The $3T Payments ‘Trade Gap’ Can Be Tamed With Better Data, Retooled B2B Platforms

The ongoing pressures on global supply chains have snarled the normal process of getting goods onto shelves, leaving buyers to scramble to find new routes and suppliers to get what they need.

And yet, for all their resourcefulness, these vendors still don’t have much leverage when it comes to setting payment terms or even getting buyers to pay on time with a method of payment the supplier prefers.

This “trade gap” of outstanding receivables is estimated at more than $3.1 trillion per day, PYMNTS research shows.

Read more: Trade Credit’s $3.1T Squeeze On US Businesses

In discussing this quandary, a quartet of online platform and payments executives told Alan Koenigsberg, global head of new payment flows, Visa Business Solutions, that the friction in giving suppliers that kind of power is not solely a technology problem, a payments problem, a business model problem — it is an amalgamation of all those issues.

Panelists included B2B payments firm TreviPay CEO Brandon Spear; CredAble Executive Vice President and Head of Credit Ranjit Singh, whose firm offers supply chain financing; B2B platform Joor CEO Kristin Savilia and payment platform Plastiq Chief Product Officer and Chief Technology Officer Stoyan Kenderov.

The aforementioned frictions have given rise to “choke points” in B2B working capital access, said panelists.

Said Savilia: “2020 was a shock to the system.” Initially, she said, as restrictions went up and borders closed, firms were not looking for capital as much as reallocation of goods. But this year, she said, 2021 is more about looking for working capital to keep businesses going.

Spear noted that several sources of traditional funding dried up through the past several months as businesses shuttered and as banks shied away from perceived credit risk amid slowing economies. In the U.S., he noted, financial institutions (FIs) scrambled to disburse Paycheck Protection Program (PPP) loans, which diverted their attention and efforts from extending working capital to enterprise clients.

As a result, said Spear, there was (and in many cases still is) an uneven placement of working capital and supply chain finance — larger suppliers fared relatively better than smaller suppliers. At the same time, Spear recounted, suppliers of all sizes have had to pivot quickly to meet the demands of eCommerce.

As a result, the great digital shift compressed years’ worth of transformation into just 18 months, said Spear.

“The minute you had your whole workforce outworking, remotely, you had to re-engineer these processes,” said Spear. “It could be as simple as you used to use to take paper checks before. And all of a sudden you don’t have somebody at the office processing the mail. How does the check get into the bank account?”

The pressures were not confined, of course, to the U.S. Singh noted that in India, even before the pandemic hit, capital channels were constrained even while businesses were moving toward tech-enabled models. India has been moving toward a more formalized economy and moving away from cash. But when the pandemic hit in full force, said Singh, “there was a supply breakdown and there was a demand breakdown at the same time,” which stressed corporate balance sheets, especially for small and medium-sized businesses (SMBs).

No matter the locale, said Kenderov, firms of all sizes and across all verticals had to move online. He noted that coffee shops and even karate dojos made the leap online, to name but two brick-and-mortar examples.

But the panelists noted that supply chains are evolving and embracing online platforms, which can help sellers and buyers find one another, and for supply chains to handle everything from matching buyers and suppliers to getting invoices created and paid. As part of that evolution, Spear said that larger buyers — namely, manufacturers — are increasingly going direct to their end customers. That means buyers must grapple with breaking what Spear called the “bulk problem.”

“How do I deal with the fact that I used to have 10 distributors or resellers? And now I’ve got 10,000 end customers, and I want those relationships and I want the data. I want to know what they are buying, but I dont necessarily have the process or the skillset or the muscle memory to deal with paying 10,000 people or to deal with providing lines of credit to 10,000 people,” he said.

Better Data Flows and The Cost of Capital

At a high level, said panelists, payments are being embedded into all sorts of digital interactions on the consumer side of commerce — which will increasingly become a staple of B2B. Kenderov said that banks were the big underwriters of supply chain financing in the past, “but their models are outdated. They take offline data, they take large amounts of data and crunch them, and they look at longevity of relationships. All of that is inadequate for a world that is retooling very fast to online commerce and needs access to flexible financing.”

The rise of platforms, of FinTechs and partnerships between these tech-nimble upstarts and FIs, is providing that access, said the executives.

Of course, noted the panelists, not all platforms are alike, and the needs of different buyers and suppliers can differ greatly. Larger enterprises are focused more on efficiency, they said, and smaller firms are relatively laser-focused on making the next sale. The platforms, of course, have also given a point of interaction for SMBs to tap supply chain financing.

Savilia noted that the “SMB and mid-markets companies have been really focused on cash flow and access to capital. They’re just more flexible in how they’re willing to do business.” She added that in two-sided marketplaces, there has been “a great acceleration to on-platform payments. We have platform payments that are being very well received, and making the accessibility to cash easier.”

But even with the availability of the platforms, said Koenigsberg, firms and lenders must weigh the attractiveness of funding — the cost of capital versus the cost of working capital.

According to Kenderov, “every business big or small will have to decide on what’s the best capital structure for their enterprise, whether it’s equity or debt financing.” What’s hidden in that formula of cost of capital are the fluctuations that this business is exposed to, and those risks are radically changing. Businesses are grappling with stretched-out payment terms and DSOs.

And, as Kenderov said, his own company has been telling its small business clients to “lean into all sorts” of capital funding — client funding, vendor funding and factor financing.

As he noted, “a 2% discount for a foster payment that is still better than waiting for 30 days or … for another loan from the bank.”

Looking ahead, Savilia said suppliers are gaining more leverage than they had before in setting payment terms. And while Kenderov said that most capital still flows through banks, synergistic partnerships that have developed between banks, FinTechs and card networks can generate data in real-time, capture it and make it available to banks in aggregate data models that lower costs across the board.

Against that backdrop, said Spear, advanced technologies are helping to streamline the underwriting process, leveraging new data streams to make decisioning more real time and accurate. Platforms, in addition, can help safeguard against identity theft, a hazard as businesses “meet” one another for the first time online.

“Marketplaces,” he said, “are probably going to become the source of trust between these two partners that don’t necessarily know each other.” That trust can be cemented by the platforms’ acting as a certification authority that ensures firms can do business with one another. Singh added that the robust data streams can reassure those who finance a business that “we don’t have to rely on the financial ratios alone.”