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Supply chain finance: Why third party solutions are growing

Third party solutions for managing payments and working capital are growing on a global scale. As a buyer you might ask yourself: How can we benefit from this? In this article I’ll show you how, and explain why third party solutions are growing.

I recently opened an account with a connected bankcard with a neobank, i.e. a 100 per cent digital bank. It allows me to make transactions between my different bank accounts and cards in real time. And when buying in other currencies the fee is insignificant.
Now, if I as a private consumer can get these services as a result of digitalisation, why cannot businesses be provided with similar services based on the same technology and attitude?
They actually can, and this is why third party solutions are thriving.

No need for antiquated systems

As I see it, companies should not pay more than actual costs plus margin to use the bank systems. But today the banks are profiting on holding their clients cash for days. As for the suppliers, they should get their payments from the banks instantly if they ask for and if these are a part of a supply chain finance programme initiated by the buyer. As banks are opening up their platforms, there are no longer need for their services as intermediaries with such antiquated systems as manual and time-consuming KYC processes. .

A number of benefits

In fact there are several benefits using a third party solution in the supply chain finance programme:

  • Quicker payments to a lower cost over time.
  • Less and easier administration.
  • Buyers get in charge of their payments.
  • Buyers take their own decisions on who will be authorised to do different kind of payments.
  • It gives a wide range of possibilities when implementing a supply chain finance programme, for example dynamic discounting.
  • A smoother onboarding process when the programme is not depending on the supplier to connect to the buyers’ bank.
  • Improved supplier relations, not least when offering the supplier to decide when and to what discount they want their payments, i.e. dynamic discounting.

Why bank solutions still are preferred

As buyers are discovering this, third party solutions are growing. Still, a traditional bank solution is by far the most common preference in the Nordic market when it comes to payments and supply chain finance. Why?
Let us go to ourselves. Why don’t we change banks more often as consumers? Because we find it complicated – even if it is not – and not worth the effort – even if it is. Most businesses act and reason as individuals in this matter, maybe with a few more considerations. The traditional banks are relying on a historical large trust capital on which they are profiting. Companies are feeling safe and sound choosing a traditional bank solution. However, today many bank solutions are outrun by third party solutions

Why third party solutions will grow exponentially

But it is necessary to question each part of a business every third year or so, taking in and analysing alternatives. Of course most companies do so, including banking relations, financial solutions and systems for working capital optimisation. In this process more and more will discover the possibilities different third party solutions provide. You will need a technologically robust solution that is continually changing and evolving to meet the demands of your suppliers. This is why it probably will grow exponentially every third year or so. And for me this is basically not about using banks or not. It is about the banks attitudes towards new digital technologies and benefitting your clients instead of defending old positions and business models.

Analyse the costs – and the benefits

So, are there any drawbacks with third party solutions? The British organisation ACCA, the Association of Chartered Certified Accountants, let the research and advisory firm Aite Group analyse a number of factors to take into account when setting up a supply chain finance programme. In the report from already 2014 Aite stressed that cost factors tends to be seldom discussed. Aite pointed out that third party solutions to a higher degree are connected with different costs as software and IT platform, subscription fees etcetera – costs that the banks tend not to charge. However, the report notes that these costs are normally embedded in the fee structure.
Of course it is important to pay attention to the cost side of a supply chain finance programme. But higher initial costs might be paid back in terms of less administration and freed up time for the staff to focus on more strategic and value adding tasks. I am convinced the recurring costs will quite soon be lower with a third party solution.

Big money to be earned

In any case, the profits in optimising your working capital will by far exceed the costs of implementing a platform that admits full control and transparency in the cash flow.
It is important to remember that all parts of the programme must be able to capture these benefits. This is central if it is to be legitimate and accepted not only by the buyer but also suppliers, the financial intermediary and the service provider. How the benefits are shared is different from case to case, depending on the buyers’ intentions and market situation, the suppliers’ financial needs and position and not least what kind of technology is used and the range of possibilities it offers.

Benefit of the digitalisation

Whether the banks are interested in keeping a part of the shared value is up to them. Buyers will not be eager to let this part be as big as today when they realise there are alternatives. Traditional banks better revise their business models and close ties with the up and coming service providers – and be a part of what we today call third party solutions. Tomorrow this will be standard in all working capital solutions.

We cannot stop the digitalisation – but we can and should benefit of it.

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