01 Feb 2013 Early payment – the new normal
One of the interesting things about the debates around financing models is the notion of paying “early” and the use of paying “early” as a negotiating tactic to secure a discount.
The obvious question is “early” in relation to what? The answer is usually “early” in relation either to existing terms and conditions or to custom and practice. It may possibly be “early” in relation to an uncertain payment date – I heard recently of one company which simply settles accounts on an annual basis.
Payment at a defined future date has been a feature of trade terms for centuries. The emergence of modern banking in Europe to support national and international trade included offering of credit payable by banking agents on a future date determined by standard tables of mean journey times between major ports. Later developments in the eighteenth and nineteenth centuries when the laws regarding Bills of Exchange and other financial instruments were standardized, enshrined a lot of what we now regard as normal practice.
Crucially, the process and documents which we now take for granted were based on the dominant technology of paper. Formal paper documents were needed to provide auditable -and actionable- evidence of transactions. Processes were put in place to mark the orderly administration of those documents given the nature of society and transportation of the time. Settling up at term or quarter days in an agricultural economy gave way to trade terms which allowed sufficient time for a paper document to be received and processed and payment also to be arranged and processed.
Our instinctive assumptions of what constitute acceptable trade terms tacitly assume both particular paper documents and the time it takes to process them.
But we don’t live in that world any more. We do not need paper documents to provide evidence, we do not need to wait for postal services to deliver things, we do not need to allow time for processing acceptable demands for payment and we do not need to prepare instructions to a bank to pay and then allow time for a Bill of Exchange in the form of a cheque to be issued, presented and processed through the banking system.
The idea of receiving a discount for paying “early” is thus a heavily value-laden idea. It obscures the notion that “early” could, and probably should, be the new “on time”. A paradigm shift in other words.
Pragmatically there is a way to go to get to this stage. This has nothing to do with technology. Technology has been available to do all of this for a very long time and I confess I thought in 2000/2001 that, with the rise of the internet, the technology and changed processes would be ubiquitous in commercial transactions by now. Unfortunately custom and practice and embedded assumptions remain (and are hard-coded into many finance systems as well as finance directors).
But these are assumptions in the commercial world. In the consumer world it is already changing rapidly. The man that came to fix one of our home PCs sent an invoice via his phone to my email and I settled by online bank transfer that day. I wasn’t paying him “early” and I didn’t look for a discount for fulfilling my obligation to pay.
Ian Burdon can be found on twitter @IanBurdon