Industry analysts agree that late B2B payments threaten the survival of small and medium-size enterprises. Often operating within thin margins, sometimes without easy access to working capital financing, SMEs can go defunct when an invoice remains 60, 90, 120, or more days without being paid.
The U.K. has emerged as an epicenter of the late payments debate. Now, one U.K. payments tech firm, VocaLink, is calling for a new payments system designed to enable SMEs to receive payment from their corporate buyers on a timescale that won't cause the business to collapse while waiting for an invoice settlement.
The firm announced Tuesday (June 14) that, in collaboration with charity Toynbee Hall and the Federation of Small Business, it published its "Inclusive By Design" report that outlines a proposed payments system dubbed "Request to Pay."
According to VocaLink, the Request to Pay system would warn businesses when a payment will be taken out of their accounts. "This gives the business greater control of their finances and means they can pay bills when their cash flow allows," the firm said in an announcement.
"For many [SMEs], late and delayed payments jeopardize the liquidity of their businesses, making it difficult to maintain their much-needed cash flow," stated VocaLink market development director Chris Dunne in the report's introduction. "This uncertainty restricts small businesses' ability to invest, grow and continue to innovate."
Why Uncertainty Persists
The payments ecosystem is evolving, and changes in the way payments are made and received are partially responsible for the ongoing uncertainty businesses face in their cash flow, VocaLink said.
According to the FSB, small businesses are engaging in this payments technology evolution along with consumers. But a limited access to traditional bank services, or a lack of skills and knowledge necessary to adopt new payments technologies, can hamper SMEs' abilities to operate smoothly in a market changing at dizzying speeds.
Further, with late payments an everlasting problem, SMEs are at an even greater disadvantage when they are unable to participate fully in new payments technologies.
"The single biggest problem facing small businesses in the payments arena is poor supply chain practice, typically from larger companies," the FSB said in its contribution to the report.
Rethinking The System
According to VocaLink, FinTech innovators and payments technology developers can help by acknowledging that many consumers and businesses, especially smaller firms, do not enjoy a consistent cash flow.
"The increase in small businesses and part-time employment has led to a decline in people receiving regular salaries or incomes, and there is a pressing case for the payments systems to adapt to address these changes," Dunne said in a statement.
Integrating an inclusive payments system must be guided by some principles, the company claimed. Developers must prioritize greater control for their end users, with SMEs able to access flexible payment timescales. Payments need to move with conjoining data regarding the transaction, and any new solution must be straight-forward and easy to use, the firm argued.
There are ways that existing payments initiatives are helping to meet the unique challenges of SMEs. But the company introduces a third initiative that it argues could land SMEs with greater control of when they pay or get paid, and how that payment will impact their finances.
'Request to Pay'
In its paper, VocaLink introduces its 'Request to Pay' system, a process that would alert an entity as a bill's due date approaches via text, email or other messaging service. Payers can then choose when to pay the bill, and how much of the bill they would like to settle. The payer's bank, VocaLink explained, would then notify the biller, who can then schedule its own payments now with a clear vision of when they will get paid.
VocaLink said the system could truly shine as a mechanism that allows banks to provide their customers with analysis on spending and bill pay habits, insight that would, again, provide greater clarity for businesses that need to know when they'll get paid in order to appropriately schedule their own bill payments.
The company noted that integrating this practice will be a challenge, with a multitude of industry stakeholders that will need to agree on adopting this system. The Payments Strategy Forum, it added, is expected to show support for Request to Pay sometime in the near future.
According to VocaLink's Dunne, the Request to Pay system could be the pill the market needs to heal its late payments problem.
"The 'Request to Pay' system could revolutionize payments for SMEs, while reducing the levels of financial exclusion," he said in a statement. "It works hand-in-hand with existing payment methods to help small businesses manage their cash flow and ensures that they don't suffer missed payments."