Are banks going to become the tipping point for e-Invoicing adoption?
According to an April 2014 article, Global Business Intelligence has estimated that “$9 trillion of outstanding trade payables and receivables currently sit on the balance sheet of large corporations” globally. Of this outstanding amount banks fund a paltry 15%.
Even with factoring calculated into the equation, there is still a $7 trillion gap that is available to be financed. This represents a huge untapped opportunity for traditional financial institutions to get back in the game.
As mentioned in our previous post, improving visibility to the entire Procure-to-Pay process plays a major role in reducing the risk associated with trade financing and consequently the cost of capital that would be made available to suppliers. It would therefore make sense, as the Global Business Intelligence paper suggests, that banks would be in a prime position to facilitate and promote solutions that improve supply chain visibility such as e-Invoicing.
It is in regard to this latter point, that the following May 2014 Global Banking and Financing Review quote caught my attention.
“Banks are in a prime position to take the opportunity to facilitate implementing these innovations. As well as being able to aid the development, due to the sheer number of SMEs that currently use their corporate services, banks are also in a position generate considerable revenue from the process. Their unique ability to link e-invoicing to companies’ current treasury and cash management services would provide a seamless extension to the financial connections already established with clients” – INCREASING E-INVOICING ADOPTION IN THE UK SME MARKET, Global Banking & Finance Review May 2014
To start, traditional banks are in a tremendous position to influence the required change in supplier thinking relative to e-Invoicing. This is based on the fact that they have an established pipeline to the supplier community—particularly SMEs. By adding e-Invoicing to their current offering, suppliers are more likely to view this service as a “seamless extension” of an existing and trusted relationship with their financial institution. As the study notes, it also doesn’t hurt the cause that banks are in a “position to generate considerable revenue from the process.”
But don’t hold your breath. As much as you and I may view traditional banks as best positioned to help close the trade financing gap, we also need to remember that banks are more likely to be followers rather than leaders. More stringent bank capital regulations (e.g. Basel III) will lead to higher bank costs and lower appetite for trade and small business lending.
To that end, the role of non-bank financing is going to be critical in providing business with viable alternatives for working capital in the immediate term. We can be sure the banks will jump into fray once these new financing sources start threatening their position as the primary provider of credit to small businesses.
Regardless of the source of financing, increasing the transparency and efficiency of buyer-supplier transactions and information exchange is a critical pre-requisite to reducing the risk to all parties involved, lowering the cost of capital, and closing the outstanding trade financing gap.Back to main Blog page