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Abbey’s Supplier Payments # 1 – Process Unravelled!

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Yesterday, I had the pleasure to speak to Marcus Hughes of Abbey UK Corporate Banking, and learn bit more about the solution they have brought to market jointly with OB10. Abbey calls this reverse factoring. Let’s review the business process:

  1. Supplier sends the invoice to buyer through OB10 e-invoicing platform. I assume everyone knows how this works, so no point in repeating it here other than to say, like every vendor out there, OB10 also claims that they can take data out from any back-office system, translate it and present it in the desired format to the recipient’s back-office system. The general rule of thumb here is that as a vendor, if you have not supported a particular format in the past, the hub/network operator (in this case OB10) will build a connector to read/write data accordingly. Sad news is that no one makes this point publicly clear (including ebdex). Readers should be aware that there are cost and time implications associated with interface development work. It is not always plain sailing unless your back-office system is a popular product such as Sage Line 100, SAP, Oracle, etc (even that’s not straight forward sometimes!).
  2. Buyer process the invoice and if there are no anomalies (or if there were, after resolvement), forwards the invoice confirmation to Abbey for payment.
  3. Accordingly, Abbey transfers the invoice value less commission to Supplier’s bank and forwards the remittance advice to OB10.
  4. OB10 forwards the remittance advice to Supplier.
  5. Purchaser pays invoice value to Abbey as per agreed payment schedule

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I like to question why is that the “invoice confirmation” has not been routed from Buyer to Abbey through OB10? The above configuration requires an connector between Buyer’s back-office system and Abbey’s front end. Or the Buyer to upload invoice confirmation manually to Abbey. Maybe there is a valid reason that I could not think of why it has been designed this way.

For the business process to take place:

  1. Supplier must have an account with OB10 and pay subscription and transaction fees.
  2. Buyer must have an account with OB10 and pay subscription and transaction fees.
  3. Supplier must have an agreement with Abbey for charges/commissions
  4. Buyer must have an agreement with Abbey for accepting invoice confirmations and release of funds prior to payment by Buyer.

Now here is a perfect illustration of a time line, which shows:

  1. Payments to supplier within 6 working days of invoice receipt by Buyer. Obviously, this is the ultimate scenario once everything is running smoothly (at supplier end, buyer end and Abbey end). OK! in reality, getting paid within 6 days might be tricky, but this product can certainly make sure it happens within, say one calendar month. What you cannot automate is those actions still undertaken by humans – the exceptions management, handling unexpected volumes, people off work, etc.
  2. However if the Buyer behaviour is to change in such a manner that approval is split into parts. Pre-approval being “yes it looks like an invoice from one of our approved suppliers – I am happy to forward the invoice confirmation to Abbey and then pick up any anomalies later”. This behaviour can ensure definite payment on Day 6. But this can increase the query/dispute resolutions and financial reconcilliations.
  3. Buyer actually pays on day 55, 10 days after his norm. Who finances for this period? Looks like it is the supplier.

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Few characteristics of above product:

  1. Aimed at large UK buyers
  2. Supplier needs to fit into “key supplier” category for above to function – the 20% of suppliers, who happen to be large and regular.
  3. This may not work well with 80% of the supply chain due to their infrequent invoicing. Setting up above agreements may be unjustified or too complex if supplier is invoicing few times a year.

Simple solutions works! This looks like a simple solution irrespective of some of the potential drawbacks I highlighted. This solution is clearly provided for the buyer, but bringing equal benefits to the supplier. There are number of ways to improve one’s working capital arrangements. Abbey can easily reverse this “reverse factoring” to “invoice discounting” or “factoring” services without too much of a hassle. But it will certainly complicate the product’s simple approach, but on the other hand, can bring even greater supplier benefits including to those 80%. Now that might be a first!

I am excited about this product. Whilst Burns e-Commerce seems to cater for this market, to date I have not seen any case studies nor real sales and marketing campaigns. So, perhaps this is the first in the UK market! We want more of these solutions.

References:

 

Update 1

I had number of communications with Marcus Hughes, and now have a better appreciation for the product and service offered. Few clarifications, according to Marcus:

  1. The deduction is a small discount (i.e. interest) charge from the payment to the supplier, which reflects the credit quality of the buyer, who is Abbey’s principal client.
  2. This opportunity will attract more than 20% of suppliers, since many of the smaller suppliers will be willing to key invoices onto the web portal or use a PO flip module in order to get the faster cash flow at a lower cost of finance than they themselves can achieve direct from their existing bankers or factors.
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