Everything you wanted to know about supply chain finance but were afraid to ask
You know when something sounds too good to be true, it probably is. Like you know when politicians are lying – their lips move.
Experienced buyers know to read between the lines – much more important than what is said in a sales pitch is what is not said. And when a product or service is sold as being in some way altruistic with phrases like “we’re supporting our customers” it begs the question “but why?” Support, but at what cost?” We need to fully understand the costs and implication of buying a product or service – and it’s not always just about money. This is just as relevant to supply chain finance and associated products as it is to anything else.
Take a look at the bank-funded SCF sales pitch. It’s easy for the banks to claim to be altruistic. SCF programs support their customers by helping them to better manage their cash flow. The bank can facilitate early payment to a company’s hard-pressed suppliers giving them stability and financial security, protecting them from the fear of late payment and helping them to avoid expensive factoring costs. In effect, the bank lends to suppliers at a rate based on their larger customer’s financial standing rather than their own. It produces a win-win for buyers and suppliers – the supplier gets early payment funded at an attractive rate and the buyer gets to maintain payment terms or even extend them to improve their cash flow.
In 2015 the banks need all the PR they can get and SCF sounds like it could move them from zero to hero in a few simple moves. B2B Robin Hood, stealing from the rich big businesses to give to the poor hard pressed suppliers. Cool!
But let’s not be naive. This is just the sales pitch. We need to look at the other side of this particular coin. What is really going on? Let’s see what an alternative spin on SCF sounds like.
This is what the banks are really doing when they promote SCF – and the same goes for purchasing card programmes too. The banks want access to their large customers’ supply chains and they want those large customers to help sell their financial products. It works like this. The bank makes an implied threat to their compliant customers’ suppliers that they must take part in the SCF or PCard programme. Failure to do so could mean that their status as a preferred supplier may be reviewed. They then facilitate early payment – sometimes to simply offset an associated extension of payment terms, leaving the supplier in exactly the same place they were in in the first place – then charge the supplier for the privilege. This is a bit like the banks helping to get a further cost reduction from suppliers and skimming the savings – less like Robin Hood and more like Al Capone.
OK, to be fair, I exaggerate to make the point – but not actually that much. I recently advised a client on a PCard programme as I have many times. They had been convinced of the benefits of the programme and in particular, were pleased that it would facilitate prompt payment to their suppliers. They also liked the rebate they’d get from the bank even though it was a fraction of 1%. What they were not told about was the 2-3% merchant fee that some of their suppliers would be charged. Paying 2% to be paid 30 days early is well over 20% in APR terms.
If the supplier can afford a 2% charge, they can afford a 2% discount for prompt payment and that’s much better for the customer than the rebate from the bank. If I was a buyer and I found that there was 2% left on the negotiating table, I’d want the 2% – not 2 tenths of a percent. I’d also want some input to the messaging and rates, being pushed to my suppliers.
I understand why banks would want to keep merchant fees secret. It is a commercial matter between them and their merchants but if they want to use my name to sell to my suppliers with whom I have a strategic relationship, they’d better keep me fully informed of what they are actually selling and at what cost.
Tungsten, (formerly OB10 who are increasingly bank-like now that they’re a bank), sell secrecy as a benefit. I get why. Saying to suppliers “Your customer will not know if you choose to take early payment” is quite a strong sales message to some suppliers who may believe that early payment is a sign of financial weakness. But given that most of these suppliers are only customers of Tungsten by virtue of the fact that they’ve been introduced by their customers, the customers may have a word to say about that secrecy and, just as in a purchasing card programme, the customers may wish to know the details of the early payment transaction.
It’s as easy to spin a positive story as it is to spin a negative one and it is important not to lose sight of the genuine benefits of SCF and purchasing card programmes. But so is it important to understand the whole picture, including the aspects that the service provider doesn’t want to draw too much attention to. This is especially important if the service provider is working in partnership with their customer to ‘support’ their suppliers. It is important that you know what that ‘support’ is and that includes understanding the costs and impact of that support.
Pete Loughlin can be found on twitter @peteloughlin