We talk a lot about friction and inefficiency in supply chain b2b payments and the $1.5 trillion trade finance gap. And for good reason: it’s a critical problem to solve, especially as the demand for trade finance grows in the coming years.
As I look at the B2B payments landscape today, I see progress. There is a lot of activity pushing the industry forward. But the progress is fragmented and not at scale.
As a result, many sellers still can’t access the capital they need to thrive, while buyers struggle to improve working capital and unlock trapped cash to power their business.
Corporate disconnect
It’s not like there aren’t financing solutions to close the finance gap and provide liquidity to sellers. Supply chain finance and dynamic discounting have existed for years. But the problem is that too few buyers can deploy these effectively.
But why? The root cause is the disconnect between the tools and processes buyers use to manage their supply chain and payments operations. This disconnect prevents businesses from establishing a single source of truth into what’s happening across their supply chain and payment processes.
Departmental silos exacerbate this issue. It’s not uncommon for departments to operate with their own agendas and rarely engage strategically. This results in missed opportunities. For example, if treasury doesn’t know that accounts payable have made changes to accelerate invoice approval, it’s unable to capitalize on this work by deploying early payment solutions.
Situations like this that mean businesses only capture around 19% of early payment opportunities.
Compliance challenges
External issues also limit the effectiveness of established supplier financing tools. Supply chain finance, for instance, is an extremely powerful tool on paper. But its effectiveness is often blunted by tepid risk appetite and burdensome compliance requirements of banks.
This means traditional bank-led supply chain finance programs are cumbersome and costly, especially for suppliers who must jump through many hoops just to onboard onto the program. As a result, these solutions only cater to a handful of the buyer’s largest suppliers.
In fact, data from the ICC shows that banks reject around round half of all trade finance requests made by micro, small and medium-sized enterprises (SMEs and MMEs).
Innovating solutions
While these issues are still prevalent, the landscape is changing. There’s a convergence of technology, regulation and innovative thinking bringing forth the next generation of supplier payments.
On the buyer side, I’m seeing companies prioritize working capital optimization in the face of continuing economic and political uncertainty. Departments around the CFO are realigning and breaking down operational silos by using technology platforms that combine supply chain and payments.
I’m also seeing regulators being more progressive. Those leading the way recognize the backbone of their economy is built by SMEs and MMEs and are looking for innovative ways to help them thrive. This is leading them to revise regulations, test innovative technology, implement real-time payment rails, and open up APIs to create new ways for businesses to integrate and drive financing through supply chains.
In my view, however, the most exciting developments are centered on data and AI. As trade continues to go digital, it’s creating a wealth of data. Technology companies and innovative funding partners recognize the immense opportunity this data creates and are working together to build innovative funding structures powered by real-time risk and pricing models. These structures will deliver on the promise of supplier finance by allowing buyers to push funding deeper into their supply chain at an earlier stage in the transaction with very little cost to the supplier.
Closing the gap
We won’t be talking about the financing gap in five years if these new financing models are successful. Instead, we’ll see liquidity freely flowing through supply chains powered by connected financing options that enable buyers and sellers to execute on their cash and working capital strategies.
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