machine Learning can identify and route out these few risky invoices at an early stage, enabling the rest to be paid immediately by a funder in confidence. All of this can be determined almost instantaneously using AI. This technology can be embedded into accounting systems offered by a large corporate to its suppliers, or even used by SMEs to secure affordable loans that allow for sustainable growth.
Given that this approach does not require any assessment of the creditworthiness or strength of the SME supplier, but looks purely at the probability that an invoice is good and payment will be met, it is a completely scalable solution that can be applied to even the smallest supplier.
The keys to the kingdom
Despite the immense promise technology can bring to solving slow payments, it is not useful on its own. Fintechs need access to the ERP data of large corporates so that their algorithms can assess payment patterns and unlock instant payment for suppliers.
Banks, therefore, have an important part to play in this cycle too. By helping SMEs to access cash locked in the working capital cycle as early as possible, businesses can trade from a stronger position. Data makes it possible for a business to access cash as soon as their invoice is issued, removing the wait for lengthy payment terms and the uncertainty of whether the payment will be made on time.
This route to approaching sustainable finance is another way for both corporates and banks to put their money where their mouth is when it comes to fulfilling ESG commitments – and strengthens the resilience of supply chains in the process. It is a financing solution that is sustainable and beneficial for all parties.
Effective business management is now about much more than simply trying to make a profit and provide dividends to shareholders. For businesses to succeed in our evermore interconnected world they must have a 360-degree purpose that engages with all stakeholders sustainably. Paying suppliers – particularly SMEs – is a vital part of that purpose.
The success of open banking at delivering enhanced efficiency at a consumer level has bought into sharp focus the need to innovate B2B payments, which are crying out for the benefits that open data can bring. As the events of the past two years have shown, slow payment is not just an ever-present problem but worsens during times of crisis. While we cannot prevent another crisis from occurring, having a fair and robust payments infrastructure in place will be crucial if businesses are to navigate the ongoing disruption and manage future shocks to the system.