How can innovative technology bring an end to the global late payment epidemic?

Late payments are a perennial problem for businesses. They have a pernicious effect on global supply chains, placing undue constraints on smaller suppliers and even putting them at risk of going bankrupt. Research has found that late payments are putting one in four companies at risk of insolvency, and a culture of paying late can even devastate large buying organisations. A case in point is the collapse of construction giant Carillion at the beginning of 2018, which also crippled many of its suppliers. 

Historically the issue has proven difficult to address, with multiple governments trying different tactics to influence the UK’s payment practices. While some within the business community have led by example and actively reduced payment terms, others have been slow to change. 

Struggles with late payment culture are not unique to the UK; while there are variances from country to country, it seems that none is exempt. On the plus side, it seems that there are some signs of progress as technology facilitates the reduction of payment terms worldwide. 

A global perspective

Analysis of millions of transactions involving 94,937 businesses across multiple countries reveals that when it comes to payment terms, the UK comes second in a global league table, just behind the USA. The average time to pay suppliers across UK has improved by 14 per cent since 2016, with payments taking on average 42 days in 2018 compared to 49 days in 2016. This compares favourably to Europe where payments take 52 days. 

Mexico tops the list of the most improved countries, with its suppliers waiting on average 51 days to receive payment, 35 per cent quicker than in 2016. The data also shows an improvement for China, where on average it takes 57 days for suppliers to be paid, a 32 per cent decrease. 

As businesses embrace automation, it seems they are realising positive gains – regardless of where these companies are based, digitalisation of their back office processes is enabling them to pay more promptly and efficiently. 

Political pressure

Since April 2017, the UK Government has required large companies and limited liability partnerships to declare their payment practices and performance, including the average time taken to pay supplier invoices. While this legislation aims to pressurise businesses into paying more promptly, it is currently having a limited effect. Research also shows that larger businesses are still paying three in ten invoices beyond agreed terms, with only nine per cent of large UK businesses signed up to a recognised payment code such as the government-backed Prompt Payment Code. Evidentially there is still a long way to go. 

In October, Small Business Minister Kelly Tolhurst announced that she wanted to explore the effectiveness of innovative technologies, such as e-invoicing and other accounting software, to help businesses improve their payment terms. The proposals included looking at empowering trade bodies to highlight the best and worst practices in payment behaviour, as well as encouraging firms to appoint a board member who is explicitly responsible for the timely payment of invoices. It is not just the UK – the US Faster Payment Council is also exploring how technology can facilitate quicker payments, both in the consumer and business world. 

Multi-faceted benefits

It remains to be seen what impact such initiatives might have, and the UK government’s commitment to pay 80% of undisputed and valid invoices to its own suppliers within 5 days with the remainder paid in 30 days is encouraging, but ultimately this is a problem that can be tackled within the business community to the benefit of all. Adopting digital technology and implementing systems that mitigate late payments through collaboration with fintech providers is probably the most effective and straightforward way to combat the problem. 

Offering a solution to late payments is not the only incentive for businesses to embrace digital innovation, as there are also significant gains to achieve in terms of process efficiency. For example, integrated e-invoicing systems speed up the payment process by removing friction from the supply chain. It also ensures small businesses are on a level playing field with their larger counterparts and adds overall transparency to the process. Suppliers can check the invoice status online and therefore chase companies for updates on their payments, which is a drain on resources and a hindrance to healthy business relationships. In fact, e-invoicing can reduce calls and emails by 60 per cent, increasing productivity, cutting costs and enabling staff to focus on the real work of growing the business. As the invoicing process becomes more streamlined, efficient and paperless, fraud, error and duplication are easier to detect, with digitalisation also reducing the cost of handling invoices by more than 50 per cent. 

It may be that the UK late payment culture is moving in the right direction, but there is still much work to be done. The faster that companies heed the call to embrace technology and bring their back office processes into the 21st century, they will not only reduce the problem of late payment, but also find that the benefits they realise will equip them with a genuine competitive edge.