05 Jul 2013 The best solutions are those that solve a problem you never thought you had
Sometimes, great ideas just never take off because some prerequisite solution to a problem hasn’t been solved. E-procurement was a great idea in the 1990’s but until the internet was ubiquitous and trusted, it was slow to take off. Looking back, the trust and ubiquity grew quite quickly but in 1996, if we had a crystal ball that said it would take the best part of a decade to become an established way of doing business, I wonder whether we’d have given up. We didn’t know that the problem was trust and ubiquity until it was solved.
There’s another example today – supply chain finance. Now I’m not talking about big business trade finance deals that the banks love, I’m talking about the sort of financial supply chain management opportunities that small players can take advantage of – dynamic discounting, reverse factoring and so on. In a world of virtually zero interest rates and constrained liquidity, the win-win presented by these solutions is compelling – until you examine the purchase to pay processes that businesses employ. They simply can’t support these new concepts because they rely on efficiency. Electronic invoicing is one of those prerequisites that is simply not used on a big enough scale today to make many supply chain finance initiatives work.
Things are changing of course and they are changing at quite a rapid rate as new and innovative approaches are being developed. I spotted one such innovative approach a few weeks ago that really impressed me. It is such a simple idea. It solves a problem that I was unaware of but when you see the solution, it opens up a wealth of possibilities.
One of the reasons that supply chain finance in it’s many forms (and yes I know I’m using the term loosely) is popular is not just because large businesses can use it to manage their cash better, it can also play to the needs of their suppliers who struggle to control their cash flow. But it isn’t all about prompt payment – it’s also about assured payment. What I mean by assured payment is that the supplier needs to know for sure that a) they will be paid and b) when they will be paid. Some suppliers view dynamic discounting with suspicion because they have experience of giving discounts for early payment only to find that the early payment doesn’t materialise. It is a constant frustration to business to have to wait beyond agreed payment terms to see cash they are owed.
So what if the supplier could initiate the payment? That way, with the agreement of the customer, the supplier could guarantee that the payment was made, the right amount on the right day. It’s called direct debit and, in the UK at least, it’s how the utility companies ensure that their customers pay on time. But there’s a problem. Operating direct debit with customers is hellishly complex. It’s also heavily regulated and small and medium sized businesses are simply excluded from using it.
GoCardless is a London startup that’s delivering direct debit facilities to all sizes of business. In a nutshell, using GoCardless, a small business can use direct debit to initiate payments from their customers. The cost is 1% of the transaction value capped at £2. It’s a no-brainer in the B2C space for regular payments of course but I can see this as being an extremely powerful extra string to the supply chain finance bow in a B2B context.
GoCardless is another example of what I think of as new school thinking – new, robust and well thought through solutions to problems that the old school thought didn’t need solving. They are now firmly on the Purchasing Insight radar and I’m looking forward to meeting the founders in the next few weeks to understand more about their plans.
Pete Loughlin can be found on twitter @peteloughlin