Call it the yin and yang of B2B payments — inseparable and contradictory opposites. Buyers want to hang onto payables, saving cash in the till until the very last minute. Suppliers, of course, want to collect on receivables outstanding, getting cash into accounts for goods and services provided.
Across it all lies the friction of accounts payable (AP) and payment management workflow, rendered inefficient by paper-based processes. Paper is the conduit of communications and payments (via checks, of course), and is the way payables have been tracked and satisfied over centuries.
It’s high time for payables to be transformed, to make the shift into digital methods.
The urgency is borne from the fact that B2B payments are increasingly becoming cross-border, especially for mid-market companies. In addition, time constraints bump up against complexities tied to everyday business processes, ranging from validating supplies to making sure taxes are paid in far-flung jurisdictions.
In a Topic TBD interview with Tipalti, CEO Chen Amit told Karen Webster that the tension between buyers who want to keep their money as long as possible and the suppliers comes as there are constraints tied to business models, processes and technology. Those constraints set up roadblocks to a happy medium where buyers and suppliers can both feel good about making payments.
Behind The Buyer/Supplier Tensions
“There are multiple aspects to the tension,” he told Webster. “Some buyers have incredible power over suppliers to improve their payment terms.”
Certain verticals have structural challenges in place, he said, that illuminate the power buyers can wield in supply chain economics. For example, in the auto industry, it can take months to get paid as cars are assembled and sold to end customers.
“The whole supply chain needs to finance the effort and the labor, and the materials that go into the process,” he said. “It is a natural component of [auto] production and it just has to be faced.”
Even as the business model dictates a longer, relatively drawn out payments timeframe, said Amit, the process of the payments workflow is a labor intensive one, too, and they are slow.
“Paper checks are still very common in parts of our economy,” said the executive. “It can take weeks for a paper check to clear.”
However, even before that last step (waiting for the check to clear), the processes of capturing invoices and approving them, connecting with banks, and providing payment instructions — and to say nothing about getting the correct information from the suppliers — all take weeks.
Stopping The Paper Chase
There’s certainly acknowledgement that the paper flow, and even the flood of emails and phone calls that can lead to a productivity drag, needs to stop. There’s no dearth of recognition of this need. Consider the fact that, over the next three years, as many as 88 percent of businesses plan to reduce the number of paper invoices they receive from suppliers by at least 25 percent, as estimated by the Institute of Finance and Management.
The shift toward automation can pay dividends. Firms that automate the invoice approval process spend 75 percent less to process a single invoice. They can process more than 10 times as many invoices per full-time equivalent. In addition, Amit said, automation can shrink the compliance and supplier validation efforts from weeks to, “potentially, hours.”
That’s especially important against a backdrop where B2B payments are increasingly becoming cross-border, and where manual business processes are glaringly inefficient. The regulatory landscape is changing as well, where manual efforts mount as executives endeavor to comply with new rules and regulations that can change quickly.
“If you have international suppliers, the friction can be tremendous,” said Amit, which creates even greater delays when suppliers need to get paid, when regulators are not satisfied or when banks reject payments because governance details are lacking. The more steps tied to vetting appropriate information or onboarding suppliers, the greater the potential for breakdowns and delays in the process with manual and paper-based methods.
“It doesn’t make sense to not automate this part of the business [before payment instructions are made]. It helps everyone,” where 80 percent of the labor can be saved, he said. “There are no losers in this part of automation. The supplier gets more transparency in the delivery of the payment. The buyer can save some time … and economics are being created where everyone wins.”
Negotiating Terms — And Growing Top Lines
Automation means that buyers can offer dynamic payment terms, said Amit. He noted that Tipalti has a product that helps suppliers get paid earlier, for a discount.
Good payment policies lead to revenue generation for the buyers and reduce the costs of working with suppliers — who, of course, get paid earlier. Thus, he said, the incentives are aligned between buyers and suppliers, and the concept of dynamic discounts and payments acceleration are gaining corporate adherents. Amit also stated that the payments acceleration movement — where Tipalti works with third-party lenders that underwrite Tipalti’s customers —is seeing a “great hunger” from investors to finance such efforts.
In a discussion on whether there is too much debt out there financing various supply chains (the subject of a recent interview in this space, speculating that there is a ticking debt bomb in the U.S. economy amid supply chain financing), Amit said “you are either efficient or inefficient, competitive or not competitive. Blaming it on financing and lending is pointing the spotlight in the wrong place.” The businesses that spend hours, then days, wrestling with compliance mandates and paper-based payments processes, ultimately, spend zero time on such efforts because they go out of business.
In the quest for efficiencies, companies find them by sourcing products and services on a global basis — a trend that is strong and continuing, he said, noting that Tipalti is able to “offload some of the challenges to our customers.” Businesses do not want to become payments experts, choosing instead to focus on the core business at hand, Amit explained, leading to a strong demand for payables automation across all verticals and small- to large-sized businesses (SMBs).