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Powering a New Era of B2B Payments Through Open Data Sharing

by internationalbanker

By Paul Christensen, CEO, Previse

Ever since Open Banking first launched in the UK nearly three years ago, the promise of sharing data to achieve more efficient, personalised banking services has been made a reality. Spurred on by increased customer centricity, banks have acted on the PSD2 mandate to deliver smarter, aggregated services to their respective customer base. 

Despite the considerable impact Open Banking has had in creating more innovative payment services on the consumer side, there is a need yet to be filled in applying the same promise to businesses.

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 could go a long way to helping solve the slow payments problem and help bring B2B payments into the twenty first century.

A problem looking for a solution 

Many of the issues that have tipped small businesses over the brink in the past year are chronic pain points which pre-date the pandemic. Slow payment of suppliers is a major one, but it is also one that can be solved. Suppliers to a large buyer often have to wait and chase for weeks or months to get paid, which results in real financial strain.

To put the scale of the issue into perspective, it is estimated that as of January this year, UK SMEs are chasing £50 billion in late payments, according to research from Tide. The Federation of Small Businesses estimates that this slow payment problem causes 50,000 SMEs go out of business every year, taking with them jobs and investment which are needed more than ever as the economy starts to rebuild.

To add to this, recent research from the Institute of Directors shows that two in five businesses are now facing an increase in overdue commercial debts, with nearly one in ten stating that late payment problems had become significantly worse.

Despite the considerable scale and scope of the slow payments issue, payment terms range from 30 to 90 days, or even longer, and late payments is a persistent, chronic issue. For some suppliers, their payment terms have even lengthened during the pandemic, increasing the pressure that they are facing.

Government-led measures to address the problem, such as the Prompt Payment Code, are welcome steps but can be limited in their efficacy, since being a signatory to the scheme is entirely voluntary.

What is needed is a technology-led solution that can deliver scalable, smart liquidity to every small business. SMEs account for 99.9% of the business population and around half of the turnover in the UK private sector. They are often the lifeblood of an economy, and a community, and it is crucial that collective effort is taken to support them.

Technology first 

Only a few years ago, the roll out 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 we are now in a position where AI is more than capable of being leveraged into a payment solution. In an increasingly data-driven world, AI is the perfect tool to deploy to fix the problem of slow payments. And crucially, the use of an AI-driven system can create a win-win environment for both buyers and suppliers of goods and services. 

Advances in machine learning make it possible for every supplier – no matter how small – to be paid instantly – on day-1. Large corporates can adopt instant payment policies for invoices in a way which would also be sustainable long-term for their own cash-flow. The technology and processes exist to enable suppliers to access cash immediately without buyers having to speed up their payment processes. 

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. If those risky invoices can be identified with precision, they can be routed out at an early stage. This leaves the remaining bulk of ‘good’ invoices, those which are highly likely to be fulfilled by the buyer. These invoices can be paid immediately by a funder in confidence, at very attractive financing rates. All of this can be determined almost instantaneously using AI.

Using hundreds of millions of data points, it is possible to create an independent score of probability of the invoice ultimately being settled. Funding can then be extended to the suppliers instantly, without having to wait for the buyer’s approval of the invoice. Given that this approach does not require any assessment of the creditworthiness or strength of the SME supplier, but looks purely at the probability an invoice is good and payment will be met, it is a completely scalable solution which 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 have an important part to play in this cycle too, and can change financial markets for the better. 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 also another way for banks to put their money where their mouth is when it comes to fulfilling ESG commitments. It’s a financing solution which is sustainable and beneficial for all parties. 

Using a rigorous risk control framework to release capital from invoices can make businesses more resilient and strengthen supply chains. That isn’t just good for suppliers, it’s good for banks, businesses and the wider economy, too.

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.

Open Banking has clearly fulfilled its goal of powering more innovative, secure payments at the consumer level. There is a clear and increasingly urgent need to direct this promise of open data sharing to B2B payments, which are crying out for the benefits open data can bring. As the events of the past year have shown, slow payments is not just an ever present problem, it worsens during times of crisis. While we cannot prevent another crisis from occurring, we can ensure there is a robust, fair payments framework to help weather the storm.


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