When auditing giant KPMG assessed corporate compliance of government requirements to report supplier payment habits, the company made a concerning discovery: Just 17 enterprises in Scotland were adhering to the rules.
At the time, KPMG regional advisory practice director Alan Flower told reporters that small businesses will likely be most affected by this lack of compliance.
“We expect both the slow uptake in reporting and these initial results to be of concern to the small business community,” he said in January.
The findings highlight the limits of government intervention in the challenge of late payments. The EU, U.K. and Australia are among the world's jurisdictions that have moved to address this problem, an issue that has generated billions of dollars in unpaid invoices and threatened the future of small business suppliers (in 2016, analysis from Amicus Commercial Finance found that small businesses were forced to write off $62 billion in unpaid invoices in the U.K. alone).
B2B FinTech hasn't ignored the issue. Some players say electronic invoicing and electronic payments can help accelerate B2B invoice payments. The alternative finance market argues that solutions like invoice financing and factoring are fitting. Still others say that government regulation is necessary (though KPMG's findings suggest compliance is far from guaranteed).
Richard Garnier at trade credit insurance company Euler Hermes said these approaches fall short. "I don't think technology is really the solution," he recently told PYMNTS in an interview. "This is about habit – and it may take a generation to change."
Considering that Euler Hermes has just launched Credable – a digital platform that analyzes payment risks of individual corporate customers for SMBs and offers on-demand trade credit insurance – Garnier's remarks about the limits of technology may be surprising. But according to Garnier, who is now managing director of the Credable brand, the very reason the trade credit insurance industry is thriving is because technology and regulation have so far been unable to eradicate this problem.
"Electronic invoicing may speed up delivery of an invoice, but it will do nothing to speed up the payment," he said.
Euler Hermes recently conducted a survey of about 300 small businesses in Sweden, in which Credable is first launching. Garnier said that analysts gained new insight into the tactics SMBs deploy to address challenges surrounding late payments, with financing tools like factoring one of the most popular. But as Garnier noted, the research made it clear that factoring doesn't work for everyone.
“Some are happy with factoring, but commonly, they say it's costly, it's not immediate – there's a process of application and a waiting period for confirmation,” he explained. “There's also the issue of choice. Factoring companies tend to cherry-pick the invoices they will finance. Some factoring is with recourse, and some is without it, meaning a small business will end up having to collect money from the company that hasn’t paid and still owe that money to the factoring firm.
“There are a number of issues around factoring,” he continued. “It's difficult, it's expensive. Very few factoring firms will buy invoices across borders, so it’s of no use [to international invoices].”
Among the largest concerns Euler Hermes heard among SMBs that use factoring solutions concerns the buyer-supplier relationship. Once an invoice is sold to a factoring company, that financier may quickly initiate a collections process and potentially damage its relationship with the SMB.
In short, said Garnier, “factoring works for some people, but certainly doesn't cater to all.”
Late payments regulations may not be going far enough (yet) to address this challenge, but there is an area of government intervention that may help. According to Garnier, this includes regulations like PSD2 and government efforts to encourage data sharing and the opening of databases.
For the Credable solution, data is critical. The platform takes advantage of nearly a century of credit rating data Euler Hermes has at its disposal, plus third-party data, to assess a small business's individual customers. SMBs can then determine whether or not they would like to insure themselves against non-payment for that specific client (or, as Garnier explained, whether they would even like to keep doing business with that client).
The executive explained that Credable uses a “traffic light” API, which facilitates data aggregation and analysis to heighten transparency of a business customer’s payments risk. The solution highlights whether a company is at risk for default, or perhaps simply at risk for paying a few days late. While Garnier said that a history of late payments is certainly the most common metric to analyze late and delayed payments risk, a slew of other data points goes into the decision.
“We look at other data around balance sheet performance, overall financial health of the company – but a history of late payments is a pretty good guide to future behavior,” he said. “We look at why a customer is paying late – because of red tape or because of culture.”
Technology may not be able to eradicate late payments. At least, it doesn't seem to have yet. But it can boost transparency into customers’ existing payment practices, enhance predictability of future payments practices and perhaps serve as a catalyst for behavior change. It won't be easy, and Garnier said it will likely take years or even decades. But with billions of dollars, reputations and the very existence of businesses themselves at stake, the issue is worth addressing.
“Late payments are a chain reaction all the way down the supply chain,” said Garnier. “It's an existential issue for a small business if they don't get paid on time, or if they get paid later than usual, which is already late.”