Thursday, 21 April 2016

Business Payments Are Broken Cogs

Example; a window cleaner. He used to take payments via cash and cheque, and his cash flow was terrible because he was constantly reminding clients to pay, popping back to collect a payment because clients are often out, costing him time and fuel.
UK businesses are frustrated by delayed business payments so where is the broken cog? Why oh why does it take so long for payments to reach our bank accounts, frustrated SMEs ask (Small & medium sized enterprises).

Almost half (48%) of SMEs in the UK are frustrated by payments taking too long to reach their bank account, a survey conducted by YouGov on behalf of ACI has found this week. The businesses surveyed also state that these delays are negatively affecting their ability to run their business.

A third of the SMEs surveyed say late payments affect their ability to meet financial obligations on time, 17 % feel that this had a negative impact on staff up-keep including salaries, expense reimbursement and recruitment, and most surprisingly to me, 10 % note access to finance is limited for business requirements such as equipment, product development and research.

What I am asking myself is, how can this be in this day and age? Where is the broken cog?

Let’s take a look at what’s happening here. SMEs are being paid via a variety of mediums, some much slower than others. From cash and cheques to Bacs-based direct debits, predicting when funds will clear in their account and be available to use is a tricky business. They also have to spend a lot of time chasing up missing payments, which means they have less billable time. All this means that their cash flow is unpredictable and their forecasting is often amiss.

Let me use an example. A friend of mine is a window cleaner. He used to take payments via cash and cheque, and his cash flow was terrible because he was constantly reminding clients to pay, popping back to collect a payment because clients are often out, costing him time and fuel. This meant his business was unpredictable and therefore he was declined additional financial services by the bank, as he was seen as too high risk to lend to. He then decided to stop accepting traditional payment types, and switch to bank transfer. As this was a more convenient way for his customers to pay, his cash flow problems improved, and the bank could see he was getting regular payments. This meant his loan for a new van and equipment was approved, and he could then service more customers, and make more money.

The example shows that the more promptly SMEs can receive payment funds in their account, the better their cash flow, the greater their chances are they will be approved for additional financial services and the more profitable their business will be – which is great for SMEs, the economy and actually for the banks who will increase revenue because of increased transaction volumes and loans.

It’s not just SMEs that would benefit from the prompt receipt of funds, this has even bigger implications for corporates. The ability to send and receive funds quickly will give the corporate treasurers the tools to better manage cash-flow forecasting, purchase orders, invoicing and ultimately supply chain risk, improving financial control and, ultimately, profitability.

Benefits to treasurers, in my view, include:

• Discounts – with improved cash flow and positive payment confirmation, corporates could obtain discounts for settling commitments early.

• Terms negotiation – one step further, if a corporate had a history of paying invoices on time or at pre-agreed events, such as shipping and delivery milestones, better contract terms could be negotiated with suppliers, totalling significant savings.

• Reduced reliance on cash, cards and cheques, which are expensive to process.

• Tighter integration between corporate ERP systems and banks’ trade finance and payment systems provides better control, reconciliation and forecasting

Customers, too, will see benefits. For instance:

• An insurance company can approve a claim and have the payment in their customer’s account within seconds.

• A retailer could refund a return in real-time, leaving their customer happy with the service and the money in their bank account.

• Loyalty cards could be linked to the customer’s bank account, so they actually pay with the loyalty card. Faster Payments is cheaper than cards for retailers, so they can reward their customers with more loyalty points as they will have the funds instantly. Only the card schemes lose out.

• Goods can be shipped or taken home as soon as payment is received.

Benefits exist for employees too, especially temporary or hourly paid employees. Firms will be able to calculate pay, then initiate payment on a Friday afternoon knowing staff will have the money in their account for the weekend. Similarly, firms will be able to pay employee’s expenses as soon as they are approved.

So where is the broken cog then? The more banks can do to enable fast, easy-to-use, convenient electronic payments for SMEs and corporates, the more profitable those businesses will be, which in turn will generate more revenue for the banks.

In my view, the UK payments industry is on the cusp of a revolutionary change. With the imminent increase in Faster Payments transaction value, the New Access Model and a forward-thinking mindset, the UK will be at the forefront of electronic payments.

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