13 Nov 2012 OB10 Express Payments – removing the barriers to mass adoption of supply chain finance
Despite their apparent compelling appeal, some great ideas just never take off the way you might have expected: 3D cinema; internet refrigerators; the umbrella hat.
It’s not just the frivolous inventions that don’t make it and in the business to business technology space there are as many examples. EDI is one. In some industries, such as retail, it’s well embedded as a core tool but is never really took off and the overlapping emergence of the internet in the 1990s saw growth in VAN based EDI plateau permanently.
Purchasing cards is another technology that promised more than it delivered. The benefits are compelling. To consolidate all of you supplier invoices into a single electronic statement that can be uploaded into your accounting system should be the default way we do business – but it never worked, apart from in a few niche areas.
And there’s a third – supply chain finance. The concept is far from new but despite years of marketing and product development, there are few examples of commercial organisations that have been able to prove its full potential. But that might just be about to change.
These examples, EDI, purchasing cards and supply chain finance, share three characteristics that contribute to their inability to gain mass adoption: high cost, complexity and exclusivity. These are the barriers to mass adoption and when you look at other technologies that have enjoyed mass adoption, these characteristics are conspicuously absent.
Take Google as an example. Before Google, there was a variety of search engines, all with their own idiosyncrasies all delivering a mixture of results with varying degrees of relevance to the user. You could perform advanced searches of course but search came into its own when Google simply stripped it all back. It delivered via the simplest of user interfaces but with the intelligence to do all of the thinking for the user. Google was an overnight success and became the de facto search engine across the web. It was free, simple and inclusive – everything that supply chain finance is not.
If these three barriers were removed – cost, complexity and exclusivity – would supply chain finance begin to enjoy mass adoption? OB10 thinks it might.
Supply chain finance – barriers to mass adoption
First consider cost. Supply chain finance can be very, very costly. While one might expect factoring firm to charge in the region of 2% of the face value of an invoice, it is not unheard of or them to charge twice that. In annual percentage rate terms that could be approaching 50% annual interest and when supplementary charges are included also, the cost escalates.
Secondly, exclusivity. Most supply chain finance offerings involve some kind of funding from the banks who naturally, command a fee. But because the banks’ profit is (generally) based on the value of the transactions and probability of being paid, the banks naturally prefer or indeed insist that supply chain finance is restricted to high volume, high value transactions with organisations with a low credit risk. This restricts quite tightly the extent to which supply chain finance can be adopted widely.
Finally complexity. Is supply chain finance complex? Here’s a definition from Wikipedia: “Supply chain finance is a form of receivables financing using technology solutions that provide working capital to suppliers and/or buyers within any part of a supply chain and that is typically arranged on the credit risk of a large corporate within that supply chain”. It speaks for itself
Express payments from OB10 removes these barriers. By delivering a simple user interface to both buyers and suppliers and by taking the bank out of the process, significant costs are eliminated. But it’s the inclusivity of the offering that gives the real opportunity for mass adoption.
There’s no restriction on the suppliers that can take part. Large, small – even one-off suppliers can apply for immediate payment terms. This is a major benefit for buyers. Instead of restricting their supply chain finance focus to larger suppliers, and instead of facing complex supplier on-boarding programmes, the whole of their accounts payable can be brought into scope.
Until now, supply chain finance has been a game restricted to the few large, cash rich buyers and a small number of their larger suppliers. It’s always been complex and costly. OB10’s innovative new product could contribute to a fundamental change in the way businesses transact with one another and we could we be seeing an inflexion point in the growth of supply chain finance.