The realm of supply chain management is a complex web of interconnected processes and relationships. From procurement to order fulfilment, managing cash flows and reconciling invoices, the entire supply chain can benefit from more streamlined and transparent processes. In this landscape, instant payments can have a game-changing impact, offering opportunities for automation, transparency, and enhanced efficiency.
Procure to Pay – Buyer Side
On the buyer side of the ledger, companies engage in various procure-to-pay activities. Large manufacturers can source components from suppliers worldwide generating thousands of invoices that need to be reconciled to receipt of goods, and related payments. Payments are not always straightforward in many situations, goods can be damaged, not fully delivered, delivered incorrectly, etc. where the buyer won’t want to pay the full amount for the goods. When this happens, payments will not match invoices, and if there isn’t clear data with the payment to link it back to the original invoice, reconciling and accounting for the payment discrepancy can be a time-consuming process.
However, with the advent of instant payment systems like FedNow, and the use of ISO20022 data standards, there is a newfound opportunity to provide rich data alongside transactions. This could allow for faster and more accurate reconciliation, thereby streamlining the procure-to-pay process. Automation and transparency become achievable goals, simplifying financial management and freeing resources for value-adding tasks.
Order-to-Cash Reconciliation Process
On the other side of the supply chain, suppliers face their own set of challenges in the order-to-cash process. Sending dozens of invoices each day to a global manufacturer, they may receive lump sum payments for these invoices, leading to complexities in matching payments with individual invoices. Moreover, credit memos, offsets, and deductions further complicate the reconciliation process, leaving suppliers without visibility into the specifics of the payments they receive.
Many businesses try to synchronize payment terms with inventory terms, thus sharing the responsibility of inventory costs with their suppliers. Given current instant payment rail transaction limits, payments under $500K or $1M could potentially benefit from instant payments offering advantages to both buyers and sellers. However, for larger payments, the traditional contractual payment terms may not align with the instant payment model.
Integration and Automation
Enabling instant payments requires integration and automation of systems throughout the supply chain. The success of instant payment systems like FedNow depends on the acceptance and adoption of data standards like ISO20022. While credit cards have already paved the way for robust data connections, widespread adoption of FedNow’s data capabilities may require industry-specific and company-specific adjustments.
Standardizing invoices and streamlining business processes will be vital in facilitating seamless instant payment transactions. Working with larger organizations and software players can expedite this transition, as they are more likely to have already incorporated ISO formats and advanced treasury management services.
Supply Chain Collaboration and Resilience
Effective collaboration between buyers and suppliers is fundamental for building a resilient supply chain. Rather than competing and pushing costs onto one another, strategic partnerships prioritize efficiency and shared resilience. Leveraging on instant payments, with their potential for improving automation and transparency, can foster improved communication and efficiency among trading partners. Enhanced visibility into payment status and performance can lead to a significant reduction in relationship capital required for managing transactions, thereby freeing up resources for innovation and process improvement.
Security and Compliance Considerations
As with any new technology, adopting instant payments comes with its share of risks, particularly related to security and compliance. Integrating instant payment into the supply chain ecosystem will still need to be implemented with appropriate checks to ensure compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. Additionally, a robust framework to detect and prevent fraudulent activity should be put in place to safeguard financial transactions and data.
The Road Ahead: Streamlining B2B Transactions
In conclusion, instant payments offer an enticing prospect for streamlining supply chain management. From procure-to-pay to order-to-cash, embracing instant payments can enhance efficiency, transparency, and collaboration between trading partners. However, the successful adoption of instant payments requires standardization, integration, and a focus on security and compliance. As the supply chain landscape evolves, businesses must seize the opportunities presented by instant payments to create a more resilient and efficient future.
Author: Marcia Klingensmith, Director, Savannah, Payments Consulting Network
Marcia is a respected expert in emerging payments, with extensive experience in the financial services and payments industry. With a strong focus on fraud and identity, she has worked with top industry leaders including Bank of America, Wells Fargo, Visa, FIS Global, and LexisNexis Risk Solutions. Marcia’s mission is to guide organizations in navigating the complexities of instant payment systems securely and effectively.
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